Title: The interaction between fiscal dominance and the geopolitical risk premium | Luke Gromen
Show: FFTT weekly Q&A — solo subscriber Q&A (Forest for the Trees)
Guest: Luke Gromen — founder & president, Forest for the Trees (FFTT), Cleveland
Date: 2026-JUL-09
URL: https://youtu.be/vp7IEub_VN8
Length: ~14:40
Note: Solo Q&A (he answers subscriber questions). Fillers (um/uh/you know) removed; wording otherwise
verbatim, including ASR garbles ("Groman"=Gromen, "Nikkay/Nikk"=Nikkei, "JGP"=JGB, "Brad sets"=Brad Setser,
"kagger/keer"=CAGR, "tenure/10ear"=10-year, "straight of Hormuz"=Strait of Hormuz). Macro-heavy: fiscal
dominance x geopolitical risk premium, multicurrency oil -> central-bank gold settlement, gold/oil ratio,
Japan/BOJ, and his personal liquid-asset allocation.

(00:27) Hello everybody, Luke Groman FFT. Hope you are well. We are getting into the dog days of summer here in lovely Cleveland, Ohio. The good weather capital of the world, at least for this time of year. Hope everybody's doing well. Great to be back in the saddle. Was off last week actually over in Scotland with Mrs.
(00:50) FFTT on the heels of a conference in London. And man it was no Scotland no party and it rings true. Beautiful country. So glad to be back here. Let me jump right in in the interest of brevity. First question as always thank you for everyone for the questions. So first question MB question with US interest expense just crossing above defense spending for the first time in 46 years and Iran firing anti-ship missiles at US Navy vessels in the straight of Hormuz today.
(01:22) according to Trump apparently. Take that with a grain of salt I suppose. How do you frame the interaction between fiscal dominance and the geopolitical risk premium now being priced into oil and gold? Interesting question. I've heard countless times the US military ultimately backs the dollar. We've all heard that a lot.
(01:47) But Chinese factories ultimately make the critical components of the US military. And there's a shift ongoing that to missiles and drones. We've seen that in Ukraine. We've seen that in Iran in terms of the ability for the Iranians to stand off the most powerful navy in the history of the world, the United States Navy in the straight of Hormuz.
(02:07) And that on some level undermines hegemony. Let's not beat around the bush. That suggests there's more geopolitical risk overall secularly. Also suggests more defense spending is needed. We've seen Trump talking about wanting a trillion and a half defense budget up from a trillion. And that's more spending into fiscal dominance that already exists with US interest expense plus entitlements 90 to 100% of receipts with receipts at near all-time highs.
(02:38) So all of that in my opinion is positive for gold over time. And I'm not talking about one day or the next day. I'm talking about positive over time. The US needs to spend more and it is becoming less able to enforce dollar hegemony at the same time. That's positive for gold over time in my opinion.
(02:58) In my opinion also makes multicurrency oil pricing more likely particularly in yuan as the US has less ability to go out and beat people over the head. we just saw we're running out of missiles after a month or two and we got pick up the phone. Hey China, can you make more for us? certainly the components.
(03:20) So all that dynamic makes multicurrency oil pricing more likely and multicurrency oil pricing ultimately we've seen it gets net settled at the central bank level in gold. Central bank gold reserves rise with multicurrency oil pricing that in turn sends the gold to oil ratio up. Oil surplus is bidding for gold.
(03:39) gold to oil ratio higher is positive for gold miners. Gold to oil ratio is just a proxy, Texas hedge proxy if you will for gold miner profitability. And yet the markets are trading gold miners as if markets do not believe the gold to oil ratio which has gone from 6x to 60x over the last what say from 2010 2008 through 2026 so call it 18 years up 10x markets do not are trading the gold miners as if the gold oil ratio is going back to 68 10x I don't think it's going to because missiles, drones, and fiscal dominance suggests
(04:24) that gold to oil ratio is going higher over time, not lower. And so the geopolitical premium to me, I think, is just over time, higher gold to oil ratio, higher gold. It's better for gold miners. oil I think ultimately again multicurrency energy I think oil stays all else equal oil stays in a range of highest marginal cost producer USA at this point in time plus 10% 15% in a range so 65 to 85 that was my base case sort of pre Iran war and I think I'm sticking with
(05:03) it wherever we are with this conflict. All right, next question from PJ. Please comment on the Chinese non-fed custodied US treasuries mainly in Luxembourg and Belgium. If true, it changes the narratives quite a lot since China wouldn't be the fleeing country regarding Treasury detention, but the one with firm stable dollar holdings.
(05:25) in my opinion, wouldn't really change the narrative much at all. US federal debt has risen 8% has risen, excuse me, 8% kagger since 2008, on average. So that's keer means come on Luke. Since 2014 global central bank holdings of treasuries are flat on net. So even if we assume all of Luxembourg and Belgium holdings are China and probably much of them are some pretty good authorities on that like Brad sets certainly assert that and there's no reason to not believe it.
(05:58) Then foreign official demand has still been way below issuance for going on 20 years. And if we move Luxembourg and Belgium out of the private category into the official category as implied here then the private category which has been held out is hey look see private demand is still okay has to get brought down and so you're still at the same point which is the point of the whole exercise which is supply of US treasury the issue is that there's too much supply of treasuries relative to foreign demand and the inability of the domestic economy to
(06:34) handle the remainder at key times certainly without rates rising to levels that start to break the domestic economy. In other words, there's a price at which everyone can afford to buy the treasuries and where you will get that but that price that rate triggers a debt spiral because the US can't afford to pay that much in interest and the policy rate of the US economy is the tenure and the tenure gets too high it creates a problem for stocks etc.
