You're listening to Teip. Hey, everyone, welcome to today's show. Our guest today needs no introduction because he's a fan favorite macroeconomist. Luke Román Luke is the founder of the macro thematic research firm, The Forest for the Trees. And he's one of the leading experts on everything happening in the global economy. Today, we're titling this discussion. The great reset, it appears, were upon some very difficult circumstances moving forward. And we want to try to pick through what some of these events might be and how they could potentially play out.

So without further delay, here's our conversation with the thoughtful Luke Roman.

You are listening to the investor's podcast. While we study the financial markets and read the books that influenced self-made billionaires the most, we keep you informed and prepared for the unexpected. Hey, everyone, welcome to the Investors podcast, I'm your host president is always am accompanied by my co-host, Dick Brotherson, and we've brought back Luke, Román, Luke, welcome back to the show. Thank you for having me back. I'm excited to be back. It's always great to talk with you guys.

Hey, so, you know, on SNL, how, like Alec Baldwin holds the record for the most times hosting SNL, you're kind of becoming that person for the Investors podcast.

There's a joke in there somewhere, but I don't think I'm witty enough at the moment to come up with the the appropriate Alec Baldwin metaphor and somehow tying it back in a non offensive way. That's not our forte, Luke Foley for the best. Hey, so I know where I want to start this conversation and it starts with Warren Buffett because, man, he changed some stuff up here in this last filing. Yeah, I guess he sold some banks, right?

They sold a little bit of his his Barrick Gold as well as the headlines I saw and maybe was doing some other stuff. But those are the ones that I seem to jump out in terms of what I saw coming across my feed. Somebody forwarded me a some type of article, it's not based on any kind of facts, it was just some hearsay that he's looking at PayPal, which I find really interesting. He's moving away from the JP Morgan's and Wells Fargo's and looking at some of these other folks that are in the space.

But from a tech standpoint, yeah, let's hear some of your thoughts on the banking in general. To me, the banks seem like they're in a bit of a tough spot, and the reason I say that is it's a little bit of an banking industry for a long time in this country was a heads they win and tails they win. Kind of a thing they did. They did well and for a long time. And I think they're in a bit of a tough spot.

And the reason I said is if the government does enough in terms of stimulus, the banks look like they are being regulated into being basically utilities that buy treasuries at negative real rates. And so if things go fine, they are in their balance sheet, the percentage of their balance sheet that is in treasuries yielding negative real rates is likely to increase over time. And if the government doesn't do enough, then we have a big economic problem and they have credit problems.

And so it's sort of like the best case for them as they increase their holdings of treasuries at negative real rates. And it's it's not a terrible deal for them. The funding costs are very low. They they change the rules a year ago or eight months ago, I should say, now. And so it's it's very little funding cost. It's positive carry for them, but they're likely to be negative real rates over time. And so to me, it's not to say that banks can't go up, but I think it is a case where over the course of the next cycle, banks as a percent of total S&P market cap, if you will, I think are likely to shrink relative to other sectors because their balance sheets are growing in terms of treasuries and treasuries are very likely, in my opinion, to be negative real rates over the course of the cycle.

They need to be for the US to basically earn its way out of what we've just gone through.

Yeah, and whenever we look at the triple P loans lonesome down here in Q2, that was big for the banks that some of the highest bottom lines.

And also, if we look at the top line, let's just say JP Morgan here for Q2, the top line on other was the revenue hit thirty two point nine billion dollars, and that was up from, what, Q1? Twenty eight billion. Yeah, I would for me that when I look back, we hear a lot that, hey, if you look at the Fed's report for aggregate banking, commercial banking sector lending, and it has been declining loans, declining CNI loans, there's been one line item that's been growing spectacularly for the past four or five months, and that's its loans to the government.

That's US Treasury Holdings, Treasury and Agency Holdings, which I think in June were up forty eight percent in July of thirty seven in August. Twenty four I think in September, I think is the latest data. I think they were up 17 or 20 percent. And so that the portion of their loan book that is represented by treasuries and agencies is growing meaningfully relative to the overall loan book, which I think is now positive. Again, for most of those four months, I think it was negative.

But it's interesting when you look back to the April time frame, as we were just coming out of the very bottom of the credit crisis, the Treasury Borrowing Advisory Committee talked about that the US banking sector looked to be a very good place and a sector that could buy a lot more treasuries as they were looking for areas of potential balance sheet capacity that could buy treasuries. And they specifically cited that, hey, right now, the banking system in the US, in total, about five percent of assets are in treasuries.

Last time the US debt to GDP was as high as it is, was nineteen forty six. And back then you saw the US banking system balance sheet get as high as 50 percent of the total balance sheet and treasuries. And so I've just from a macro perspective, kind of thought about that. The price target for what percentage of the US banking system balance sheet that could be taken up with Treasuries over coming years? I think at the high end is that 50 percent range just from a very top down level of saying, hey, last time we were in the same type of situation, which is to say very high debt to GDP, very low foreign purchasing of treasuries as a percent of total issuance.

You saw the banking system take a lot of that you see in the regulations changed between April and now in terms of those SLR regulations to make it a very attractive, positive carry for the banks. And so for me, I think the banks are a little bit of a tough spot is I think their share of their assets that are in treasuries that are likely to be negative, real rates over the course of this cycle, probably on their way from five percent as of earlier this year.

I don't know where they are now. They're probably modestly higher towards something meaningfully north of that. And that's just that's not a bad thing. It's just I think there's going to be more attractive, higher ROIC returns on capital within the economy. And that just implies, like I said, a shrinking of bank share of global equity market cap in the United States, if you will. You know, it's fascinating, while you were talking there, I was pulling up some of the figures for various banks and how I had mentioned earlier, JP Morgan's went up their top line, went up in the second quarter of twenty twenty one covid hit Wells Fargo went from in the previous quarter before covid was at thirteen point seven billion on their top line, covid hits second quarter was eight point three billion when they got hammered.

