Podcast Summary
Navigating the scariest macro environment: Luke Groman sees a potential path towards increasing wages for the US middle class as a bullish outcome in the current macro environment, but it's not guaranteed. Prepare for volatile times by staying informed and considering an ultimate portfolio to weather the storm.
Learning from this episode of the Bankless podcast is that we're currently in the scariest macro environment Luke Groman has ever seen in his career. This environment is driven by a potential bursting sovereign debt bubble, which could have significant consequences for individuals and the world as a whole. The choice for America is between bailing out the middle class or the treasury, and Luke sees a potential path towards increasing wages for the United States middle class as a bullish outcome for America. It's important to note that this outcome is not guaranteed, but it's a positive sign in these volatile times. For those looking to prepare for this macro environment, the ultimate portfolio to weather the storm is a topic of ongoing discussion on the Bankless podcast. Be sure to listen to the debrief episodes for more insights and analysis from Ryan and David. And a big thank you to the fantastic sponsors, Rocket Pool and Brave Browser, for making this episode possible.
Global Sovereign Debt Bubble and Resource Crunch: Navigating macroeconomic challenges involves staying informed and adapting. For crypto investors, focusing on decentralized finance projects and supporting eco-friendly initiatives can help mitigate risks.
The current macroeconomic situation is the most challenging in over 20 years due to a confluence of unprecedented factors. Firstly, we're witnessing the first global sovereign debt bubble in a century, primarily in developed economies. With no higher authority to pass the problem onto, the only release valve will be the currency, meaning countries will have to print money. Secondly, we face a resource problem, specifically an issue with the availability and affordability of energy. Although we're not running out of energy, the increasing cost to find new resources, coupled with the heavy debt burden, could lead to economic catastrophe for most assets. However, physical gold and Bitcoin, being the exceptions, do not rely on the assumption of a growing supply of cheap energy. To navigate these challenges, it's essential to stay informed and adapt accordingly. For crypto investors, this might mean focusing on decentralized finance (DeFi) projects like MakerDAO, which offers financial solutions that don't require selling collateral for liquidity. Additionally, supporting environmentally-conscious initiatives, like Maker's partnership with One Tree Planted, can contribute to a more sustainable future. Overall, understanding the macroeconomic landscape and its implications for crypto is crucial for making informed decisions in this complex and ever-evolving space.
Scariest Macro Environment in Last 27 Years: Debt, Energy, and Geopolitics: The current macroeconomic environment is the most challenging in the last 27 years due to global debt, peak cheap energy, and geopolitical tensions. These factors could lead to widespread defaults, commodity price collapses, and even US government default.
The current macroeconomic environment is the scariest in the last 27 years in finance due to the convergence of several factors. These include the global sovereign debt bubble, peak cheap energy, and geopolitical tensions. The price of all assets, except for gold and Bitcoin, is based on the assumption of a cheap and growing energy supply, but energy supplies are not growing as fast as they used to, and they are becoming more expensive. This is leading to geopolitical tensions, particularly around energy and the US dollar. The US dollar is a major factor in this situation as it connects everything, and the end of the road to kick the can down the road for these issues could result in widespread sovereign defaults, commodity price collapses, and even the US government defaulting on its entitlement promises and treasury bonds. The consequences of these events would be felt quickly and could lead to deflationary chaos. The current state of the US economy and the Federal Reserve is such that they have allowed the system to evolve in a way that requires asset prices to rise to keep the wheels turning, but these issues make that difficult. The binary choice is between letting the system collapse into deflationary chaos or intervening to prevent it, but the consequences of intervention could be significant.
Global economic instability and potential currency shifts: The global economy faces potential catastrophe due to supply chain disruptions, high sovereign debt levels, and a shift from a gold standard to a debt-backed system, increasing the risk of inflation or deflation and currency instability.
The global economic situation is on a nonlinear path towards a potential catastrophic breakdown of supply chains and widespread shortages around the world, despite a strong US dollar. This outcome could lead to a dramatic weakening of the dollar against physical commodities. Additionally, due to the unsustainable sovereign debt levels in the West, particularly the US, it's likely that the Fed will have to print money again to prevent sovereign insolvency, leading to potential inflation or deflation. We've arrived at this point due to the shift from the gold standard to a debt-backed system, which creates systemic risk during periods of deflation as debt defaults erode demand for the currency. The longer the delay in addressing these issues, the more potential for significant financial gains, but also increased uncertainty and risk.
Economic instability due to unsustainable promises and flawed assumptions: The current economic system sets unrealistic expectations and relies on cheap energy, leading to potential crises from unsustainable promises and flawed assumptions.
The current economic system, which requires constant growth and inflation to avoid collapse, sets up unsustainable promises and obligations, particularly in the form of entitlement programs. Human nature, with its desire for something for nothing, has led to the postponement of addressing these issues until a crisis arises. The bursting sovereign debt bubble is a significant concern, and while some argue that inflation could serve as a release valve, others believe it could lead to a bursting bubble with severe consequences. The world's economic assumptions, based on cheap energy, are also proving to be flawed, adding to the instability. Ultimately, we find ourselves in a complex and historic situation, where the consequences of past actions are coming due.
