Title: Why U.S. Treasury's Bond Market Intervention Is Just The Beginning
Show: Monetary Matters (host Jack Farley, The Monetary Matters Network)
Guest: Luke Gromen, founder of Forest for the Trees (FFTT)
Date: 2026-08-20 (recorded 2026-08-19, the day Bessent announced doubling Treasury buybacks)
URL: https://youtu.be/IsswgLUkUas
Length: 1:30:39
Note: Fillers (um/uh/you know), stutters and false starts removed; wording otherwise verbatim, every (mm:ss) cue kept in place. Auto-transcript garbles corrected: "Bessant"/"Besson"/"Bassin"/"Bessin"/"Besset"→Bessent; "Worsh"/"Wars"→Warsh; "Groman"/"Roman"→Gromen; "FEMA swap lines"→FIMA swap lines; "tenure" (rate context)→10-year; "Greg Gip"→Greg Ip; "Nick Timos"/"Timouse"/"Timarouse"→Nick Timiraos; "Tukrium"/"teum"/"tukream"→Teucrium and "WA T"/"S YB"/"CE"→WEAT/SOYB/CANE (sponsor read); "ticker co"→ticker CORN; "doge"→DOGE; "nasty Graham"/"nasty gram"→nastygram; "manonies"→Mangiones; "sofur"→SOFR; "Bernani"→Bernanke; "JPAL"→Jay Powell; "Larry Frink"→Larry Fink; "Howard Mark"→Howard Marks; "Jameson Greer"→Jamieson Greer; "himnil"→hymnal; "mercante list"→mercantilist; "deacto"→de facto; "solveny"→solvency; "perspectus"→prospectus; "straight of Hormuz"/"horm"→Strait of Hormuz/Hormuz; "204 2024"→2024; "a,000 barrels"→1,000 barrels; "75 billion 70 million boomers"→70 million boomers; "100 to20 trillion"→100 to 120 trillion. Two passages left exactly as spoken and flagged UNVERIFIED: "Dr. Miller" as the co-author of Warsh's December 2018 op-ed (identity not confirmed from the audio), and "like golden Ellie getting hot in her" at (1:16:06), which is garbled beyond reconstruction (context suggests "really getting hot in here"). Bracketed noise tags ([laughter], [snorts], [applause], [gasps], [clears throat], [music]) removed. The Teucrium sponsor read at (32:34)-(34:12) is host-read advertising and is deliberately excluded from the analysis page's stocks table.
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(00:00) debt spiral. Bessent has a debt spiral problem today. That's why he acted. It's why he acted two weeks ago. It's why he acted yesterday. It's why he's going to keep acting going forward. >> Today's episode is brought to you by the Teucrium Corn Fund, ticker CORN. Let's get into it. Got a very important conversation today.
(00:17) I'm joined once again by Luke Gromen of Forest for the Trees Research. Luke, welcome back to Monetary Matters. >> Thanks for having me back on, Jack. It's great to be here. Luke, last time we spoke in December, you had a thesis that AI and the AI capex buildout would cause borrowing costs on the long end to rise. That was a pretty contrarian theory, but here we stand right now and the hyperscaler issuance for this year is probably going to be about 500 billion.
(00:44) And the long-end yields have risen a lot, about 50 basis points since we last spoke. So the 30-year yield well over 5% and this rise in yields has caused market angst, so much so that we actually had a news item from the Treasury Secretary today. So I set the stage for you today. So why have yields risen so much since we last spoke and what is the bombshell that has hit markets very recently? >> A lot of demand for capital has been driving it. You've got essentially AI bidding for capital.
(01:19) Secretary Bessent bidding for capital. The two of them are competing with each other. We're getting to the point, I don't think we're fully there yet, where it's a bit of a paradox because AI is bidding for capital and bidding up the cost of capital against a government who is dependent on receipts, half of the receipts from employment.
(01:43) and AI in the short run I think is going to hurt employment receipts. It has to for the AI case to make sense because that's what productivity is in the short run. And so it was really three things: AI, bigger than expected government deficits especially after the tariff thing was knocked down by the Supreme Court, and then the stupid Iran war.
(02:10) If I wanted to do the dumbest possible thing as the Trump administration, I would have attacked Iran and they did it. So we were showing people at the time the day we attacked Iran, the 10-year was 3.94%. Went out yesterday before today's news at almost 4.74%.
(02:30) So that makes perfect sense why rates went up. It was a very bad idea to do what they did. They thought it would be over fast. It wasn't. It isn't going to be. And then that brings us to today where Bessent came out and announced that he's doubling the size of Treasury buybacks which makes perfect sense. He needed to.
(02:49) People are saying, "Oh, it looks like he panicked." They said he should be panicking. The latest third quarter Treasury borrowing advisory committee report — we literally wrote a report for clients yesterday. The title was 3Q26 TBAC report says that Bessent has an emerging market hard currency debt spiral problem today.
(03:10) And we underline today. That was the morning of August 18th. August 19th. There we go. He's managing long rates via upsizing Treasury buybacks. >> Treasury Secretary Bessent just did literally today, August 19th, raise the buyback level. So it's increasing by at least double the size of liquidity support of buyback operations for Treasury securities, government bonds from the 10-year to the 30-year sector.
(03:34) So the long end support. So what is this program and how do you think it is going to work or not work? >> It's essentially a version of, depending on how you want to spin it, operation twist. It's another soft form of yield curve control. And the full report we wrote for clients last week on August 11th, we highlighted that Bessent's yen interventions were a soft form of yield curve control.
(04:06) And his admonishment to upsize the FIMA swap lines so that Japan could use them were a soft form of yield curve control. And we'd highlighted that for his 18-month tenure, that's all he's done is move down the path towards yield curve control. The title of that report was Secretary Bessent accelerates towards yield curve control, further down the road to yield curve control.
(04:29) Whether it's the UAE swap lines, whether it's the Japan swap lines, whether it's the stablecoin thing, whether it's Treasury buybacks, which he's now upsized, it's all the same. It's all in the same direction, which is managing the long end by issuing more at the short end. And that's fine. That's totally fine.
(04:51) That's essentially what he has to do. The trade-off to that is that it's going to be inflationary. >> I think part of the reason yields have risen so much is Kevin Warsh came in and when Kevin Warsh took over the Federal Reserve, there was a time where people thought he's so strong. He's so hawkish.
(05:10) So we've got to buy long-dated yields because he's going to have inflation under control. What did you make of that then and what do you make of that now? >> I thought it was then and I think it's now. And I wrote as much to clients. Kevin Warsh, people said Kevin Warsh is a hawk. Go read his December 2018 op-ed that he co-authored with Dr. Miller.
(05:31) They were begging for the Fed to cut rates because bank stocks were down 15% off the highs. He's no hawk. And that's what he said at the time. Everyone wanted to believe, and this is the tricky part of markets. The math was crystal. A, his own record. He wasn't a hawk. B, the math. In the same way that the math suggested that there was no way that Elon could DOGE 200 or 500 billion or a trillion, there's no way Warsh could be a hawk.
(05:57) It is mathematically impossible. And yet for four months, you get these stretches in markets where everybody in New York, they all repeat the same hymnal. It's like, oh yeah, he's a hawk and yes, sell gold, buy bonds. And it's a frustrating time when you're sitting out here away from Wall Street going, what are you guys smoking? Do the math. No, no, no, he's going to get the math, he's Kevin Warsh, he's not Powell. And here we are. So you can sense the frustration in my voice a little bit
(06:30) because you just look at his math the whole time. The math hasn't changed. Now the one thing that did change is this dumb war in Iran. If Warsh had even that much of a chance to be a hawk and have it work out, you couldn't attack Iran. That died on February 27th, his ability to be a hawk.
(06:52) And so here we are. >> What is the math? >> The math is straightforward. Entitlements plus interest plus veterans benefits are right now through fiscal third quarter 105% of receipts. Receipts are near all-time highs. The economy is good. You could argue receipts are bloated by an AI boom slash bubble that I don't know when it's going to burst, but it will burst at some point because every capex boom smaller than this one in US history going back 200 years have all burst.
(07:28) And when that happens, receipts will fall a lot because it has been a huge driver to GDP. And here's the kicker. The entitlements, interest, and veterans affairs benefits, which are all interest-like obligations, they're growing 7 and a half% year-to-date. Receipts are only growing four. And the more you print, these are essentially hard currency. Bessent doesn't owe boomers dollars.
(08:01) He owes them inflation adjusted dollars in social security. He owes them hips, knees, pharmaceuticals, doctor's time in Medicare, Medicaid. And he owes veterans pharmaceuticals, hips, knees, doctor's time in veterans affairs. So the more he prints, the more he liquefies, the more dovish he and Warsh are, which they have to be, the price of those things are going to run away from them.