And then it came back in the third quarter back to kind of where they were at prior to covid. Now, Bank of America completely flat. They basically retained their twenty two point three billion. So it's really fascinating to me that you're seeing these permutations in these banks that are all too big to fail. Right? Every one of these banks are too big to fail, but yet you're seeing a pretty wide divergence in performance through that event. And I guess the reason I'm bringing it up is because there is more triple P loans on the way.

There is like this are not going away.

And if we think that we understand how that performance played out during those previous event now, it might not be as well. Who knows? It could be exactly like the liquidity crunch we saw during covid. But do you see that as a barometer for the way that they might perform moving forward? To me, that's the sixty four thousand dollar question, you got me speechless that my wife would tell you that that rarely happens.

It could be too late, I suppose. But the challenge is, is that we've seen for me, it could be too late if you're a very nimble trader. And that's why I sort of if you're running a big portfolio that we've seen, they are not going to let you twist in the wind for very long now. That said, it could be painful for a period of time, days, weeks. I don't think we're talking about months anymore, even like we were in the fourth quarter of 18, let alone quarters like we were in 2011 or twenty eight, just given where we are and leverage.

And I think that's really the maybe the biggest legacy of the crisis that we've been talking about a lot, is that a number of the metrics we were talking about in twenty eighteen where you'd say, OK, the big three US expenditures, entitlements, defense and interest expense, growth, interest expense. We were watching that in early twenty sixteen and we were saying, all right, it could be over one hundred percent of tax receipts by twenty, twenty one.

And lo and behold, 18 months later, because the Fed raised rates and because the economy slowed, those three actually went above one hundred percent of tax receipts by three to eighteen and they continue to trend higher while those big three coming out of the Koven crisis as of three to twenty were one hundred and forty percent of tax receipts. So entitlements, defense and gross treasury expense, which was primarily is a gross interest expense before, but it jumped enormously during the crisis, according to the the Treasury data.

So I think there is gross Treasury expense, plus some of the Treasury's stimulus stuff of backstopping stuff they were doing as part of covid. So I don't know that that's a particularly apples to apples. But at the same time, we can also say if they took it away, GDP would be shrinking even faster and tax receipts would be shrinking faster. The point is, is those three line items in the tieback went from call it eighty five percent of tax receipts in twenty sixteen to one hundred forty percent of tax receipts in third quarter of twenty twenty.

And the point is, is that covid took what was an incipient fiscal problem, balance of payments problem and made it irrecoverable. I mean they are in the full euro pile at the top, got a flat spin. There's no pulling out of it. There's some things you can do, but it's irrecoverable. And people say, well, look, if there's a band, the US is a reserve currency. It can't have a balance of payments problem.

Well, you're right. And that's what we've been seeing for the last 12, 14 months. And I think we're going to see more of that. So is a person who likes to just look at patterns, right? I suspect that the more that you step in and start manipulating the market and there's a pattern that kind of shows up, everyone that's watching this is saying, oh, well, this is what worked last time when they stepped in and did this.

So now I'm just going to hit the copy paste button here and do this all over again.

And if there's one thing we learned from covid, it's that Tech was a major winner coming out of the debasement of the currency. So let's just play out the scenario where they wait too long and they don't provide enough stimulus and they have to step in because there's just a major liquidity crunch like we saw previously with covid. I mean, I would think that a person is looking for some type of technical limitation or they're looking at how much the government arrives to the table.

I suspect they're going to arrive in a form that Triumph's anything that we have seen historically as far as the basement goes. I mean, if they did five last time, I guess I'd naturally think they're going to do double that. Enormous numbers like numbers you can't even fathom. So do you step into that trade again, into the tech Google, Amazon, Apple companies that, you know are just going to continue to perform?

Do you buy that equity? I buy that equity, I buy in US industrials, equities, I buy gold, I buy Bitcoin, I buy all those things, I do step into it again because again, the thing that gives me the comfort to do that is the big gears of what we're talking about, which is debt to GDP is now one hundred thirty five percent. You cannot allow GDP to fall for very far, for very long because you get into a debt death spiral.

You have the three big years of your government entitlements, defense and interest expense. One hundred forty percent of tax receipts tax receipts are falling sharply as a result of all this. If they don't do enough fast enough, your entitlement bill doesn't go down. It goes up. Your defense bill isn't changing of anything. It's going up and your interest expense isn't really going anywhere persay. But as we saw in covid of Treasury does some special stuff. They're going to do some.

And so when you look at that, you're 40 percent sure relative to tax receipts on those expenditures, which are non negotiable. You can't skip any of those things. And I think that's a key point that the listeners should really pay attention to, because you're talking about these three items, they're just so important to understand there are nondiscretionary expenses, so entitlements, defense and interest expenses, and they have to be paid no matter what. And right now, we had one hundred and four percent of tax receipts and tax receipts are falling.

Let's pretend they don't do enough, how quickly will the feds step in what you can say, OK? One hundred and forty percent of tax receipts, if you did nothing that you've got, well, less than a year before you default on one of them, I literally don't have the money if you're just paying Hanania. So then you say, OK, well, I'll just borrow the money and you say, OK, well, who's buying the treasuries?

The US net international investment position is negative 60 percent of GDP. The foreigners own engross 40 trillion in assets that 12 trillion in assets, dollar assets. If you don't do enough, the dollar's going to be going up. The dollar debts they owe are going to be squeezing them. They are going to be liquidating dollar assets for dollars and they're going to be selling what they can, what they want to. And when they sell that they can is the quote unquote deepest, most liquid market in the world, treasuries.

So the government now needs to sell treasuries to finance this one hundred forty percent of tax receipts, big three items. So they're selling treasuries. Foreigners who have a own 11, 12 trillion dollars in US assets are going to be selling treasuries for dollars. Mom and Pop are going to be selling treasuries for retirement. Businesses who are holding treasuries, going to be selling treasuries, banks who own treasuries for high quality liquid asset purposes, for regulatory reasons so that they have proper liquidity in a crisis are going to be selling treasuries.

So there's trillions of treasuries for sale. Where's the bit? Who's the better? The Fed's the better. That's it. And so that's why I say I step into that trade is it's going to be uncomfortable as possibly if they don't do enough, you could absolutely see this sharp sell off, this sharp spike. And it is going to feel terrible, just like it felt in March. But my bet is the US government will not be the first government to allow itself to be shut down for lack of printed fiat currency in history that I'm aware of.

