Luke Gromen — Equities Extremely Complacent; De-lever and Prepare to Buy The Dip

2:13 FFTT's process — hunting developing economic bottlenecks

• The firm aggregates a large amount of publicly available information "in what we think is a unique manner" to identify developing economic bottlenecks by sector — because sectors and companies poised to benefit from (or be hurt by) a bottleneck tend to out- or under-perform.
• Two reports a week, 46 weeks a year: "I do a lot of writing, do a lot of thinking. I think I've got the best job in the world."

3:31 "Wrong for the right reason" — the Iran duration call

• Consensus (and Trump) said the war would run 3–4 weeks; FFTT told clients from day one it would run far longer, and that Hormuz would stay shut past May, June, even July 4th. "Here we are, it's July 29th. It's essentially still closed."
• Right on the reasons, wrong on the market path: the March reaction (S&P −9%, oil up big, rates up big, inflation picking up) was exactly it — then "everything changed in early April."

4:58 What he under-appreciated — China cut imports 3–4M bbl/d

• "China's ability to reduce imports by 3 to 4 million barrels a day surprised me, surprised a lot of people." There was probably more leakage through the Strait than admitted, but it was marginal next to what China did.
• The read-through: "China has more leverage than we acknowledge right now" — and it is in China's interest to extend the conflict while keeping supply high enough and prices low enough for itself. "Ultimately the US getting stuck in another quagmire is good for China."

7:28 Game on again — but from a worse starting line

• Street-ball analogy: same game, restarted. Except now it begins from lower global stockpiles of oil and other commodities, a higher baseline inflation, higher baseline yields, tighter global supply chains and a slower Western economy than three months ago.
• "Rates are going to keep moving higher until something breaks" — US, Japan, UK, EU, Germany, France all rising. "The only guy whose yields aren't rising is China."

8:40 The variant perception — in the risk-off, yields go UP

• When something breaks in equities you get a momentary drop in long-term Western yields — "5 days, 10 days, maybe even if we're lucky, 3 weeks" — and then they stop going down and "go up even faster as equities fall. That to me is when the real crisis starts."
• Consensus still expects the textbook sequence (yields up → something breaks → equities fall → yields fall) even though the opposite "has happened over and over and over since 2020": COVID, the 2022 hiking cycle, SVB/Signature in 2023, fall '23, and Liberation Day 2024 (down two days, then away). At the war's start the flight-to-safety crowd said 10s would fall; "we're up 70 basis points since then."

10:53 The pain thresholds — 4.4, then 4.65–4.7, and 4.6–4.9 as the problem zone

• "4.4% for a while you could see it like clockwork — 4.4 they back off, 4.4 we get a tweet from Trump." They have since allowed 4.65–4.7; historically 4.6 to 4.8, up to 4.9% on the 10-year "has been a problem area," and higher debt levels make that more binding, not less.
• Bessent's "three arrows" programme "is in the toilet — he's going to get none of his three arrows as a result of this war," which makes the deficit more sensitive to the 10-year.

12:04 Credibility erosion, the protection racket — and Warsh's veto over the war

• Every back-down erodes credibility "a little bit… and that doesn't matter until it matters. That's going to matter all at once." Part of the military's historical job "has been to threaten people into buying Treasuries that maybe don't want to buy Treasuries."
• Two demonstrations are corroding that: you can't take pain above 4.6–4.7% on your 10-year, and "your most powerful navy in the history of the world… keeps getting stood off by missiles and drones, which are very cheap and easy to mass produce."
• Tactically they can cap yields any number of ways "particularly if their guy at the Fed plays along" — and if Warsh decided the war was a bad idea, he could run policy in a way that forces its end. Yields "will only get away from them if Warsh wants them to."