(08:32) Just as if Argentina owed dollars. Just as if Venezuela owed dollars. Bessent owes 100 to 120 trillion dollars worth of hips, knees, but it's 100 to 120 trillion today. Tomorrow it'll be 120. Next year it'll be 140. The year after that it'll be 150. And this is the pinch they're in. That's the math.
(08:54) That is just the math. And part of the problem is not their fault. Who's to blame? I had a discussion about this the other day. Well, Trump's to blame. No, he's not. I just said 105% of receipts are entitlements, interest, and veterans affairs. Well, 80% of that receipt number, so $4 trillion a year now are Medicare, Medicaid, Social Security.
(09:28) Well, who approved those? FDR, LBJ in 1935 and 1968. And then you had 50 years of political cowardice by every politician since because any idiot with a calculator could go, "Wow, 70 million boomers born. Someday they're going to turn 65. What do we do?" Well, Luke, it's a good thing that the population in the United States is getting younger, healthier, and that medical care is getting cheaper. So the math that they're facing didn't change because Warsh is
(10:16) younger and handsomer and has better hair. It didn't change because Secretary Bessent ran a hedge fund and Janet Yellen was an academic. The math is the math. And I think today is the first down payment on the recognition of — in the same way that I had to listen to how "Elon's going to figure out how to cut a trillion dollars." I'm like, good luck with that.
(10:35) And I have had to for the last four or five months listen to "Warsh is going to be a hawk and Bessent ran a hedge fund and Yellen was an academic so they're going to figure it out." I'm like, good luck with that. Today's the first day where everyone's like, oh god, the math is the math.
(10:52) There's the math of the US government owes all of these off-balance sheet liabilities. There's also the math of Kevin Warsh has talked about inflation and he says he's going to slay inflation, but he keeps on referring to this trimmed mean inflation and other various measures of inflation that are lower than actual inflation is.
(11:13) So he keeps on laying dovish breadcrumbs that the market didn't really pay attention to for a while. But I think he is, and literally in the first press conference, he said that maybe after we do all these task forces, there doesn't have to be a zero at the end of the inflation thing.
(11:31) It doesn't have to be 2.0% inflation target, Luke. It could be 2.1 or 2.9. How is that not ridiculously dovish? Jay Powell would never say that. I think a lot of these guys around this administration — and to be clear a lot of the problem was waiting for them when they got in — we can see that in Bessent's pronouncements. How critical was he of Yellen
(12:08) in '23, '24? And then he gets in the seat, he does all the same things except bigger and faster and harder. And that just tells you, because he's a very smart man obviously. So he's not making himself a hypocrite >> for giggles. >> He's not making himself a meme for giggles. I got people with his face on Yellen's hair on my X feed today.
(12:30) >> So he's not doing that because he likes that. He's doing that because he has no other choice. And that's the corollary to all this that we've been writing for clients that people just didn't believe — consensus didn't believe, our clients believed it I think, but consensus believed that once you get to a certain point, if he raises rates, if Warsh was hawkish, the long end was going to run away from him, and if he was dovish the long end was going to run away from him.
(12:59) He didn't have a choice. He didn't have a choice about "I want to contain the long end." The only way to contain the long end is how they're now starting to contain the long end, which is buying it themselves. Yeah, the Treasury buying back. Well, Luke, it is funny that Kevin Warsh's philosophy is I don't want to influence markets.
(13:18) I don't want the short-term or long-term interest rate market, the Treasury market, to react to me. I want it to react to the economy. And I think he has this 1970 view of how the bond market sniffs out all these amazing things in the economy. But literally Treasury Secretary Scott Bessent, who is pretty close to the Federal Reserve, is now doing actions to contain long-end yields by more than doubling the Treasury buyback.
(13:45) So Kevin Warsh is saying I'm paying attention to the market, I'm paying attention to the market, but the market is being influenced by the Treasury. >> Yes. And I would even add to that: if you go back, Greg Ip at the Journal wrote an article two, three weeks ago and he pulled one of — it was after I think Warsh's congressional testimony, whatever that was, and Warsh is like we are going to stand aside.
(14:09) I'm not going to be the referee. And then he leaves a qualifier of unless we're in a crisis and then I'm going to make sure there's a fair price for assets, which translates to I'm going to make sure Treasury bond yields are low enough so that the US government can afford to make its interest payment. That's like I'm going to let the Browns win the Super Bowl.
(14:41) It's silly. It's literally other than that, Mrs. Lincoln, how was the play? If you're not going to let bonds find their level in a crisis, then you're manipulating markets, which is fine. Again, they don't have a choice because we have 90 years dating back to FDR of these programs and the demographics and the political cowardice of our political class.
(15:08) And then, I don't want to let the Trump administration escape. This Iran war was so galactically stupid. I can't even — I just remember watching going, "Okay, good luck, guys. Have fun." And it was the straw that broke the camel's back. Really, when you look back, it's going to be seen as the straw that broke the camel's back.
(15:28) That's why I bring it up. >> Yes. Luke, to be honest with you, I had on a lot of guests, economists who when we attacked Iran, they said that this would be a disaster. And I think there was a lot of push back to some of those economists and those views, and I think their predictions have been accurate.
(15:50) It's tough to conquer a nation that has 90 million people and has some of the biggest mountain ranges in the world. It's not going to happen. And I think that miraculously the oil disaster has not been nearly as bad as many people including myself believed.
(16:06) >> Myself too. Yeah. >> It's not looking good. >> No, it is — the Iran war was something that I got three out of four things perfectly right and the fourth was a flaming dumpster fire. Said it's going to last longer than expected. Said Hormuz is going to be closed longer than expected.
(16:28) I said that the Treasury market will break way before the Iranians or the Chinese. Check, check, check. Which all three of those were varying degrees of contrarian. And then I said, "Look, I think that you're going to have a significant global supply chain implosion as a result of A, B, and C." And I couldn't have been more wrong.
(16:49) And the things I got wrong on it — number one there was some leakage clearly, but the biggest swing factor is that China took down demand by 3 to four million barrels a day. >> Some of that was running down their supplies, but a bunch of it was also switching over to EVs.
(17:06) They have gotten rid of like a million barrels a day on EV demand. And so it's ironic, or paradoxical. I got that totally wrong. And at the same time, me getting that totally wrong also made the people saying that the Chinese were most screwed by this and we were totally going to have control of their oil — those people were galactically wrong.
(17:26) China now controls the oil market as a result of this action that was said to grab control of China's oil. You can't make this stuff up. >> Yeah. And actually the chemical products, refined products that human beings and consumers and companies interact with like jet fuel or gasoline, they actually are stubbornly high, but the price of oil has just been lower.
(17:51) So the refining margins have been really really high. So, very high. >> Marathon Petroleum Corp. Luke, how do you think that this war impacts the economy over the next six months? The economy in America is in some sense because of AI booming and so it's been very resilient to the high price of oil, but what is the impact on asset markets whether it's oil or gold or bonds or stocks, the consumer, just over the next 6 to 12 months? How do you think the impact is? >> I'll talk through the different factors as I'm thinking about them. So
(18:21) all else equal oil prices and commodity inflation would be higher. All else equal bond yields would be higher. Now we're moving to contain bond yields which is probably even more inflationary for commodities but doesn't necessarily negatively impact bond yields. Containing bond yields is also going to be good for nominal GDP growth and for financing for things like AI etc.
(18:49) So it's probably good for those things. And when I blend all of this together, I think the war ends up being positive for stocks in dollar terms and negative for stocks in gold terms. Basically a continuation of what we've seen. >> So the war is bullish for gold. That is interesting.
(19:11) I think that the top in gold was actually right before the war. Normally when you see these geopolitical spasms, you have gold rally as a geopolitical hedge, a flight to safety. But gold, unless you correct me if I'm wrong, was selling off on the escalation news of the war.
(19:33) And I wonder is it a degree that literally Iran is selling its gold to fund its operations or something else? >> Well, it's overall bullish gold because the only way the US is able to stop itself from a debt death spiral, and with it the West more broadly, is by keeping real rates negative. That's what we're talking about here ultimately. Today's move is ultimately just the latest down payment in moving towards significantly negative real interest rates.
(19:57) And what I mean by significantly is significantly, and that's good for gold. In terms of the war, yes, the price of gold peaked I think on the day that Warsh was appointed or was announced by Trump, right at the end of January, and then sold off with the war. I think gold was acting through this war like a reserve is supposed to.