Yeah, I think that the scar tissue from the early nineteen thirties is so deeply entrenched into policymakers minds as we're never going to go down that path again. And when you look at how that played out initially from nineteen twenty nine up until they basically relinquished themselves off of this gold standard in thirty three, I mean it was a deflationary spiral because policymakers were. Well if you're not competent enough to run your business appropriately and have savings for rainy days, well then you deserve the fail.

Right. And you literally have the exact opposite line of thinking from policymakers today than what you had during that period of time. And so I see folks on Twitter from time to time that are posting these charts that are analogous to the nineteen twenty nine Great Depression and it coming down and all that kind of stuff. And I'm looking at that and I'm saying, yeah, you might see like liquidity shocks that are somewhat mind blowing, how quickly they drop 30 percent or whatever.

But the policy response to that is going to be so drastically different that I just don't see it playing out as a one to one kind of scenario like what happened back then. I agree it is different. So twenty nine to thirty three, the market was falling in dollar terms, but it was really falling against gold because it was a gold backed dollar. And if you look at, for example, the equity market since 3Q 18, it is down versus gold.

It has fallen versus gold. You look at the equity market since 2000, it is down tremendously in gold terms. I think that's one important thing. I think the other thing that is really kind of stuck in my craw chart that I saw. It's a brilliant chart by Dan Oliver at Mirman Capital. He gave a presentation on Reinvasion back in March. If you haven't seen. It's excellent. And I've had dinner with him before. He's brilliant. He's a gentleman.

One of his investment letters back in May had this tremendous chart and it showed the price of gold in German Reichsmarks from nineteen fourteen to nineteen twenty three. So the beginning of World War One when the Germans went off gold. And that said, we're just going to print the money to pay for the war and we're going to make that the losers pay for it, which is what everybody said. World War One and through nineteen twenty three. So fourteen to twenty three is one of the particularly eighteen to twenty three, twenty to twenty three.

One of the great currency hyperinflations of all time complete currency destroying hyperinflation and dance chart shows the price of gold in our German marks go from fourteen to twenty three and it does what you think it does on a annualized basis. It's a hockey stick up currency gone. But the fascinating thing that I didn't know until I saw this chart was I think he has a month over month and what it show the month over month returns on gold as the yearly return was, as the currency was hyperinflated zero the month over month, the returns on gold.

If you were levered, if you were because you would think, OK, well, the currency is going to hyperinflated. I want to borrow as much as I can and buy as much gold as I can. And I'm going to be rich. And the reality is, is if you look at how gold traded in a hyper inflating currency, if you were levered, you lost all your money four or five different times because there were periods where you, like you just said, these air pockets you hit.

And there's any number of reasons that that happens. A lot of them in these situations are very political. A certain leader gets elected, a certain leader in Germany's case gets assassinated, whatever the case was. I mean, there were times when the German mark Reichsmark rose significantly against dollars for a few months and gold got killed. And then sort of a longer. So the point is, is, I think, very supportive of what you just said, which was that you get these countertrend moves.

But I just don't think when you're in this purely fiat system that you're going to get these. When I see the analogs of hey, or this is nineteen twenty nine and we're going to have this four years down of equity markets, I just don't think that's going to happen because we're not it's an apples to oranges comparison. It was comparing against gold then versus dollars now and the equity market effectively is the economy now and we're highly indebted. So it is the economy is this circular doom loop they've created by a policy over the last several decades where they've got to have stocks rising to be able to keep the wheels on the cart as it relates to the fiscal situation.

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I just want to tell the audience, so while you were talking there and your comment about gold, if you price the S&P five hundred and gold, it's down significantly since 2000. So I went and I plotted this out. I priced the S&P five hundred and gold. It is down sixty five percent in terms of gold since the year 2000. I had no idea it was that much throughout that period of time. If you go to let's see here the two thousand eight time frame, the top.

Wow. That is just crazy. I had no idea it was that much Luke. And from twenty eight till now, it's pretty much flat, the S&P 500 has not even gone up at all. In nominal terms, in dollar terms, in gold terms, you have. Look, so you mentioned about pension plans there before, you have the baby boomers who are about to retire, then Vesper Menges had them in a ton of bonds with no yield.

How is this going to be played out? You've got a highly indebted government who needs negative real rates and a retirement populace who wants to own these bonds, and so it's really the keys to the power of the government against the individual pensioner. I think I saw Russell Napier's quote saying it's robbing old people slowly. It's how he phrased it. And I was reading and I literally laughed out loud when I saw him say that when you go back to again, the last time the US was in this position fiscally, which was right after World War Two, a debt to GDP is higher.

This time, entitlements are higher. This time Medicare. Medicaid didn't exist then and foreigners are not buying nearly enough treasuries. US real rates were negative for the majority of the next thirty five years. And when you look at how the US delivered from, we were at probably I think one to say one hundred twenty or twenty five percent of GDP, maybe one hundred thirty percent of GDP in forty six and by nineteen eighty we were thirty, thirty five percent that the GDP and that was made up of.

If you look over those thirty five years, US nominal GDP consistently ran at a five hundred to eight hundred basis point premium to the ten year treasury yield and the three recessions real rates would go positive for like a cup of coffee and then they would shoot right back to this. And some of that was tremendous productivity growth, tremendous demographics, tremendous technological growth. But it was in the end also a massive financial repression. If you are a bondholder and your GDP is nominally growing at five hundred basis points above your Koopa, you're making a donation on a real basis every year in terms of your purchasing power.

And so I think that's where this movie's going. There are things that are very different this time in terms of the use of treasuries as collateral and some of this this inherent demand for treasuries, regardless of the coupon, that it's not all about mom and pop and pensions drawing a coupon on this. But I think ultimately the broader lesson holds, which is one way or another, they're going to get their nominal GDP to make real rates relative to nominal GDP in particular, significantly negative to deliver their way out of this.