15:43 The creditor swap — patient buyers out, fickle leveraged ones in

• Demand is still there but the holder changed: from patient, non-profit-oriented creditors (the ideal creditor) to "extremely fickle, very short-term oriented investors in the form of hedge funds based out of the Cayman Islands."
• Global central banks stopped buying on a net basis in 2014 and their holdings are net down over 12 years. The gap was papered over by rule changes: Treasuries as high-quality liquid assets for banks (2014), the 2015–16 money-market-fund reform that herded cash into government funds ("effectively a form of QE" that crowded out the private sector), and Trump's 2018 pension tax tweak.

17:45 The basis trade and the ULX — 37% of net issuance since 2022

• From ~2018 the Treasury basis trade took off: short the future, buy the cash bond, on massive leverage. The biggest marginal foreign buyer since 2014 is "the ULX" — UK, Luxembourg, Ireland, Caymans, Switzerland — i.e. hedge funds, tax havens and US corporates, not foreign states.
• A Fed white paper from October 2025 showed that since 2022 37% of net issuance of notes and bonds (everything but bills) was Cayman Islands hedge funds. "That's fine. There is a trade-off to that though…"

19:32 The de-grossing doom loop, in plain English

• "It's a certainty… because 40% nearly of the notes and bonds bought since 2022 have been bought by hedge funds. On high leverage." When equity vol picks up, risk managers make the book flat — "they sell everything… they turn sellers of Treasuries."
• So the biggest buyer of the last four years becomes the seller exactly when equities fall: "higher yields in a risk off, I got to de-gross equities more… I got to de-gross more Treasuries, rates up" — a self-feeding loop.

21:03 …until they cry uncle and inject dollar liquidity — the four-times playbook

• 2020: massive QE, $600 billion a month. 2022–23: Yellen weakening the dollar at a 40% annualised rate from October '22 to Feb–March '23. Later '23: shifting issuance to the front end and running down the reverse repo — "effectively just delayed QE that she had control over." Q2 2024: the first Treasury repurchase programme in 24 years.
• "Bessent criticised the whole thing, became Treasury Secretary, and promptly doubled the rate of Treasury buybacks that she was doing." Friends who have traded emerging markets recognise it instantly: "this is just an emerging market debt crisis with the American flag pasted on the top."

22:40 Treasury-market functioning is the Fed's real #1 mandate

• Powell's own phrase: we're doing QE with inflation where it is "because we need to ensure Treasury market functioning." That is "the Fed's shadow third mandate" — and with debt/GDP at 120% and 6% deficits, "it's the Fed's number one mandate."
• Consensus says Warsh will subordinate Treasury-market functioning to price stability: "there's not a chance. The only question is how long" he lets dysfunction run before he bends the knee — and it has to be short, given the leverage in the system and Treasuries' centrality as collateral.

24:27 Contagion — UK, Japan, Germany, France; gilts and USTs tied at the hip

• All the historic creditors are flashing red; the exception is China, which has gone from the highest 10-year yield of the group in 2008 to the lowest — now below Japan.
• Japan and the UK are the #1 and #2 foreign creditors of the US, and the UK is "the only other developed twin deficit nation" — its private Treasury holdings exceed Saudi, China, Russia and Germany. Run 10-year gilts against 10-year USTs: "they just lockstep. They're tied at the hip."
• "I don't know where it's going to break first, but once one of them breaks, they're all going to break in very short order." So much for the 5D-chess theory of choking off China — "you're going to choke off your own allies way first."

27:14 Equities are extremely complacent — in the short run

• Big tech AI has become "very debt financed, very cash negative debt financed," and it's a very large slice of the biggest index in the world: "they can't have anything go wrong. And yet they need to keep borrowing more and more money, and the underlying rate… is going to keep rising on them. That is a very bad combination."
• Tactically, then, equities are "extraordinarily complacent" to what is happening in Western sovereign bond markets.

28:15 …but rational in dollar terms — the Venezuela framing

• If this is "an emerging market debt problem with US and UK and German and Japanese characteristics," look at the extreme: for several years the world's best-performing equity index was Venezuela's, "as the currency was just getting destroyed."
• He's explicit that he isn't forecasting hyperinflation — the point is that resilient equities are telling you about the currency. Evidence: the S&P priced in TLT (the long bond) is exponential, on both price and flow.