(20:21) I think it's actually interesting. Historically, when gold was not part of the system, gold got bid on wars. People like, "Oh, I need to hedge something bad." Gold's now part of the system again. It's a bigger share of FX reserves than dollars are, than treasuries are. And so, because it's rallied so much, >> the S&P is at 7,800.
(20:46) Share count's down. How do we count the S&P? >> Yeah. Yeah. >> Right. Gold's price rallying so much to make it the biggest part of reserves is the whole point. That's the whole point. In the same way that you don't say hey I have this many shares of S&P in your 401k. What do you say? My 401k is worth this in dollars. True. So gold's back in the system, and when you're back in the system as a reserve, when it rains you got to sell. And so you can see gold was sold, treasury bonds were
(21:20) sold. Both were sold by some parties. Now, China, who was supposed to be being choked out of oil and their economy falling apart, did the old take and bid it. Hey, gold's down. Great. Give me 10 tons this month. Next month 12 tons, next month 14 tons, next month 19 tons, next month 26 tons.
(21:41) Just waving it in. So, not everybody, but yeah, central banks overall sold gold. A bunch of central banks sold gold. Central banks bought just a little bit on a net basis in the calendar first quarter, but in the calendar second quarter, gold buying went back to basically all-time highs by central banks.
(22:02) So I think that's why gold got sold off — exactly, people sold it because they needed dollars or they needed oil. And that also is a support for gold's now back in the system. And by the way, it worked. Notice nobody needed to do gold swap lines. Nobody needed to intervene in the yen because people were selling too much gold. It just worked.
(22:31) And they didn't need Bessent's permission to sell gold like US allies need reportedly permission to sell treasuries. >> Well, gold doesn't have a CEO. It doesn't have someone in charge of running the gold. >> No, that's exactly right. And you don't need the banking pipelines to sell your gold.
(22:52) Look, I like Bitcoin long term, but Bessent's been talking about controlling the pipelines and the on and off ramps to this. And purists know you don't need on and off ramps for Bitcoin. But I think probably at sovereign levels, that's a bit much.
(23:08) But the gold is pretty easy to see and you don't need anybody's permission. So gold did what it was supposed to do in the war. If gold is moving back into the system, if gold is now a more important FX reserve than treasuries are, which it is — that's just a fact now. And I think they're only going to get more important going forward with all the actions the US are taking, which are effectively communicating that treasuries are only good for certain things if we say so at certain times. And oh, by the way, we're
(23:39) going to be managing the yield curve to erode the real value of your Treasury holdings. If I'm a sovereign, I'm just saying, "All right, fine. I'm done. I'll buy gold." >> One of those actions that Treasury has taken, of course, is intervening with the yen.
(23:59) Tell us exactly what Bessent did, first with I think instructing European countries to interfere and then the FIMA swap line, which Nick Timiraos of the Wall Street Journal, who we both know, said it wasn't in the true spirit of Federal Reserve policy, and then Treasury Secretary Bessent said some pretty nasty things.
(24:20) Tell us your view of what happened and where it stands now with yen intervention. My understanding was that the United States did not let the Europeans know, which apparently was a violation of international protocol. >> Basically, Bessent came out and sold euro. I think it was 11 billion euro in reserves on our balance sheet and he sold those to buy yen, famously with the stylized Instagram "sell yen" thing.
(24:54) And I think the reason he did the stylized thing was essentially to try to get a bunch of friends in the hedge fund community to front-run him and do the heavy lifting for him. Hey, I'm going to sell 11 billion in euro and if you front-run it, he could get a lot more bang for his buck.
(25:14) And I think that's probably why we saw this little stylized Instagram thing, to let all these guys know before he actually did it. And that's fine. It bounced back pretty quickly. I haven't checked levels, but it's already retraced over half of that full intervention if I'm not mistaken. And then he talked about these FIMA swap lines.
(25:39) I don't know enough to know about whether they're in the true spirit or not. I would probably take Nick Timiraos's word on it. He knows that. Bessent was honked off with the nastygram about Nick and I think we are getting into this sort of infighting between these two gentlemen, or Bessent saying that, I think smacks of the desperation that Bessent feels — which is at the end of the day the Fed's job is one thing: finance the US government. And the Fed likes to play all coy and we're independent and blah blah
(26:15) blah blah. At the end of the day, that's their job. And the problem is they never thought it would happen again. Happened in World War II. It's happening again. And I don't think the Fed likes that, or certain interests around the Fed certainly don't like that. But that's their job.
(26:34) That's always been their job. That's why they're there. That's what Warsh said when I said, "I'm going to set a fair price for bonds." And so I think Bessent was just pushing him on it. >> And how much of the intervention is when the yen is super weak, it makes yen exports very competitive and US exports, which we want in America, manufacturing less competitive?
(26:54) How much of it is that? How much of it is a potential weakening of the yen would force Japan to sell its treasury holdings to defend the yen, which Bessent doesn't want? >> I think it's much more the latter. We wrote a report for clients in August of 2024. If you remember late July, early August of that year, the yen strengthened a bunch and it started to trigger an unwind of the yen carry trade.
(27:24) And I wrote that report because that had caught me kind of by surprise because I'd forgotten about it. I'd spent so much time focused on the dollar carry trade that has been created after Bernanke cut rates to zero. So I've been highlighting for — and I've been talking about forever — there's 13 to 14 trillion in dollar borrowing offshore.
(27:51) Foreigners own $22 trillion net, $65 trillion gross of dollar assets including nine and a half trillion of US treasuries. And anytime the dollar gets too strong, they are going to sell bonds, treasuries and stocks to raise dollars to cover their dollar short to support their currency. Because they've borrowed 13 to 14 trillion in dollars.
(28:16) And I've been focused on that leg of it. And what caught me by surprise and what generated that report in August of 2024 was: oh my god, I forgot there's also a yen carry trade, and if the yen gets too strong it triggers forced selling of stocks, bonds around the world. And that was the moment where I >> if yen gets too weak >> no, no, too strong >> oh >> because they borrowed in yen too. There's a yen carry trade too. >> Oh, okay. Yeah. >> And so that highlights your point, and that's why I wrote the report.
(28:48) That's where I knew, like, they're done. Now we know they're done because if the yen gets too strong, they're screwed. You have a crisis. If the dollar gets too strong, you're screwed. They have a crisis. And dollar on opposite sides of each other. And so at the time, what I said was tactically what they're probably going to have to do is cut interest rates.
(29:12) This is August of 2024. September 2024, they cut rates 50 basis points in a surprise. Everyone's like, "Oh, he's doing it to move the election." I don't know. I think it was because of this. And then they're going to have to inject liquidity, sort of brake and spur, yen and dollar — the US and Japan — to keep the dollar yen rangebound where it doesn't blow up the yen carry trade and doesn't blow up the dollar carry trade, which are just two opposite sides of the same coin.
(29:39) I said it's probably going to be really good for gold. It's going to be really good for Bitcoin. Be good for industrials. Check, check, check. I said it'd be good for emerging markets through the end of the year of 2024 and that was good through like October and then Trump won and it was terrible for emerging markets.
(29:53) So you can't win them all. Gold has since ripped huge. But you fast forward to today when the yen thing happened. It carried so much more weight for me because it wasn't, oh, this is just a one-off. This is: they were screwed two years ago. It was over. Now you're just moving pieces around the chessboard, playing for time before you're checkmated.
(30:18) They're in time trouble. The yen thing was the stupid Iran war. What are you doing? What are you doing? You literally — you're screwed in August of '24. Yen gets too strong, you have a crisis. Dollar gets too strong, you have a crisis. You need to not create any ripples. And Mr.
(30:45) Bull in a China shop, Trump comes in and does a trade war. And then he starts a real war when he said he wasn't going to start any real wars. And so guess what happens? The yen gets killed. Energy costs go up on the yen. So now the JGB markets sell. So it completely destabilizes the whole thing.
(31:05) And so I wrote last week for clients in one of the reports, essentially: if the goal of the Iran war was to basically completely undermine the US's position and clear the decks and create a crisis that then gives you a way for a reset of the system where gold comes back into the system as a neutral reserve asset at a much bigger number, then this Iran war has been a smashing success.
(31:27) But if that wasn't the goal, either Trump needs better advisers or he needs to listen to them better. So when I saw the yen thing, this yen thing was really, oh wow, it's going acute again. This has been a two-year story at least. >> And he's basically trying to prevent the net international investment position unwind.
(31:51) You know, if the yen gets too weak, dollar gets too strong, the Japanese sell bonds. That's what they're going to sell. They sell what they can, not what they want to. And they're going to sell bonds into an environment where AI needs to sell a bunch of bonds. And they're going to do that into an environment where the projected net borrowing for Bessent for the next two quarters is 1.