You know, look, I don't think that it helps that when you look at this older population being in bonds for the last 40 years, especially long duration bonds, has been one heck of a trade. You know, you really could not get a more slamdunk trade. I mean, when you look at Bill Gross and the fact that he left during that era, that he was doing what he was doing it there, really, I think I could put a mannequin up against him and it probably would have had a similar amount of performance.

It would have been stellar performance.

I don't know if I go that far. He was he was pretty darn good. But you look back at what he did, especially with the size of the fund he was running later in his career. He put up some numbers and I was always on the equity side. It was one of these sort of that kind was over there. But you look at his numbers and the size of his fund, sometimes you go, man, but your broader point, I get me in trouble.

Ruffle some fixed income investors feathers. OK, so a couple hours ago, I posted that you and I were going to have a conversation. I think I had a hundred comments within a couple hours of people wanting to pick your brain.

There was one person that asked about student loan forgiveness. I'm kind of curious to hear your thoughts on this one. I think it's coming. I think it makes sense. I did a tweet thread last week and I said if I was tasked with ensuring that the United States stayed in secular stagnation, as Larry Summers called it, we want you to set up economic policies that make sure we continue to underperform as a nation, as a national economy, and we continue to remove the dynamism we were once known for.

What would you do? I said, well, one of the things I would do is I would load up our most productive generation with as much college debt as possible. And then I would make it non dischargeable in bankruptcy. And then I would have much of the wealth as possible with the older class of citizens who have an extraordinarily low marginal propensity to consume.

And so I've got my high marginal or marginal propensity to consume or high MVC generation loaded with debt so they can afford to buy anything houses, cars, get married, have kids, etc.. And I would have my low generation with all the money and benefiting from all the monetary stimulus, etc. just getting richer and richer. And so to me, when you hear these policymakers, whether it's Powell or other central bankers saying we need more fiscal, we need more fiscal, we need more fiscal.

And you hear other other pundits, policymakers saying we need a policy that gets money into the hands of people that will spend. And then you hear other people say, well, gosh, with a divided Congress, how are we ever going to do that? All of these are valid points. And to me, when you sort of if you do a Venn diagram of all this stuff, the thing that's right in the middle are student loans. You've got one point six, one point five trillion in student loans.

I don't know the exact number, but the vast majority are owned by the government. And so it's literally a balance sheet entry. You cross it out, you tell them, stop paying. They don't have to pay any more. And you immediately have put hundreds, if not thousands of dollars per month every month into a generation of people with a very high marginal propensity to consume. They're going to get married. They're going to buy cars. They're going to be houses.

They're going to kids. They're going to reinvest in the economy. GDP is going to grow. Velocity of money is going to grow. And there's a whole bunch of positive things. The negatives are some dogmatic view of, OK, well, that's socialism. And I pay my loans and they didn't have to and they shouldn't do that. And to be fair, that is a that's a real discussion. My view is it needs to be weighed off against.

Well, is that worse than continuing the secular stagnation where we're starting to have riots in the streets and people burning stuff down? And in my view, that's a lesser evil attitude at this point. And then beyond that, it's really it stinks if you're a bondholder, it stinks if you're long dollars.

And that was where I was going to go.

Really, the way you're paying for that would be something along the lines of a five percent debasement of the currency for debt forgiveness.

No, because you assume I'm only about multiplier on that monthly nut, it's it could be big. Well, and I think that that's a really important point, so let's transition into this term, quote unquote, inflation, because you bring up the multiplier on top of the base money because I'm talking base money, inflation of five percent. But when you account for the multiplier on top of that, are we still talking about five percent more currency or spend debility into the system or are we talking more than that?

Well, it could be more than that. And they can really be more than when you start talking about a vaccine. Right. Just think about they've created all this based money. And how often have you or I heard it a lot this year, all this M2 money supply has been created. It's OK because they're just filling in a hole. It's not inflationary because they're just filling in a hole created by code. And that's one hundred percent correct, in my view.

And then the next line is, well, as long as Velocity doesn't pick up on that M2, it won't be a problem. They won't create inflation. Well, what do you think's going to happen when they get a vaccine the last season to take off? So now you're looking at a situation where you could have velocity picking up from. I mean, you've had Warren Schumer saying they can get student loan forgiveness. They're encouraging the presumed President Biden to do it via executive order in his first hundred days.

So to me, you're looking at some things that could be extraordinarily stimulative, slash inflationary, I think, be really good for GDP growth. When you're talking about an economy that desperately needs nominal GDP growth and inflation to start trying to earn the lever of this record debt to GDP. And by the way, still high unemployment, you still have record social tensions. This affects a lot of boxes. It's going to be really hard to sit there with whatever unemployment still is, six, seven percent.

And with the tension we have between young and old and the wealth inequality to not sign off on this, it's easy to do. And yeah, I think it would be it's interesting because I do think it could be very inflationary. And it introduces a new when you push one thing and it's like a balloon, something pops out on the other side and all of a sudden you're going to get the yield curve back up further, as we know, because I don't know what the number is.

But there's a level, in my view, on the bond market where the Fed's going to have to come in and basically say, that's it. The yield is not going any higher than this, no matter what. That student debt forgiveness enough to take the yield over that number. We won't know until it happens that were it to happen, but that then would turn around. Now, you've taken one inflationary thing and you've turbocharged it because now the Fed's balance sheet is just going to grow and real yields will be significantly negative.

So for the person listening to this, we're seeing the same problems as you are. Look, how should the position themselves, first of all, to protect the portfolio, but also to compound the wealth? So I think it's super important for anybody listening to this to understand, I think, a couple really big pieces of context, the big piece of context. Number one is we are. I think without a doubt, in the first bursting global sovereign debt bubble in one hundred years, so nobody alive that is trading today has ever lived through one of these things to trade it with that said, the last time one burst the real value of the sovereign debt relative to gold.

Of the six biggest industrial powers in the world, the US, the UK, Germany, France, Japan and Russia from nineteen eighteen to nineteen thirty three, the sovereign debt relative to gold fell anywhere from 50 to one hundred percent. Germany and Russia went to zero against gold. They hyperinflated the Japanese. I want to say we're seventy five percent us. Seventy five percent. France I think was 75 or 80 percent. UK was I think only 40 or 50 percent as the reserve currency of the world.