29:44 Price the index in gold and the bull market disappears

• The Dow's 85–90% fall from 1929–33 was a fall in gold terms, because the US was on a gold standard. Apply the same lens now: the S&P total return priced in gold is down 40% since the January-2000 dot-com high, down 8% since Q4-2018, and down 21% since January 2022 — even after this year's gold sell-off and the April-onward equity rally.
• So the secular behaviour is rational: the Fed "has proven five times in six years that their number one mandate is not price stability, it is Treasury market functioning," and the government keeps adding to the debt — "then it's pretty simple. Don't own long-term bonds and own equities instead," and buy all the dips.

31:38 Zugzwang — the stock market backs the Treasury market

• Through the consumption link and federal receipts from non-withheld and stock-based comp, "if equities go down 20% and stay down, the deficit will blow out. We saw this in 2022, 2023. And you will go into a debt spiral."
• "Paradoxically, the stock market backs the Treasury market. And the Treasury market backs the stock market" — leaving policymakers in what chess players call zugzwang: you have to move, and every move makes your position worse.

33:16 The dollar — down ~70% against gold, weaker but managed

• "The dollar has essentially collapsed against gold in the last 3 years… from 1,800 to 5,400. That's the dollar down almost 70% against gold," and he expects that to continue.
• Against other currencies it's more contained: DXY "needs to get weaker on a relative basis in the near term," and ultimately much weaker — "but I don't think that's going to happen in the next year. I think they're managing this process."

33:56 Defense stimmies — the COVID playbook with Patriot missiles

• Coming out of the NATO meeting the US, Japan, Germany, UK and Korea all said the same thing — which looks coordinated. It is the COVID stimulus template, except "instead of TVs, they're now buying Patriot missiles."
• The logic: you escape a debt problem with high nominal growth and low relative rates — you inflate the debt down — while rebuilding a defense industrial base. The corollary is that all their bond markets sell off at once, so they "devalue at the same time against gold, but not against each other": the decline shows up against the yuan and against gold.

36:22 Gold's pullback is digestion — and China buys every dip bigger

• The run to 5,400 had "traits of a blow-off top… the vertical lines in charts which makes everyone in our business nervous and take some profits." The retreat to the low-4,000s has been "a healthy pullback," and central-bank buying stepped right back up after March/April.
• The tell he recognises from 15 years on a sales-trading desk: 5,400→5,000/4,800 and China buys 80 tons, the most in X years; down to 4,400 and it buys 2X, the most in 2X years; lower again and 3X — "and the last month they bought 173 tons imported," the most in ~12 years. "They're kind of telling you what the story is."

38:36 A quarter of China's surplus is being settled in gold

• 173 tons ≈ $23 billion against a $105 billion monthly trade surplus — "they're putting almost a quarter of their trade surplus into gold on a de facto basis."
• "I think it's going to go way higher than the 5,400 record. Because what we're watching in real time are China's surpluses being settled in gold." The "there isn't enough gold" objection is a price statement: not enough at 4,000; enough at 10,000 or 15,000.

39:19 The $16,000 solution — and why the West won't say it out loud

• The arithmetic of the imbalance everyone complains about: in June China imported $23B of gold and net-exported $105B of stuff. At $16,000 gold — 4x — it would have imported $100B of gold against $100B of net exports, "and China's balance of trade is flat."
• "Why is this not an acceptable solution? Simple. If gold's at 16,000, guess where the dollar is… it's a lot lower," and inflation is a lot higher. That is where it needs to be — but it's "a very big political move" with geopolitical implications.

41:08 Why China wants gold — not the yuan — to replace the Treasury

• "There is zero chance the yuan is going to replace the dollar as the dollar's been structured since 1971," where trade surpluses recycle into Treasuries, MBS and US equities. China doesn't want that system; it wants "gold floating in all currencies."
• The motive is defensive, not hostile: without the ability to buy oil, gas and commodities in yuan, China eventually runs out of dollar reserves and re-runs the late-1990s Southeast Asian currency crisis — "a political redline for Beijing."