(32:12) 4 trillion net. Net debt spiral. As I said in the report yesterday, he has a debt spiral problem today. That's why he acted. It's why he acted two weeks ago. It's why he acted yesterday. It's why he's going to keep acting going forward. >> Hope you're enjoying today's interview. This episode of Monetary Matters is brought to you by the Teucrium Corn Fund, ticker CORN.
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(34:12) Past performance does not guarantee future results. Thanks for listening. Let's get back to today's interview. >> What do you think is a greater risk to Treasury Secretary Bessent? Rising Treasury yields in dollar terms or a weakening dollar against other currencies? Because today the dollar is weakening and yields are actually falling back on this buyback announcement.
(34:32) >> And that's exactly what you'd expect. The weaker the dollar gets, the lower yields should go. Hedging costs for the dollar go down. Global economic growth picks up, global balance sheet capacity — but up to a point, because at some point the dollar gets weak enough, inflation expectations start picking up and now your long end is going to go, ah, that's too weak. And so he and Yellen have been trying to manage us between these two: dollar gets too strong, treasury market gets hit; gets too weak, treasury market
(35:00) gets hit. And the problem is the more you keep adding debt, those two live wires that they're on, they keep narrowing. And so if you wanted to kick this can as far as you could, the last thing you would do is start a dumb war in Iran, because when you did that this gap which was closing slowly as debt grew — we're going over 40 trillion, what, today, tomorrow, next week, something like that. I talked to somebody this week: I used to work in Treasury not that long ago, like eight years ago,
(35:36) six years ago, and we thought 19 trillion was a problem. It's doubled. So he is now stuck between these two live wires. Dollar gets too strong, treasury market's going to sell off hard. Dollar gets too weak, treasury market is going to sell off hard. All else equal, a modestly weaker dollar helps him.
(35:59) It buys him time, but ultimately he's going to have to do something very drastic because again, where's he spending his money? 15% of it's discretionary. 80% of it's going to boomers and going to interest. And the weaker the dollar gets, the more expensive those services get because docs aren't going to work for free.
(36:22) >> What is your outlook on, let's say, the 10-year, which is now roughly 4.7%? Where is the line in the sand at which it has to go lower, it cannot go above that in your view, and the government is going to act very very strongly to prevent it getting to those levels? So clearly you're bearish on treasuries, I presume.
(36:46) But is there a limit to it? Because I don't think you're a guy saying the 10-year is going to go to 8%. Because if the 10-year goes to 8% — yeah, exactly, you're shaking your head — then you think there's all sorts of consequences that we've been talking about so far. So where is this line in the sand? And we know you're bearish on treasuries, but just how bearish? >> I'm bearish on a real basis.
(37:06) And that's kind of where I've always been. I mean, not always, but for probably the last two years, it's really been on a real basis, maybe almost three years, which is over 4.8 on the 10-year, bad things. And look, if it goes over 4.8 and goes into a debt spiral, you want to own gold.
(37:29) And if they inject liquidity to stop it at 4.8, you want to own gold. And so to me, I don't know that I'm really nominally bearish on the long bond here, on treasuries here, for a very simple reason as you just said, which is they can't afford it. What are the odds? What odds would I ascribe to the United States government nominally defaulting on its treasuries, on its entitlements or veterans benefits? Zero.
(37:59) That's never going to happen. And that makes this on one level an easy trade, easy macro trade. Okay, then what's the level where you start to have problems? Well, we can see that: 4.7, 4.8, 4.6. Depends on where's oil at, depends where the dollar is. But end of the day, 4.7, 4.8, here we are.
(38:22) They got to do more and they won't let it go beyond that. And if it does, they'll have to do more. And so I go, well, do I want to buy the long bond? No, I want to buy gold on that. And since 2014 when global central banks stopped buying treasury bonds on net, in gold terms the TLT is down 90 or 95%.
(38:42) I think it's got another 90 to 95% to go against gold and I don't think it's going to move that much. >> And so that 95% move, you're absolutely right, part of that was gold going up. Part of that was bonds selling off in value, aka the yields were rising. So, but you think that the next 90% move is mostly going to be gold going up, not >> all gold.
(39:05) >> Yep. >> Yeah. >> So if you're bearish on treasuries, but you think it has to be pinned pretty close, would you actually say you're kind of a bear on fixed income volatility, like you'd actually be a seller of straddles on TLT rather than a buyer? >> I think treasuries are going to stay more volatile simply because there was an article last week in the FT that hedge funds are now 8 and a half% of the treasury market. They own eight and a half%.
(39:39) They're bigger than Saudi, they're bigger than Japan, they're bigger than China, they're bigger than all these guys. And a lot of that's the highly levered basis trade. So Treasury vol, I think, has been elevated. I think it probably stays elevated. I don't know, going to get a lot more elevated from where it is sustainably. I think this part of what we're doing — this isn't a volatility dampening exercise.
(40:02) I would rather own gold. I'd rather own US equities in dollar terms. Shorting Argentina stocks in Argentine peso terms is a stupid thing. It's been a stupid thing for a long time. Shorting American stocks in dollar terms is not a good idea.
(40:21) Shorting them in gold has been a great idea. Since Powell started raising rates in early 2022, S&P total return in a very good market, it's down almost 30% against gold. Since 2000, it's down 50% against gold still. So, especially given the La La Land valuations in anything related to AI and tech, certainly as a percent of the economy, I think gold's going to continue to outperform equities over the next two to five years.
(40:54) Now on volatility, I do think you'll have volatility, probably more volatility there. Because people still don't believe this is what's going to happen. That this is what the math says has to happen. I have extraordinary conviction of that. Now, the path speaks to your volatility. We had four months where people that went to the best schools in this country believed that Warsh had the flexibility to be a hawk.
(41:20) It's sixth grade math, guys. Come on. But this narrative game, that's part of the game. I get it. It's frustrating to me, but I get it. So these narratives are where the volatility will come. And that's why gold's up 120 bucks since we got on this call. People actually believed — people who went to Yale and Penn and Wharton and Harvard — that he's going to be a hawk. Come on.
(41:42) >> Yeah, I agree with you and it's looking like the evidence supports our view. And also, Luke, I think there's a tremendous amount of evidence that President Trump, Treasury Secretary Scott Bessent want lower yields. Whether or not it's for Luke's reasons of debt to GDP, tax receipts and stuff, or it's just because they want a stronger housing market.
(42:07) It doesn't matter. All three of you are on the same page. They want lower yields. >> Definitely. You got to have lower yields. The math is the math on the fiscal side. The last time debt to GDP was here, 110% debt to GDP was 1946 and we got it to 55% in five years.
(42:27) And so I hear all these — I just laugh. You're going, it's like Morning in America, like Reagan. Well, Reagan did this. Reagan did that. I'm like, guys, Reagan had debt to GDP of 30%. Because they had run debt to GDP from 110 down to 25% from 1946 to 1970. How did they do that? They killed bondholders on a real basis between '46 and '51.
(42:54) We've heard the Fed Treasury Accord come back out. We're going to have some new version, guys. Real rates bottomed from '46 to '51 at -3%. Bondholders lost all their money on a real basis basically from '46 to '51. That's too strong. They lost probably half to two-thirds of their money on a real basis in five years.
(43:17) That's what has to happen. You want Reagan? Great. Clear the decks, guys. Now, I think the most interesting question maybe is, is this the down payment on that? This Treasury buyback upsizing? I think it probably is. But again, it's a political game. If it was me, I could have this thing done by the end of the month.
(43:41) It's the easiest thing in the world mechanically, but you have people chirping in Bessent's ears. He's got to go to the dinner parties and listen to all his New York buddies go, "Oh, you're killing the bond market, dude." Like, yeah, that's what has to happen. >> You could get it done in a month.
(43:56) What has to happen? >> Oh, that's simple. I take the exchange stabilization fund. >> Okay. >> I start bidding gold. Aggressive. Aggressive. And then I also announce that from now on all deficits with China, all trade deficits will be settled in gold. We've kind of been de facto doing that. Once gold's run up to a really big number, I instruct Warsh to revalue the gold, and in doing that that creates a deposit free and clear of dollars into the TGA.
(44:30) That's just money creation using the gold. That's like the MMT platinum coin trick except it's actually on the books in the Federal Reserve manual. >> But it's real. Yeah. The US has tons of gold that is valued at an absurdly low level from when we bought it at like $40 or something, >> right? So, say gold goes to, I don't know, let's take it at 20,000 for easy math.