So the point is, is when you get here to this point, it becomes the sovereigns. They were going to do whatever they can to keep themselves in business, so to speak. And the release valve is the currency. And so I think it's super important to understand that within these trading moves, this, I think, is the big fear. And you don't want to get crushed up by this big year. And so when you talk about these types of things, you need to be overrepresented in your portfolio to things like gold, like Bitcoin, I think like high quality equities, things that will preserve your purchasing power if, as I think they will, currencies do what they did the last time a global sovereign debt bubble burst.

And this isn't about, hey, this quarter's performance or this month's performance. This is about two years, five years, ten years from now, currency debasement of those periods of time. So I think that's the first big one is this is the first burst in global sovereign debt bubble. One hundred years. The second big thing, I think, is that we are in a currency, the first major currency system change over in fifty years really since the petrodollar system.

And you're seeing these the tensions between the US, between China, between the US and Europe. And nobody knows how it's all going to work out other than to say it's changing. And you know what? The winners and losers were the old system. And so you can sort of infer that. And I guess if I said only two big things, but I think there's probably a third that's worth noting is this. We've never had a demographic situation like this at a time when social democracies you're basically, I think, having sort of this social democracy promise bubble bursting as well.

You're in rundown mode on these entitlements and what have you on that, too, I think is important. So really is supportive of the first point in terms of the bursting global sovereign debt bubble. So I think these things are the big gears that are really driving things. And they're driving both the domestic economics. I think they're driving the international geopolitics. And so I think to protect yourself, I think you need to be conservative in your leverage. I think you need to be conservative in your finance.

I think you do want to have some leverage, but I think it needs to be smart leverage and by smart leverage, I mean not overly levered, ideally in productive assets or in a house. Where are the loans? Can't get called. They can't get repriced. You can be locked in for long periods of time. And then being whatever the model says you should be in and bonds. I would take the under on that just pretty systemically over the next two, five, ten years again.

And this is not a this is this month, this quarter. But I think these are the big year that are really turning faster and faster now. How do you see residential real estate playing out through this, and I'm going to use this term because somebody had a question about this, but you just kind of addressed the question, which was the World Economic Forum using the term the great reset? What does that mean to you? I think you just described perfectly what that means to you.

So back to my original question, which is the residential real estate, the homes that people are living in, what does this mean for property values if you go through a, quote, unquote, great reset? I think it depends where you are. I have a very dear friend who is down in Hilton Head, South Carolina, who owns one of the bigger architecture firms down there, and they have been jammed all year. I mean, the real estate number, even in the depths of the Corona crisis, the region, you would send me the MLS listings and sales and numbers year over year.

And they were beaten the numbers by like 40 or 50 percent as the world was coming unhinged.

And I said, what is going on, man? And he said, Oh, so I had another one last week, someone from New York, they just came. They have a house down here or they they they bring it down here. Historically, they came down, they bought a house, they called back to Connecticut, called the agent, said, sell it all, pack up the furniture, send it down. We're never coming back. And he's like, this is happening every week.

Real estate's always been a local game, but I think unless some really big things change relatively soon.

I think this migration out of cities into more rural or semirural areas and probably in in the south. I mean, there was an article this week in The Wall Street Journal on op ed, and I don't remember the gentleman's name, but he runs a big VC fund in San Francisco. And the op ed in The Wall Street Journal was California. Love it and leave it. And he just said, my wife doesn't feel safe walking in San Francisco anymore.

And sometimes the power outages are like a third world country. So I'm packing up my family and I'm back in my firm and we're going to Austin. And so these two stories, I think are just anecdotally, but I think it's going to depend where you are. I think there is this. What we are seeing this year could very well be an early stage of a re prioritizing of what people really value, particularly if these big trends of sovereign municipal.

What I'm implying is, you know, if you keep the promises to all of your pensioners in Chicago, you might not be able to pay new cops as well, or you may not be able to hire as many or you may disenfranchise them and pick in Chicago. I it could be Cleveland as well where I live. But the point is, is that there's tradeoffs that have to happen. And as those trade offs start to happen, you get sort of this entropy throughout the system.

And suddenly the things that people that I love being in a city, they go, maybe I don't like being in a city as much. Maybe I want to go live outside of Hilton Head, or maybe I want to go live down in South Carolina, or maybe I want to go live in Texas. And you're seeing these movement patterns. You can see them in the U-Haul rates and the destinations, et cetera. So long winded way of saying, as I think some of it, I don't want to get carried away with it because some of it could be covered.

I think this trend is real because of these big years. I think it may have gotten turbocharged to a certain extent or maybe overshooting the trend, if you will, because it over this year. But on current course in track, I think these big gears are likely to drive sort of a re prioritizing of what people where they want to live. And so I think it's just going to depend where you are in terms of real estate.

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That's blankest spelled Belin KNST Blankest Dotcom's billion US to get twenty five percent of a premium membership and a seven day free trial. Blankest dotcom sless billion us. All right, back to the show. So I agree with you on this trend, I think that this trend is going to continue to persist now, whether it stays as aggressive as it has over the last six months, this is the rationale that I think you're seeing. It is. Local governments, state governments can't print, right?

And the policies of some of these various locations, these local governments have policies of spending as if they can print as far as tax implications go, it's getting obscene and absurd to continue to pay such a ridiculously high tax rate for local municipalities or states that you're in. And I think that that trend is absolutely going to keep getting worse. And if true, these migration patterns that we've seen of people moving to areas that have more favorable local and state tax considerations are going to continue to trend in the direction that they've been trending.

So I'm going to throw this out to the audience because I know we have people that are real estate investors. If you have a really good chart that shows which regions have gone up and which regions have gone down in the past six months, please, I beg you, share this with myself and Steg on Twitter and I will retweeted tweeted out to everybody to see, because I think that you were really on to something here. I think it's part of the tax consideration.

I'm curious, do you agree with that?

Do you think that that's maybe what's driving it? Yeah, I think it is I think it's primarily a tax thing. I mean, I think that's been it. I think this year has been the first time where there has been a little bit of the safety, which is unfortunate. But I think it's primarily tax. I think that's right. Yeah, I agree with you, I think that the the fact that you've seen some social unrest on top of the issue that the person probably already had with living in the area was simply the icing on the cake.