(07:02) So that is really the issue and ultimately that is just a function of look weaken the dollar it's less of a problem higher nominal growth less of a problem strengthen the dollar more of a problem but it doesn't change the narrative at all in my opinion from CL what is your personal asset allocation of liquid net assets 20 to 20 at at of liquid assets right now 20 25% cash and T bills 35% gold 3 to 4% Bitcoin 10 to 15% US electrical infrastructure.
(07:32) The balance is across broad equity indices and also a bit in life insurance equity at AAA rated Northwestern Mutual earning around 6% federally and state taxfree. next question from Sam. AI is expected to lead the frontier of discovery of across multiple domains not least that of science.
(07:57) Do you think we should come to expect some breakthroughs in the field of economics? If so, where do you think certain blind spots in economics lie? It's a really interesting question. there are some areas of medicine, for example, that are driven by dogma or profit or CIA, cover your ass over actual facts, actual over actual science.
(08:19) the so-called replicability crisis of scientific research is a perfect example. Google replicability crisis and see what happen. Just think about what happens if you apply AI, hard AI to replicability crises on some of these scientific discoveries. Will those be allowed to be corrected, etc. We'll see.
(08:43) As it relates to economics, I think AI will reveal economics to be what it is, right? They are who they thought we were. and tennis green. Economics isn't a science. It's a branch of moral philosophy. It's about trade-offs. It's about politics. And so to me, the breakthrough that AI may bring to economics may not be one that the economists like a whole lot.
(09:10) And which is to say it will give the average person with an interest in economics the ability to solve for political outcomes. Hey, AI Claude, give me the economic system that you would employ if you wanted to maximize corporate profits and the flow of those corporate profits to the top 1% of citizens. Hey Claude, how would you structure an economic system to be most equitable to fix the K-shaped economy? Hey Claude, right? You see where I'm going with this? there the economics profession in academia has been able lot some of them
(10:04) not all of them of course have been able to hide behind academia and formulas call up one of these papers and it's like sigma and this like what it's a branch of moral philosophy it's not a science and AI will allow people very easily to see when you have an economist pushing a certain type of economics, a certain branch, you will be able to infer very quickly what they are solving for politically and who they are solving for politically.
(10:39) I'm not going to say more than that. I'll let you pull on that thread. Okay, next question. Final question from Guof and from Tom. How high can JGB rates go before they're in big trouble? From Tom, what's going on in Japan? Has the BOJ been intervening and selling dollar reserves to stabilize a yen? This has probably been answered before, but when push comes to shove, will they choose to save the bonds or the currency? so yes.
(11:03) I just saw something last week or so. They have been intervening to manage the rate of decline of the yen. So far, not so good. It's not really doing much. Just slowing things down. in my opinion, they will save the bonds over the currency. they really have to. when do we hit trouble? I don't know.
(11:23) this is one of these any given Sunday kind of things. if you look at a chart of the Nikk priced in yen looks awesome. If you look at a chart of the Nikkay priced in dollars looks less awesome. and if you look at the same chart of the Nikkay priced in gold all over the last five years it's like nothing. It's all currency. So they're already sacrificing the currency.
(11:45) when you have the nikk like nikkay and yen like this, nikkay and dollar like this and nikkay and gold like this the it's the currency. Okay. So people are seeing that there's no way out of this and that they're going to choose to save the bonds over the currency and adjusting and the problem the bond market is getting hit as well and given that they're a creditor currency that has issues for the US and for western sovereign debt pulling yields up there.
(12:15) now weaker yen can kind of manage that but that also weaker yen pushes higher dollar higher dollar all else equal pushes higher tenure yields in the US higher tenure yields in the US all else equal create stresses elsewhere so it's a very delicate situation in theory you can kind of try to manage it but it's again it's an any given Sunday type thing for me you know, try I'm not trying to guess when, but you just heard me say I got 20 25% in cash and T-book like and gold like I don't know how or when but I just look at and I you
(12:55) know I've been doing this 30 years I know unsustainable when I see it. So you know as long as they don't have a capital flight or sudden stop they maybe they can kind of just keep all the balls in the air for a time but that's any given Sunday who knows what could trigger that.
(13:12) So yeah it's I have been surprised. Here we are in early July and last year in the third quarter was when you had a gap. It was when if you look at 10ear US Treasury yields minus 10 year JGP yields against the yen and rising relative yields in Japan at the 10-year rate have stopped.
(13:36) they've started driving a weaker yen not a stronger yen. That's a problem. That's currency crisis behavior. Now Nikkay is responding that way, right? Nikkay and yen, Nikkay and dollar, Nikk and gold. That's what you'd expect to see. So that's what I'm watching. That's how I'm thinking about it. And I'm sorry I don't have a strong view on that any given Sunday.
(14:01) Could be tomorrow, could be five years, I don't know. in the meantime though, I would expect you to continue to see Nikkay and yen, Nikk, Nikk and gold. because that's kind of the dynamic that we're seeing. So, with that, as always, if you like these updates, check out fft-lc.com for more information about our Tree Rings product, 10 most interesting things.
(14:26) Brief synopsis on each and what grabbed our attention about it, and whether it's either reinforcing or changing a way we'd previously been thinking about the world. As always, thank you very much for joining me. Appreciate you being here. Everybody have a great rest of your week. Have a great weekend. Take care.