(44:52) >> Yeah. >> The TGA deposit is going to create $4 trillion. That coin trick, four trillion into the TGA. Now I'm Bessent and I can buy back everything in cash beyond probably five years. Then I roll out the Clarity Act and stick the rest of it into stablecoins. And then my last little special surprise for everybody is, hey, a stablecoin T-bill doesn't yield three and a half, it yields 60 basis points.
(45:27) Have a good day. Done. Now who wins? Who loses? Treasury holders get killed. Inflation goes nuts. Wages go nuts. Nominal GDP growth goes nuts. Great. It's what we need. Who holds all the bonds? Banks >> who got bailed out and never paid for it really. and boomers. >> Mhm. >> Who are the richest generation in history and are consuming 80% of the budget and not paying for it.
(46:07) You just paid for it, guys. Thank you for your donation. Thank you for your service. Done. It's that easy. Now, politically, you're going to have inflation. You're going to lose the midterms. But it's an easy mechanical fix. It's the easiest thing in the world. Stock market goes nuts, by the way. Nuts.
(46:29) Dow probably goes from 50,000 to 100,000. Corporate earnings go nuts. Hiring goes nuts. The debt's the problem. >> How high do you think inflation goes in this Luke Gromen scenario? >> 10, 15% for a couple years. >> The revaluation of the gold, how does that create 4 trillion in the TGA? Tell us about that.
(46:50) Is it on whose balance sheet exactly is the gold now? I know the Fed's probably involved. They have certificates and then where's that TGA come from? >> So if you go to the Federal Reserve financial accounting manual for Federal Reserve banks — it's a public document, it's published at least once a year — section 2.
(47:13) 10 says that the gold is held at 42. The Treasury Secretary at his sole discretion can instruct the Fed to revalue it. And by revaluing it from 42 to whatever that market price is, which you could get it up there, I could get it up there I think, especially if the Chinese are on board, which I think they would be — and that mechanically creates a deposit of cash into the Treasury General Account at the Fed.
(47:44) It's basically just debit gold, credit cash. You're increasing the value from 42 to 20,000. You have to have an offsetting journal entry. It's 261 million ounces, times 4,000 — every $4,000 is roughly a trillion. And so 20,000 up from here from 42, that's basically five fours.
(48:09) So five fours. So yeah, five trillion. Every 4,000 is a trillion. Five of those is 5 trillion. This just mechanically gets deposited into the TGA. That might be one of their only ways out of this actually, now that we're into this period where your interest and interest-like obligations are growing nearly twice your receipts and your receipts are inflated by AI which isn't going to keep bubbling forever.
(48:30) >> Well, we'll get to AI in a moment. Yeah, Luke, when you said I'd do it in a month, I was like, okay, I'm going to challenge Luke because how can he do 1946 to 1951 in a month? But I see you're taking it to the next level. >> I could do it in a month. Look, there we are now at the point where there are no pleasant ways out of this. We are now into dancing along the edge of a debt spiral and it's the entire West, and China ain't going to end up great in that outcome either. So
(49:00) once you get to here, the Overton window of possibilities starts to blow out immensely in terms of policy options. This is a policy option and it would work. Inflation's in the cake. Don't kid yourself. We're going to hear every apologist on X telling us this isn't money printing and it's not inflationary. You're taking long-end bonds and you're moving them to the front end and you're going to cut rates. That's inflationary.
(49:28) You are money financing stuff. Stop. Stop. Don't lie to people. It's inflationary. >> Luke, in this scenario where you're doing this in a month, wouldn't you kind of have to lie to people? You'd be like one of those guys who used to talk so tough on the outside, but then when you get to the inside, you're like, it's actually — Jack, it's actually not money printing.
(49:50) >> No, I would be honest. Actually, I would do the FDR thing. I would sit down with the American people like a fireside chat and I would say, "Listen, something that is extraordinary is going to happen over the next month." And the reason it's happening is because your leaders have been lying to you for 80 years, 90 years.
(50:10) They told you you could have free stuff and never pay the cost. And that's a lie. We all know — you're all adults. There's no such thing as free stuff forever. And I'd run through, I'd say what I said to you. 70 million baby boomers were born from 1946 to '64. And yet your leaders pretended like they were never going to turn 65.
(50:33) They were always more interested in themselves than in doing what is best for the country. And as a result of their lack of courage followed by the lack of explanation and courage around Medicare, Medicaid, the lack of courage around Vietnam, the lack of courage around the Iraq war, the lack of courage around the bailouts and how they were handled politically, the lack of courage around COVID, which we're seeing in a big way — those people lied to you.
(51:02) I'm not going to need a lot of help convincing people that their government has been lying to them badly for 90 years. Here's what's going to happen, American people, as a result of the lies your government has told you for the last 90 years. We're going to get rid of the debt. Doing so is going to be inflationary.
(51:20) The effects of this are going to be very inflationary. However, the inflation is not going to be evenly distributed. It is going to be most painful to those areas of the US economy and world that benefited most from this arrangement: Washington, Wall Street, and retirees. And it is going to be least painful for those who were hurt most by this arrangement: the working class, the middle class, wages.
(51:54) And then I stand aside because I don't want to run again. Why would I ever run again? I wouldn't want to be in that cesspool for more than five minutes if I could avoid it. >> Luke, in that environment, don't long yields rise a lot? >> No, because the Fed's going to buy them all. >> Okay. >> There are no long yields.
(52:10) It's not a market. >> No long yields. I also was thinking, Luke, if long end yields do rise, maybe you as the monetary czar actually want that because then you could buy them at higher yields, aka lower prices, which I actually think is kind of like what Germany did. >> You could do that.
(52:25) Yeah, you could do that. And look, because oh, by the way, the gold holders — I said this to you at the end of maybe not last time, but two times ago where you asked me, "What yield would you buy 10 years at?" And I said no yield. It's not about the yield. It's about the price of the dollar.
(52:40) At $20,000 gold, I would buy 10-year paper. It's fascinating. We're watching in real time the more the yuan collapses against gold — and it has collapsed. Everyone's been waiting for it to collapse against dollar. The yuan's collapsed against gold. What's happened to Chinese yields? Down, down, down, down, down. At the right price of gold, you're basically going to have a gold collateralized de facto treasury market.
(53:08) And in a gold collateralized bond — and Judy Shelton's work has done a lot of groundwork around this — 2% interest rates for the long term, if it's gold collateralized, maybe three. That's the part people are missing. Gold at a high enough rate doesn't destroy the Treasury market. It collateralizes it.
(53:31) Now, on a real value, yeah, it's a restructuring, no question. But these people need to be restructured. It's an insolvent market. And there's enough gold at $20,000 gold. There's enough gold to back the treasury market. >> No. >> No. I think the market's what, 30 trillion today? >> Yeah. >> $20,000 gold is going to be worth officially 5 trillion. So that's — but if you look at the treasury market, and I don't know these, now I want to say the five trillion probably takes you, it's probably 100% of everything over
(54:07) at least seven years and maybe over five years, and you can buy it all back. And then you want to reissue it in bills, you want to resize that however you want to do that, you can certainly do that. But that is a paradox. You would think that with inflation ripping and gold at 20,000 — gold at 20,000, inflation ripping in the short run, it would be terrible — but you're basically restructuring it. On the other side you're going to have lower yields.
(54:40) >> What about though when debt grows faster than gold supply as has happened before? >> Right. Remember what you said before: gold need another revaluation, another revaluation of gold higher, aka another dollar devaluation. >> You would need some sort of agreement, where the problem with gold is when you peg it to a currency.
(55:04) >> Okay. So you're not suggesting a peg? >> No, not at all. >> Okay. Got it. >> No. >> Yeah, I'm with you. >> No. What you would do is essentially you're going to settle in gold now. And I think that you would probably have some sort of agreement where you would say, "Look, if you're going to peg anything to anything, you're going to peg gold to oil at 1,000 barrels an ounce.
(55:24) " And oil doesn't move a lot. So, or say 500 for easy math. $40,000 gold, $80 oil. And you could do something like that. You don't have to do this through Bessent. You could do this through agreement between China, Russia, and the Arabs. Hey, we're going to sit down.
(55:46) We're going to do a conference, and from now on gold is 500 barrels for an ounce of gold, and we will have devalued oil, which backed the dollar for 50 years de facto, against gold, which backed the dollar for pretty much the rest of American history. And in so doing, we will have created an economic market-based incentive. Now, if America wants to have a lot of oil for national security reasons, great. We all know we need $70, $80.
(56:18) Maybe we need $60. We can't do less than 60. Okay, 60. 500. Boom. 30,000. You got to have $30,000 gold. So the whole exorbitant privilege goes away. We can't print dollars for oil anymore. That's fine. The Chinese, they want cheap oil because they don't have any oil. Not enough, certainly.