And they're just like, I'm out of here. I'm not dealing with this anymore. So online, a lot of people were wanting to know your thoughts on the Judy Shelton fallout.

First, explain who she is for people that aren't familiar with who she or. So judicial nominee from Trump, she's the most well known for her, they're considered unconventional or controversial views regarding gold, the gold standard, and in particular, she's written at least one, maybe two op ed about that. Having a neutral reference point or gold backed bonds to settle trade would go a long way in increasing actually the dynamism of the US economy and sort of undoing some of these imbalances that have accrued and that have caused some of the problems we're seeing in terms of wealth inequality, in terms of de-industrialization of the US and that deindustrialization.

Now a bit of a problem as it relates to the US and China relations. But so at any rate, Trump nominated her. They brought it up, tabled it, and today they tried to get it through and it didn't go through. My understanding is there's still a chance it could happen in the next few days, maybe depending on who is there. But to me, it was somewhat disappointing only because of my longstanding view. Our research suggests that really, if you don't change the currency system in a way so that you're settling trade in a neutral reserve assets, or whether that's gold back bonds or gold at a floating rate or some sort of neutral reserve asset, the US's role in the world increasingly gets relegated to us supplying the dollars to China for China to buy up finite assets and grow their own military and grow their global economic influence and reduce our role in the world.

And so it is. I was a bit disappointed because I thought it was an interesting potential new voice that maybe she could communicate and maybe some cross pollination of some ideas with the people at the Fed currently of here's what this system has wrought. But it's not meant to be apparently at this point. There's this great article from the early twenty nineteen called How to Diagnose Your Own Dutch Disease. And the United States has Dutch disease. It has Dutch disease, Dutch disease that came up when the Netherlands found oil or gas.

I forget what it was, but the gist of it was, is when you have this resource endowment, if managed improperly and leaves the rest of your economy to atrophy because you've become it's so easy to get rich using that and exporting that, that's what you do when everything else goes away. And this article makes the point the US is the Saudi Arabia of money. We can produce dollars with a couple of keystrokes. And so why would we produce anything else?

Let's just produce dollars and have the rest of the world make stuff for us. And at first it's it's the greatest deal in the world. And it helped us win the Cold War and it's helped us drive and get very powerful. But the point is that the US military late in twenty eighteen said, look, our industrial supply chain is falling apart because for 40 years we don't. I mean, I saw an article today that we've built this new crane in Florida for our container ships built in China.

They've built a giant container ship crane in China and sent it here because presumably because we don't do that anymore. And so on one level, it's like, OK, I guess that sort of makes sense. But then you go to the guys in the military and say, the politicians say, well, we need to really crack down on China and the guys in the military going, are we going to send them dollars to make our stuff for us?

And the code crisis? Hey, China, send us some, please. Pretty please. And that's happening across Taiwan. We've outsourced all this stuff to Taiwan, which was all made a whole bunch of sense until the Chinese had the ability to easily take it over and we couldn't do a thing about it, which is the case right now in all likelihood. So one of the things that you and I talk about a lot online is gold and bitcoin.

I mean, the price in Bitcoin has just been explosive in twenty twenty. When you look at gold, it was explosive as well. But then it's fizzled out here in the third going into the fourth quarter when Bitcoin has really started to perform. I mean, it's been the strongest part of the move in 2020. When you and I have some engagements online. You talk about gold having this levered derivative kind of explosive piece to it, potentially if it gets to a certain point.

Explain this to the listener. And I'm just, um, more interested in just kind of hearing your general thoughts about both of these two forms of holding value. I like them both a lot, so the gold market was allowed to expand in a lot of different ways, cash settled futures are a small part of the problem when you have a cash settled futures contract, which means you don't have to have the gold, you can settle in cash. Most of them are settled in cash.

But once you're settling something with a high stock to flow ratio like gold in cash, the high stock to flow ratio means you can separate physical fundamental supply demand fundamentals from the price for a very long period of time, which means the cash settlement aspect of it turns into a balance sheet contest. And so I think gold supplies are being bought and they're getting very tight. And so I'm going to own some gold futures and that might very well be right.

But if JP Morgan's trading desk comes in with two billion dollars notional for sale or whoever that is, that comes in in the middle and it doesn't matter, your stocks get raw and you create this waterfall effect. Right. And so that's a short term type of aspect in terms of the futures. The bigger deal, in my view, and had it explained to me, is the unallocated gold market out of London or the credit gold market out of London where it's, hey, I want to own one hundred million dollars worth of gold done.

And it's not like they found the gold producer, the gold and. Right. So contrast that with what Michael Saylor is on the tape saying how he had what he had to do to buy his four hundred million in Bitcoin. It was like a Navy SEAL raid in terms of trading to make sure he didn't squeeze the price up. And the difference in that amount of liquidity is this credit gold market. And so when I say ultimately, the credit gold market can go on and on and on, as long as there are no leverage restrictions in terms of that, there's always been sort of this mythical or conceptual, maybe the better way to put it something could break that market or force and unwind in that market.

They would have to be big. They would have to probably have nukes because they are gold is not a free market. It has never been a free market as a political metal. And that is, I don't think, fully appreciated by everybody. But in theory, if that happened, then the deleveraging of that system would have to be settled via price. And the Comex guys, when they said, hey, we've got one or three percent of all the Kyle Bass, Kyle Bass talked about it maybe three, five, seven years ago when he owned some gold for the Texas University system, etc.

But he went on the vault tour, that climax, and he said, well, what happens if you guys are three percent reserve? What would happen if someone came in and said, I want it all? They said, no, that never happens, Kyle. Yeah, but what would happen?

Price would settle everything. And that's the point. Now, it's again, it's a political medal. Brothers tried to do that and they just shut down the exchange when sales only and squeezed them out and they lost they lost big and average size hedge fund could go into the Cemex and clean it out today. There's a reason why they don't. I don't fully know why they don't, but I've got my suspicions. It's a political matter. It is not it's not a pure market.