43:33 The plumbing — offshore yuan clearing banks in every gold hub

• The yuan only works if the capital account stays closed. Step one: make the yuan buy things worth having — "Chinese AI… Huawei equipment… BYD cars… solar," not the "plastic squirt guns" of 20 years ago.
• Step two: for the surplus yuan left over, China has set up offshore yuan clearing banks "in every major gold hub in the world" — London, Switzerland, Dubai, Singapore, Hong Kong, Shanghai. "You can show up with yuan, get your gold, and you can take it home. China's capital account is two-way through gold on a limited basis." That is how gold replaces the Treasury bond as the reserve asset.

45:21 Two bonds — and the recapitalisation nobody noticed

• The yuan is down ~80% against gold over five years — and because Beijing has told households and banks to buy gold since 2002, "that starts to look like a recapitalization of the Chinese household balance sheet and of bank balance sheets, which is exactly what it is."
• The one-line comparison: "gold is a 0% yielding bond of finite issuance, infinite face value. What's a Treasury bond? A 4% yielding bond of infinite issuance, finite face value." In an era of defense stimmies and secular deficits, gold is superior "to anyone that has a sixth-grade math understanding."

46:19 If gold is the backstop, the risk-free rate is 1–2% — very bullish equities

• Back-of-envelope from the post-1971 record (debt compounding ~8%, gold ~9%): over the long run gold behaves like "a positive 1 to 2% real rate instrument going back hundreds of years," so a gold-backstopped world implies a 1–2% risk-free rate — "very attractive to very indebted governments… very good for equity prices."
• The scare story is the other variant perception: "I was told there would be zombies in the street when gold went to 5,000… I look around, I don't see any freaking zombies." What does get hurt is bonds: "the real value of bonds get crushed? Yeah. But that has to happen. That's in the cake — bonds are going to get crushed by either devaluation or war."

48:07 Twenty flat years of US electricity — PAVE and GRID

• US electricity generation in 2024 was essentially the same as 2004, despite "massive wealth growth on paper." Because power consumption and real GDP are tightly correlated, "what that tells you is the US inflated a lot from 2004 to 2024… on a net basis, the US didn't really grow on a real basis for 20 years."
• That is now reversing — AI first, then reshoring ("if you have factories, you need grid"). The expression: "ETFs like the PAVE, GRID… look at the companies in those ETFs" — recommended to clients for years, with no financial relationship to either — "the people selling picks and shovels to the mining boom that is reshoring the US industrial base."

49:30 Japan by process of elimination

• The old production saw: fast, cheap, or made well — pick two. The US needs to reshore fast and well, but if it isn't done cheaply "the bond market's going to blow up because of the inflation" — so it will be done well and slowly.
• The US no longer has "the skilled trades… the grid… the machines to make the machines." Only three countries can supply that: Germany (being beaten up by China), China (off-limits), Japan — Korea only at the margin, its Kospi "trading like an altcoin because it's basically two AI stocks."
• "The Japanese do a lot of the stuff that the Chinese do, and in some ways better… by process of elimination, the Japanese industrial companies are going to have to make a ton of money reshoring the US" — the defense base and the electrical grid.

51:42 The conclusion — bearish now, screaming buy later; and be unlevered

• Asked to summarise US equities — "very bearish short-term, but almost oddly think that long-term it's going to be a screaming buy on the dip" — he answers: "Yeah, I think that's exactly it."
• Closing advice: be unlevered. "There are things happening that haven't happened in a long time or ever… the Overton window of possibilities in markets is as wide as I've ever seen it, and I've been doing this 30-plus years."
• "To benefit from what I think is going to happen very bullishly over the next decade plus, you got to survive. You got to get there… I think you want to own some gold."