(56:38) As we've all been — they don't have nearly enough oil relative to what they consume. Great, they need cheap oil. That's fine. But if you have cheap oil then you have cheap gold. And so cheap gold in yuan, expensive gold in dollar — what's going to happen to the currency? Yuan's going to strengthen a lot against the dollar. China's ability to be mercantilist will also be hamstrung or limited by that arrangement, by pegging oil to gold. The Europeans, same thing.
(57:10) Hey, we don't really have oil resources and so we need to incentivize EV, so we want relatively expensive oil so EVs make sense. Okay, 100 barrel, 100 euro, boom, 50,000 euro gold. I think that is ultimately where we'll end up. I don't know if we'll end up there without a war or not, or if we'll end up there, but that's another way you could do it.
(57:33) And then if we did it that way, then boom, then you can revalue the gold using that. That probably requires some sort of international agreement. Probably just between the US and China and a couple of the Arab countries would be more than enough. Strong-arm everybody else. >> So, I'm going to read you a quote.
(57:51) Gold can't have a fiscal problem. Gold cannot have a giant budget deficit. Gold cannot have a war. That's what Treasury Secretary Scott Bessent said to Tucker Carlson on April 7th, 2025. What did he mean by that? And I presume there are elements of that that you agree with, but how is it that he's saying that? Because he's not the treasury secretary of gold.
(58:18) He's the treasury secretary of the United States. >> Tucker asked him about it. You can find that quote online and I think there's a treasury transcript of it as well, last April when he was on with Tucker Carlson, April of 2025. And he said it, and I think Tucker asked him about gold and Bessent said, hey look, I would probably be considered a gold bug when I ran my fund.
(58:44) And that's when he laid out that math or those quotes. >> And is that philosophy, do you think, going to be affecting his views? Is he going to be doing the Luke Gromen playbook or even the Luke Gromen playbook? >> I hope so. It would be the best thing for America. People say gold's anti-American, yet the best times in this country have been when we've had a neutral reserve asset.
(59:12) And >> when were the best times in the country? >> Oh, I would say from Hamiltonian through 1971. >> Mhm. Okay. >> And critically he updated his thoughts, in my opinion, as it relates to that, which is in June of this year he gave a speech at the New York Economic Club about Hamiltonian economics, and in case anybody thought he was speaking out of turn he wrote an op-ed in the Wall Street Journal that same day.
(59:47) It said Trump's economic statecraft is based on Hamiltonian economics. What's Hamiltonian economics? Neutral reserve asset, high tariffs, tax foreigners to pay for America rather than tax Americans to pay for foreigners. Trump in early 2025 said, "I want to take us back to when America was wealthier and more powerful than ever, 1870 to 1913. We were taxing foreigners to pay for Americans rather than taxing Americans to pay for foreigners.
(1:00:18) " At Davos earlier this year, US trade representative Jamieson Greer came out and gave a speech about Hamiltonian economics, got lost in the shuffle of Carney and his elbows up and the world order's over and all this crap, and he said, "Listen, we're moving back to Hamiltonian economics," and he specifically called out that Keynes's neutral reserve asset proposal at Bretton Woods was a better idea.
(1:00:41) So I think Bessent is absolutely on board. And you can say, okay, well, is some of what we're seeing today, could this all be sort of a 5D chess move in that direction? Possibly. He's a very smart man. It's very possible. But I hope we're getting in that direction. Yeah, I absolutely think he would — it would be a good thing for the United States. It'd be a great thing for the United States.
(1:00:56) >> Very smart man and has read many of the same books about Hamiltonian economics that you have read that, to be honest, I have not read. But Luke, here's what I do know is that Hamilton could fund the tiny US government spending that we had by taxing whiskey and taxing imports.
(1:01:22) We can't do that. Tariffs would have to be 10,000% to fund social security with tariffs. And we've seen the challenges that tariffs have had over the past 18 months. What does this Hamiltonian philosophy really mean in a world that's 2026 and not 1826? >> Well, I think it's important to overlay a part that I left out, which is you become self-sufficient.
(1:01:45) That's the key. That's the why of the tariffs, which is it's almost a Henry Ford type of economy. The Model T. Hey, why do you pay your workers above a market rate, Henry? Well, because I want them to be able to afford the cars coming off the line because that's a sustainable business model.
(1:02:08) What we have done through neoliberalism and free trade, which is — because we don't actually engage in free trade. We engage in free trade in things we want to. There's no free market in the dollar. Come on. As we've been seeing, we're intervening in the Treasury market repeatedly. >> I don't think that was particularly free market.
(1:02:28) >> No. So the goal here is to get back to, instead of the Chinese making the US military for us because we can save 40% on labor and we can have all-time record corporate profit margins, we get back to making a lot more of our own stuff. Corporate profit dollars go to all-time highs, but corporate profit margins are lower, which is also, by the way, what you need to narrow the gap between the top end of the K economy and the bottom end of the K economy.
(1:03:10) Because if we don't do this, we're going to go back to 1855, 1856, 1861. That's where this is going. There's going to be a lot more Mangiones. There's going to be a lot more Charlie Kirks. If we don't narrow this — Hamiltonian economics or an economic policy that can narrow the legs of the K, they can drive massive growth, a renaissance, because we've spent 40 years hollowing out our industrial base.
(1:03:37) Perfect example. Any economist will tell you one of the easiest ways to look at the real economic growth and power of a country is to look at its electricity generation. How much energy is it generating? United States did not generate any more electricity from 2004 to 2024. Flat for 20 years. Most of the growth of the US economy from 2004 to 2024 was inflation. But the exciting thing about it is we're now moving in that other direction.
(1:04:15) We're building our own electrical grid, much more of it. We're going to try to catch the Chinese on electric. The Chinese when this started had less than half our grid in 2004. They now have over 2x our grid. We're chasing them. But do we want the Chinese to make the grid for us? Or do we want to make it ourselves? And if we want to make it ourselves, we need to put up tariffs because I'm not going to invest in a metals factory in America that has to compete against the Chinese.
(1:04:41) No businessman is. You're not going to put your capital there. That's the other side of Hamiltonian economics, of self-sufficiency or a much greater degree of self-sufficiency. And people say we don't want that. Did you like having to wait for the Chinese from COVID? Do you like having the Chinese make your military? If the answer to those questions are no, then you're in favor of tariffs. You just don't know it yet.
(1:05:03) >> Luke, tell us about the AI boom we're having. As a result of the AI capex, real GDP forecasted to be 4%, which is just huge. So we're because of AI having an industrial boom. You've showed us a chart showing how over the next six years the AI buildout is going to be as a percentage of GDP 3 and a half%, so multiples higher than telecom, than highways, electrification, canals, even higher than railroads, which was previously the high I believe in percentage of GDP capex.
(1:05:37) What is your outlook here on the spending? Are you a bull on semiconductors, a bear on semiconductors? Do you think this revenue that we've had from Anthropic and OpenAI, this revenue growth that has been tremendously high, is sustainable? What's your outlook here? Are you using it? I want to know your thoughts.
(1:06:02) >> I think AI is going to be revolutionary. I think it will drive a productivity miracle eventually. But before it does, I think it is going to undermine the tax base of the United States that already has a fiscal problem, because half of the tax base comes from jobs and a lot of those jobs are white collar service jobs.
(1:06:21) So, the biggest employer in I think 39 US states — this was the New York Times a year ago — 39 US states is healthcare administration, uniquely suited to being disintermediated massively by AI. And all those people have mortgages, they all have cars, they all have student and consumer loans that they will then default on.
(1:06:46) So I think for me AI is a case of the early bird gets the worm, but the second mouse gets the cheese. I think it's going to be massively productivity enhancing and I think a lot of these current companies are going to be bought out of bankruptcy by somebody that then gets really rich on their business model.
(1:07:03) Like we saw with telecom. All the telecom guys laid a bunch of fiber. Massive productivity enhancer. Oops, bankruptcy. People buy it out of bankruptcy. We're still using that. Railroads. Massive productivity enhancer. Massive capacity increase. Oops, bankruptcy. People bought them out of bankruptcy.
(1:07:25) They are still valuable assets 150, 160 years later. That's what I think we're looking at with AI. Now, that then begs a question — and by the way, that chart you mentioned is a Bloomberg chart, to give them credit for it, but it shows the prior five capex booms as a percent of GDP going back to 1840 to the canal boom.