And so some.

Are you saying that if you really wanted to take it home, it might be an issue? Even if it was a fractional reserve situation? They'll have to bit the price power in that situation.

The prices globally play into a factor. So what's happening locally?

Well, they would have to be some sort of structural event, right? It would have to be, you know, the one I've used a lot because I think it's maybe the cleanest way you could see it happen. So things get chippy with the US and Russia and China and Russia and China get together with Saudi and say we are only accepting physical gold for our oil at a value of one thousand barrels of oil per ounce. And immediately everyone in America, the paper market is going to, oh my God, what a great arbitrage opportunity.

I'm going to go buy an ounce of paper gold and I'm going to turn around and get a thousand barrels of oil and I'll turn around, sell a thousand barrels of oil and it'll be worth forty thousand dollars. And everyone will show up at the paper markets, which will promptly close. You'll be cash settled with the prior days close and it'll be physical only. And so your paper will you'll get paid in your paper. But unless you own the physical, that's how you could break that.

That's the type of thing that it would have to happen.

So let's say we fast forward into August of twenty twenty one. And let's just say for critical thinking, drill here, the price of Bitcoin is punching through a hundred thousand in August, twenty twenty one, does this narrative start to run on Wall Street and cause concern as to the utility of gold being a store of value? Is this something that the people that own gold start trying to actually sell it in order to start buying Bitcoin? Or do you see that these are just two totally different worlds?

I think it depends on the level you are, I think if you are, you're the average millionaire, you're the average 10 millionaire, you probably sell some gold, maybe you get really aggressive, sell all your gold. The market's telling me this if you are a giant, right. If you are Russia, if you're Saudi, the Russians are not going to dump their gold to buy Bitcoin. Yeah, I completely agree with you, I don't think that would ever happen if they wanted to buy Bitcoin, but they didn't just print more money.

They could conceivably.

And as it is, I think they've banned it. I think it's illegal now that that's worked for them or the currency. But I think I saw some they were looking at making it illegal. Not that that's, I think, the right thing to do or a risk. But the point is, I think the super giants in the system and I tweeted about this today at some point, if bitcoins punching through these bigger and bigger levels, you're starting to talk about this sort of institutional threat.

You are dis intermediating the banking system. What do you need? A central bank for bitcoins, a million dollars, a coin, a billion dollars, a coin. Who needs a central bank? And that's where I think the higher it goes at some point, I think there starts to be some institutional pressure for these guys to defend their franchise. All right. What do we have on our balance sheet that can compete with Bitcoin? Well, look around, guys.

We've got mortgages for mom and pop in the gypsy and gold. OK, let's raise the price of that. There's things they can do there. Now, this is to be clear, this is speculative on my part. It's based on a view that if Bitcoin does what I think it could do as to what you're hypothesizing, you could do, which I think is entirely possible with the stock to flow charts that would have you that are out there suggest it could do to me.

The wild cards in it are that don't get as much airplay that I'm trying to raise is what do the super giants, so to speak. And that's that's a term from FOAF away. What are the super giants in the system and the status quo?

Do they just sit there and watch that all that whole central banking fiat seigniorage franchise just get taken away like Amazon did to Walmart and Walmart? Maybe a bad example to the entire out of these brick and mortar stores? Or do they say, what are we going to use to defend our franchise? What are we going to do? And there's only one thing on their books they can use to defend that franchise that has unlimited upside price. And that's cool.

And they have a printing press. So in theory, they can come out and say Bitcoin is a million, OK, gold's one hundred thousand. We'll make a market right there. I don't think that's going to happen. But I'm just saying conceptually it could. And I'm just thinking in terms of the institutional motivations as Bitcoin continues to be more and more successful and really sort of stick their nose in it. Right. I mean, I had a drink with one of the biggest physical gold traders in the world three years ago.

So it had been like August to 17. We were in New York City and Bitcoin was doing sort of its first. It wasn't really getting to the heights of that year yet, but it was starting to really ramp up and unsolicited. We're talking Yuko's Bitcoin. Bitcoin is doing what gold would be doing if it didn't have all this giant paper market attached to it. And that was exactly what I thought of it, because I do agree the stock to flow dynamics in terms of the happenings and the supply, their superior Bitcoin versus gold.

They are because you do have the mine supply increases. I disagree with Sailors' two percent. No, I don't think that's the right. No, gold supplies haven't risen for a couple of years, actually. And at current prices, I think it's supply numbers are overstated. But to his point, they are generally positive over time. And unlike Bitcoin, they're price sensitive. Right. So we woke up tomorrow and gold five thousand. Those supply numbers are going to adjust accordingly, et cetera.

So I think he makes a very valid point. But I think the price response could be very non-linear and in gold. And I think I said that to you today, where I think there are periods of time where gold could outperform. And I think those periods of time are probably going to be very compressed and probably around political events or just the system being Bitcoin doing so well. It it starts to sort of brighten these guys, their franchise. All right, well, look, I know I've learned a ton from you through the years, and one of the things that I think I've learned the most from you is the books that you've written, these two books that you've written.

They go by the title Mr. X interviews. If people want to look it up on Amazon and we'll have links in the show notes. But your books are fantastic. They're so easy to understand. I know one of the first times I talked to you, I was like, wow, this guy has a lot more behind the discussion points and a depth of knowledge that's there that I wish I could tap into. And I'm telling you, folks, if you do want to tap into that, read his two books.

Look, if people want to learn more about you, give them a hand off where they can learn more about you. Sure, so thank you for those kind words, I appreciate it. Yeah, if you want to learn more about what we're up to, you can check us out Fitty Dash, L.L.C., dot com. And I've got a, as Preston will testify, a fairly active Twitter. Feed it at Leupp Groman Lucky Grow Emison. Luke, thanks so much for your time.

Absolutely, thanks for having me on. It's always great catching up. All right, guys, as we are letting Luke Groman go, we're going to play a question from the audience. And this question comes from Jeff. Hi, my name is Jeff, I'm from Toronto and I have a question, I guess, which would be appropriate for Preston, you've made a compelling case for investing in Bitcoin, but having never done it before, I'm just wondering if you could explain to listeners in some detail how we go about safely buying Bitcoin and equally importantly, how do we store it securely so that we don't become another one of these high profile hacks that takes place.

Thanks very much and a great podcast, guys. So, Jeff, great question.

This is something that I get asked a lot on Twitter. It's something that I normally don't respond to because it really comes down to the person and their technical expertise as to how they want to take possession of Bitcoin. I would put this into two different categories. You can you can take physical possession of the Bitcoins yourself or you can outsource it and you can have somebody else take possession of the bitcoins.

Early on, there was a hack. There was a really famous hack of an exchange, not bitcoin, but of an exchange. This was the Mt. Gox hack. I think this happened back in twenty thirteen. Ever since that event, there's been a lot of folks, especially folks on on Twitter that have been in the space for a very long time, that strongly suggest that everyone should take physical possession of their bitcoins and not outsource it to some other entity to manage their private keys for them.

So there's there's a rift between those two communities. I'm one of the people that would encourage you to take physical possession of your bitcoins if you're technically capable of doing it.

If you're not good with computers and you're somebody who would lose your private key and just not comfortable with those kinds of things, well, then maybe having somebody else manage that for you that's a reputable source might be a better solution. I can't answer that for you. You've got to answer that one for yourself. So if you're going to take physical possession of your bitcoins, there's a couple of hardware wallets that I would recommend. The first one would be ledger, another one would be called card, and the third one would be treasure.

Those are very reputable hardware wallets and all that. That hardware, while it's doing is is really holding your private key. It's holding the twenty four word mnemonic that makes up your private key. And if that sounds like a bunch of technical gobbledygook for for a person listening to this, think of it like this. Think of your Bitcoin as is really just being a key to an address. So you've got your house and you've got a key to get into your house.

Everybody knows your address to your house, your mailing address, but they don't know what the key looks like in order to get into your front door. And I would explain Bitcoin in a very similar way where everyone has a public address, like if I want to send somebody some Bitcoin, I just have to know what their public address is. I have to know what their address is. Right. And in order for me to send it, I have to have that key to unlock the bitcoins, to leave my address, to go to their address.

That hardware wallet that we're talking about is the thing that manages or or has that private key inside of it, which is the twenty four word mnemonic. So if you've got that and you and you know what the public addresses that's associated with it, well, that's how you store your bitcoins. So there's another there's one more hardware wallet that I want to mention. And it's actually on your smartphone and it's by a company called Block Stream and the name of the app is the Green App.

This because it's connected to the Internet at all times and people might be. People might want to try to take a picture of their private keys because it's on their smartphone, they might do it like a screen shot with their with their smartphone. I would highly encourage you to not do that. You don't want any type of digital records of your private keys if you're taking physical possession of them. One final note that I would tell you. If you're taking physical possession of your bitcoins is think about getting what's called a metal seed storage.

This is just a piece of metal in which you would engrave your twenty four word pneumonic onto.

And in the event that you would have a house fire or you would lose your smartphone or you'd lose your treasure or whatever it might be that twenty four word mnemonic will always be able to restore your account if you have it. And if you have it saved on a on a piece of metal, there's probably nothing better than that. All right, so for people who don't want to go through all of that and they don't want to take possession of their private keys, which is my recommendation, if you have the technical skills to do it, there's a lot of other options so you can own a thing called GBC.

This is just a stock ticker. Like you go into whatever trading account you got type in. It'll come up just like you would an Apple stock and you can buy. This is a trust where somebody else is buying physical bitcoins. They're storing them for you. It's a company called Greyscale. I think they have ten billion dollars worth of Bitcoin under management and you'll get total access to the price action, but you will not have physical possession of the Bitcoins.

And I think that's a really important point. I can't make that decision for you. It's a personal decision. PayPal recently announced that they're doing something similar where you can gain access to Bitcoin, but they're going to continue to hold the private keys at PayPal cash up by. This is Jack Dorsey's company. They're doing it. Robin Hood. You can do it on Robin Hood. I recently saw that JP Morgan was doing something with the Winklevoss exchange. There's all sorts of businesses.

Fidelity, I'm sure, is going to have access to this shortly.

So if people want to buy it, but they don't want to manage their private keys because they don't feel like they have the technical prowess to do it, that these are other options for you to gain access to Bitcoin. So here's what's and I have decided to do. We're going to release a show every Wednesday that talk specifically about Bitcoin. This way, we're able to keep the stock investing conversations on Saturday and we can talk about this new and emerging technology that so many people have an interest in on Wednesdays.

If this is something that does not interest you, I highly encourage you to not listen to the Wednesday show, just skip over it. And then on Saturday, the normal show, the normal stuff that we cover is going to come out. Then if it is something you want to learn more about, please download the show on Wednesdays. We're going to bring in some of the most impressive technically skilled guests that can talk this stuff in so much detail, way more than Stig and I can can do.

But we're going to be the ones asking the questions and hopefully pulling this information and just the best resources for you to learn right along with us as to what in the world this is all about. Our first show is actually going to come out this Wednesday right before Thanksgiving. It's already recorded and it is one heck of a conversation. My mind was blown at the end of this conversation, and I would highly encourage you to check it out. If you do have an interest in this stuff, if you don't know, big deal.

We'll see you guys again on the following Saturday. So, Jeff, really appreciate you asking this awesome question for asking this. We're going to give you free access to our tip finance tool. It's got all sorts of things on there, like being able to do intrinsic value assessments, momentum tools, portfolio tools to help manage your correlation between your various picks. And we're really excited to be able to give that to you. So thanks for asking a great question.

And if anybody else wants to get a question played on the show, go to ask the investors Dotcom and record your question there. And if it gets played, you get free access to our top finance tool. All right. That's all we have for this week's show. Be sure to check out the new release on Wednesdays. And we look forward to bringing that content to you. Thanks for joining us.

Thank you for listening to TI IP to access our Schnitz courses or forums, go to the investor's podcast Dotcom. This show is for entertainment purposes only before making any decisions. Consult a professional. This show is copyrighted by the Investors Podcast Network written permission must be granted before syndication forecasting.