(1:07:46) There were several US states that defaulted, went bankrupt after the canal boom. And my point in highlighting that was every single one of those prior five booms ended in a bust. And this one will end in a bust too. And when it does, it's going to make the fiscal situation that much worse because it has been so additive to GDP, etc.
(1:08:15) And that means that Bessent's 4 billion in Treasury buybacks will probably turn to 40 or 400 billion in Treasury buybacks when that happens. And the Fed will probably be helping with that at that point. But as it relates to AI, my view of it is make sure to take profits. And what we highlight in the report is: look, I don't think the bubble has peaked. You are seeing signs of — I recently read A Very English Deceit by Balen, I can't think of his first name, and the point it
(1:08:55) goes over the South Sea Bubble and John Law's Mississippi bubble. And what you take from that is when these things happen, you have to keep applying new credit. You have to keep supplying new credit to keep the thing going. And so when I see headlines last week where the SEC is changing the rules around securitizations for anything related to AI, where you're getting all the big private equity guys in a room to securitize, and you got NVIDIA, Jensen bragging about creating a compute security
(1:09:23) derivative, whatever — that's fine. No judgment. I know what that is. That's making it easier to get more credit to them. So, the bubble's not over yet. >> I agree with you and I think that yes, taking profits is healthy, but I would very strongly urge people against shorting semiconductors or something like that.
(1:09:44) I think that to use railroads, the track has been laid for NVIDIA to make $300 billion in operating profits. No accounting nonsense. Pure operating profit because of $500 billion of — Larry Fink said we're going to create these AI securities.
(1:10:04) I don't know what that means, but he's going to do it. Are you doubting Larry Fink's ability to raise money? I'm not. He didn't even go to that CNBC studio. He probably was in Saudi Arabia raising billions of dollars. I don't know. Or maybe he was on vacation. I don't know.
(1:10:17) But I think that Google, as FT, Wall Street Journal reported, they have 800 billion dollars in forward purchase commitments. This stuff is going to happen. So I think my confidence that in Q4 when these semiconductor companies or the power electrical companies report, it's going to reflect the reality that we already see in these off-balance sheet agreements.
(1:10:41) So yeah, I agree with you that it's going higher. The bubble hasn't popped yet, if it's a bubble. I also think that you're right that everything always pops, and of these canals, railroads, telecom, it's very frequent that genuine technological booms get overextended and then pop. I think Howard Marks said that if AI isn't a bubble and it doesn't pop, it will be the first technological revolution that doesn't create a bubble.
(1:11:11) >> Yeah. And I think there's an important point you make there where you said, "Hey, he's probably over in Saudi Arabia getting money." And I would say from who? This is the galactic stupidity part D or trey of the Iran war. What money? >> Yeah. >> What money do the Middle East have to invest now? Especially if it continues.
(1:11:35) And I think this is a part that people aren't paying enough attention to. And I'm not saying this is — again I agree with you, I wouldn't short them here. When I say take profits, the analysis in that report that you have shows that once you were two to three years into any of those other bubbles, you did better if you were a long-term investor, you did better by selling most of the bubble and buying gold.
(1:11:59) Gold outperformed over the full cycle. The bubbles might have continued, but by the time five years was out, 10 years was out, gold had massively outperformed the bubble in question. Every other one of them. And I don't think this is going to be any different. And within that, when you look at the financing side, I think they will get the money and from the UAE.
(1:12:23) Who's giving them the money? Scott Bessent is, isn't he? >> Yeah. >> Because we got into this stupid war. What did the UAE do? We need swap lines. We're illiquid. And if you don't give them to us, we're going to go to the Chinese. Scott Bessent was like, whoa, whoa, whoa. I'll give them to you. So now think about that, AI.
(1:12:40) And there's all the circular reference stuff and I think there's some truth to it. And the one that I've not seen anyone put is if Bessent's given swap lines to the UAE to invest in us, who's actually investing in it? He's just creating the money. Which again is fine. I know what to do with that.
(1:13:01) But that then goes to this point of it will eventually bust. And once you're two, three years into it — every other one of these capex booms that turned to bust, two, three years in, you were better off buying gold. You were better off buying gold in 1920, you outperformed stocks. If you bought gold in May of 1929 — I looked at this the other day, this blew my mind.
(1:13:23) If you sold all your stocks, you own the Dow Jones Industrial Average in May of 1929 and you sold it and bought gold, you are still up 15% 103 years later. That blew my mind. >> Yeah. And that's the benefit of survivorship bias in the Dow. That's a completely different Dow. That's get rid of the dogs, bring in the good guys, and gold.
(1:13:53) It just shows how important it is as an investor when you're in these frothy periods — that's fine, they're fun, don't forget to take some off the table before the party ends, because when the party ends, it ends. >> Yes. And to people watching, what I've been saying is to people who think AI is a bubble, buy software stocks that have been sold off indiscriminately because AI is going to ruin them.
(1:14:22) They're trading at a PE of 15 to 20. So there are many things in the stock market that are just obviously not a bubble and people who think AI is a bubble should consider buying them. But just on a macro sense, Luke, GDP is just really high. You speak about the industrial boom that we're having and I understand that not everything is great in the US economy but just GDP is probably going to be 6% this year, right? >> Yeah, I saw the latest Atlanta Fed one. I think it's running
(1:14:55) what? >> Real GDP 4%, but I'm adding inflation. >> Okay. Yeah. I think the economy is fine. I think the economy is fine. It's interesting if you look at private manufacturing construction in the United States. You would expect it to be up. It's actually down 18% year-over-year.
(1:15:13) And that's with AI doing what it's doing. Now, some of that is you're still in a hangover from the Biden administration when they were doing the Inflation Reduction Act or whatever it was, some of the green related stuff that they spent on there. So we really haven't even kicked in yet.
(1:15:30) What we can do, and what I think we'll eventually do — and that then leads to two issues. You can pull that thread two ways. Hey, we haven't even done it yet. And the 10-year is at 4.7, and construction spending still down 18%. What do you think inflation in this country is going to be when construction spending is actually up? What do you think wage growth is actually going to be when it's actually up? And that's where I keep coming back to, which is when they actually decide to kill the bond market
(1:15:59) is when America will actually be great again. Because if we actually start really having a boom, I mean a real boom — you didn't have a boom with private manufacturing construction spending down 18% year over year. I'm sorry, you just can't. Let's say it's up 20%. Inflation's going to be running, be like golden Ellie.
(1:16:23) getting hot in her. Which bond at the long end do you want to own at 4.7 with inflation going in six to eight? >> None of them. >> Yeah. >> Which — can the United States government finance itself at 6 to 8? No. Because debt to GDP is more than GDP. It's 120%. And growing rapidly because a bunch of, 400% of off-balance sheet stuff's coming on balance sheet every freaking day with the boomers and the veterans.
(1:16:52) And so I look at this and go, it tells me you can't short stocks in dollars. Tells me you can short stocks in gold. It tells me I want to own industrials. I'd rather — I'm a more conservative guy anyway. So I look at, I think AI is going to be revolutionary. I also think it's going to be massively disruptive to employment.
(1:17:17) It better be. If it's not, then it's not revolutionary. And all that trillion dollars in AI debt, trillion dollar in AI lease commitments, trillion dollar in semiconductor commitments — poof, if they don't create a bunch of unemployment, then that hits receipts. You can see it's a snake eating its own tail problem.
(1:17:36) And it all comes back to the same thing. Bessent is never going to let the 10-year go over 4.7, 4.8. Great. I know what to do with that. Stocks, long stocks in dollars, short stocks in gold. Stay away from the long end of the curve. Not because I think it's going to lose money nominally. I just think it's going to finish falling its final 90, 95% against gold, mostly via gold.
(1:17:55) And that's the environment we're in. And that's a great nominal growth environment. It's a terrible environment for bondholders. Good. That's how it has to work. >> Yeah. Luke, what do you think of non gold metals and minerals like silver or copper and the rest? >> I like them. I like silver. I like copper.
(1:18:20) I like — copper quietly is what, like almost seven bucks? Everyone was talking about it, no one's talking about it anymore. I think iron ore, steel, all these — you cannot build a grid with dollar swap lines. You can't. And at some point the United States has to sort of figure out what it wants to be when it grows up. Do we want to be the bank for the Chinese and the world or do we want to actually grow our grid and be a nation that can actually make stuff.
(1:18:53) And I think we've made the choice, but that's the encouraging thing. But we're still in this sort of bargaining stage somewhere between anger and bargaining. Well, we want to keep the dollar reserve status as it's been since 1971. And we want to reshore and we want to move away from the Chinese. You can't.
(1:19:11) You can't. If you want to reshore, if you want to be somewhat self-sufficient in your own military, your own grid, the post-'71 structure, the dollar has to go away. It has to go back to a neutral reserve asset. It has to go back to Hamiltonian economics, which then goes Bessent Hamiltonian, Greer Hamiltonian, Vance. You saw it up and down Twitter last couple days.
(1:19:38) I wrote about Vance saying that in 2023, 2024, by the way. So that clip of Vance saying the dollar reserve status is no longer in our interest — he said that in '23. He's on board. Trump's on board. They're all on board. They're going to do it. They're doing it. But we're still in this bargaining of like, well, what do we do with the bond market? Simple.
(1:19:57) Kill it. >> Why do you think the dollar has held its value roughly over the past year if you have all these extremely powerful figures wanting or supporting at least a weaker US dollar? Why hasn't it weakened? >> Gold's up 100% the last year. >> Yeah. >> Because they've done a very brilliant job, which is get everybody in a room. Think about what we heard right around June, July.
(1:20:24) We had a NATO meeting where we had US, Germany, Korea, UK, and Japan all came out of it and said, "We're going to spend a bunch more on defense." That's like four drunks all going, we're going to get bottles of whiskey and drink more. The UK is in no position to increase defense spending. Japan is in no position to increase defense spending.
(1:20:49) Germany's in no position, and yet they all are. Now what happens when they do that? Hey, if we're all debasing against defense spending and gold at the same time, nobody notices. It's brilliant. Dollar is getting weaker. Inflation is back. It's just against stuff, not against other currencies. And I expect that to continue because that's the — you can keep the financial markets asleep if you do that.
(1:21:14) And by the way, you have to, because again, dollar carry trade, yen carry trade. If those two start moving against each other too much, you create crisis. But if you just go against gold, against metals, against general inflation, you have a chance at least till you have to do something. >> Luke, we've covered so much in the economy and I know you analyze a lot of these topics through the lens of the Treasury market.
(1:21:40) One thing that is catnip to you is private credit, because private credit is basically an asset class that we're going to sell to insurance companies that used to buy 10-year, 20-year, 30-year duration treasuries and we're going to get them into credit risk loans that have a duration of zero that are linked to SOFR, linked to the overnight rate.
(1:22:01) So the demand from all these insurance companies on these assets has gone from immense duration to a duration of zero. That is not supporting demand for treasuries. >> Not only that, but think of where a lot of — I guarantee you that the Trump administration gave zero thought to the thought that the Middle East was putting a bunch of capital into this stuff and now needs it back out.
(1:22:25) I would bet you dollars to donuts part of the reason why the UAE is so illiquid is because they are up to their chin in private credit and as soon as the Iranian missiles started flying was like, oh god, we've got no liquidity, and Hormuz shut down. I actually think you're probably seeing some of the signs of Hormuz shutting down actually in some of these private credit problem things like with the Dodgers and Lakers. But yeah, it is crazy because in theory, yeah, you take the 10 year up to five and insurers
(1:22:56) should be buying all of it. >> Yes. >> But the problem is, to your point, they've been stuffed with all this crap they can't sell without taking a mark that blows up the whole thing. And that's the only — it's an interesting point you make. The 10 year went to five, or 4.7, and insurers aren't buying all of it.
(1:23:23) That gives you all you need to know about the actual liquidity and solvency of a lot of the stuff that's in private credit. If they could sell it at a decent mark and buy a 10-year Treasury bond at 4.7, 4.75, they would have and they didn't. So I think we're going to hear more about private credit.
(1:23:49) I know everybody says that. To me, I just look at go, I know what to do with that. The fact that the insurance industry didn't dump all their private credit and buy all the 10-year treasuries — I tend to be hyperbolic, I don't know why, with you I like getting — you get me worked up. It's a good thing.
(1:24:08) But no, the reason the insurance industry didn't literally ape into 10-year treasuries over the last four months, it's because they can't. And if they can't, that's fine. We know what to do with that. Buy gold, because that means they're going to have to inject more liquidity to liquefy everything and give them the balance sheet to be able to do that. That's okay.
(1:24:30) And inflation will pick up. >> Yes. And it shows a key point about institutional buyers of fixed income is that they often are non-economic. They'll buy it at 1% and they won't buy it at 5% even though logic would dictate otherwise. So, Luke, summing up, do you think that the Treasury increased buyback is going to be enough to pin these yields at 4.
(1:24:55) 8% for the 10-year or higher, a lot higher on the 30-year? And if not, what is coming? >> No. And I think whatever — everything's coming. I think whatever it takes. Bessent said whatever it takes. Remember, two weeks ago, three weeks ago.
(1:25:21) I thought that didn't get nearly the air time it should have. >> I missed that. Wow. That's a strong phrase. >> He said we will do whatever it takes to support our Japanese partners, which really means we will do whatever it takes to support the Treasury market. And yeah, I didn't think people made enough of that obviously, with the old Draghi — those words carry more weight than just the words themselves in our business.
(1:25:44) So yeah, I think they'll upsize it if they have to. I think the Fed will cut rates if they have to. I don't know if you read Bessent's tweet or X post about getting the Clarity Act done like a month ago, three weeks ago. >> It was this lengthy nastygram. It was almost as nasty as the nastygram he wrote Timiraos.
(1:26:02) And again, I go, "Why is this man so worked up? Oh, he's desperate. He's getting squeezed." People that are in control and have no pressure: sign it, don't sign it, I don't give a crap. People that are like, "Oh my god, my fiscal situation is going every day. Get this Clarity Act done. I need to stuff stablecoins with T-bills so I can cut the rate down to 60 basis points and boom.
(1:26:31) I don't want to be the guy that goes into a death spiral. I don't want to be sitting in Treasury and be that guy." That's when you get nastygrams. Mad nastygrams. It makes me laugh. >> And then the call for the Treasury market in terms of the global selloff in long-duration government bonds:
(1:26:49) the call is kind of not coming from the US. It's coming from Japan. And arguably Japan is buying more US treasuries than it really should. Japanese securities are a lot more attractive than US yields on an FX hedge basis. How do you think — is Japan going to put a yield curve control on their long end, because they have yield curve control on the actual 10-year, but on the 20, 30, 40 year it's just the wild west.
(1:27:18) >> I would think they're going to have to and the 40 years is at 4.2% in Japan. 4.15%. >> And Japan — and I don't know the relative liquidity of those markets because that's not my — I never spent a lot of time in those markets. So I don't know if that's just an illiquid bond issue or if that's — but you would think. But I look at what Japan's doing. They are borrowing money they don't have to increase defense spending meaningfully.
(1:27:49) They just cut taxes on food. That tax has been on food since 1989. It's the first time they've ever cut it because inflation's so high. They're trying to make food more affordable for low and middle income households. Now, paradoxically and sadly, the worst thing you can do if you want to get food inflation down is to cut taxes on food.
(1:28:08) But that's neither here nor there. And so I look at Japan and I see a mess. I look at a logical mess in the midst of a country that is this unbelievable producer, unbelievable partner of the United States if we want to friend shore or whatever we're calling it. If you want to stop inflation, stop spending on defense. It's pretty simple. We're providing you defense, or at least we used to. We did for 80 years, but we can't anymore, we don't want to anymore. So again, it's another one of these things
(1:28:48) where if we do that then it immediately falls back to us, which then one way or another it falls back to our treasury market. If they stop spending on defense so we have to spend more on their defense, well then our treasury market sells off. And at the same time, if they just keep doing what they're now doing our treasury market's going to sell off because you're exactly right. I was just looking at it today: FX hedged treasury yields at the 10-year tenor, they are negative 120 basis points in Japan. You get you
(1:29:14) >> it makes no sense to buy treasuries unless you aren't hedging. None. >> And for the audience, for the inside baseball there, it just means that as long as that's true, one of two things has to happen. The dollar's got to get a lot weaker to make hedging costs go down or 10-year Treasury yields in the US have to go way higher.
(1:29:34) And so what's happening is Japan's just telling us what's going to happen in the US. And we know Bessent's not going to let it go above 4.7, 4.8, which means it isn't enough. Which means — and that's why I keep coming back to, like, all roads lead to gold. Great. I love duration.
(1:29:51) I just want to own duration that is 0% yielding, infinite face value, infinite duration, and finite issuance. I do not want to own duration that is 4.7% yielding, infinite issuance, finite face value, and finite duration treasuries. >> Luke, it's been a pleasure. People can find you on X at Luke Gromen, your website fftt-llc.com.
(1:30:15) Thanks so much. >> Thanks for having me back on. >> Hope you enjoyed today's episode. Those interested in learning more about the Teucrium Corn Fund, ticker CORN, can find more information in the link in the description. Until next time. Thank you.