Comparing the US to a highly indebted Latin American republic: The US, as the reserve currency issuer, faces unique challenges due to wealth inequality, financialization, and deindustrialization. Negative real interest rates and high inflation are needed to address debt and prevent a crisis.
We are currently facing a complex macroeconomic environment with elements reminiscent of various historical periods, such as the 1940s, 1970s, and different eras in Latin America. The speaker argues that the US, as the reserve currency issuer, resembles a highly indebted Latin American republic due to its record wealth inequality, financialization, and deindustrialization. He also emphasizes that the current situation is unique because the US cannot rebuild the world like it did after World War 2, and supply chains are no longer under its control. The speaker believes that the US needs an extended period of significantly negative real interest rates to address its debt situation, and tightening too soon could lead to market turmoil and economic instability. Inflation needs to be kept high to prevent a debt deflation crisis. The speaker warns that there's no single good metaphor for the current situation, as it combines elements of various historical periods.
Fed's Monetary Policies in the 1970s vs. Now: The Fed's outdated decision-making and politically driven actions could lead to a financial crisis, despite the current economic situation's differences from the 1970s.
The current economic situation and the role of the Federal Reserve are vastly different from the 1970s, and attempting to follow the same monetary policies could lead to disastrous consequences. The Fed's decision-making is based on certain metrics while ignoring others, making it a backward-looking institution. The Fed's actions, such as inflating to reduce debt, are politically driven and not based on an independent assessment of the economy. The markets, however, may soon realize the Fed's limitations, leading to a financial crisis. The ongoing trends in credit markets, housing, stocks, and even Bitcoin, indicate that the Fed's efforts to fight inflation are no longer just a ruse. The consequences of the Fed's actions, or lack thereof, could lead to a significant economic downturn.
Historically unusual imbalance in US treasury market: Foreign selling, large US deficits, and potential Fed exit from buying treasuries could lead to rising yields and negative real interest rates, but the feasibility of this scenario is less likely due to recent policy actions and the unsustainability of negative rates given high debt levels.
The current situation in the US treasury market is historically unusual due to a combination of factors, including foreign investors selling treasuries to buy dollars, large US deficits, and the Fed's potential exit from buying treasuries. This imbalance could lead to rising treasury yields and negative real interest rates in the coming years, potentially following the pattern of countries like Israel in the 1980s that experienced high inflation and debt forgiveness. The end game may involve a much larger Fed balance sheet filled with foreign sovereign debt, and a prolonged period of significantly negative real interest rates. However, the feasibility of this scenario is now less likely due to the Fed's recent policy actions and the unsustainability of negative interest rates given the high debt levels.
Expects significant sell-off in risk assets, prolonged high inflation, and US debt-to-GDP reaching 60-70%: The speaker predicts a major sell-off in risk assets, prolonged high inflation, and a potential US debt-to-GDP ratio of 60-70%.
The speaker expects a significant sell-off in risk assets, followed by a prolonged period of high inflation in the US. During this time, US debt-to-GDP could reach 60-70%, and the Fed may need to normalize policy by raising interest rates and cutting fiscal deficits. This could lead to a decrease in purchasing power for treasury holders. The speaker also notes that the US, as the issuer of the global reserve currency, has greater implications for the economy than Israel did during its high inflation period in the 1980s. Additionally, the conversation touched on the growing importance of layer 2 scaling solutions, such as Acros and Arbitrum, in the crypto space, as well as the potential for new staking features in apps like Ledger Live. The speaker also raised the possibility that, in response to economic challenges, the US government could take measures to discourage the purchase of certain store-value assets, such as gold, and instead encourage the buying of bonds or treasuries.
Government shifts demand to gov-backed assets during crisis: Governments may incentivize shift from private Bitcoin to gov-backed assets, but this could negatively impact consumer spending and economic growth.
Governments have a history of shifting demand from private assets to government-backed assets during times of financial instability or economic crisis. This was seen in the 2014 SEC rule change for money market funds, where the US government incentivized the shift of trillions of dollars from private dollar assets to US Treasury T Bill money market funds. This regulatory measure was similar to what FDR did during the Great Depression with gold and what Argentina did in the early 2000s with private pensions and banks. The speaker suggests that similar regulatory threats could be imposed on Bitcoin, potentially limiting self-custody wallets or mandating that funds hold a certain percentage of US Treasury bonds. However, the speaker also notes that such a move could negatively impact consumer spending and economic growth, as net capital gains and IRA distributions are a significant source of funding for personal consumption expenditures. Therefore, governments may need to consider the potential consequences before implementing such measures.
The stock market's health impacts the economy, especially in highly leveraged systems: In a highly leveraged economy, a depressed stock market can lead to a rapid and non-linear economic downturn, influencing consumption patterns and potentially causing inflation or wage growth depending on political actions, with different consequences for bondholders and risk assets
The health of the stock market significantly impacts the economy, particularly in highly indebted systems. The deficit reduction efforts under Obamacare led to an increase in premiums, which reduced consumer spending and caused deficits to rise as a percentage of GDP. The stock market, representing a large portion of individual wealth, influences marginal consumption patterns. In a highly leveraged economy, a depressed stock market can lead to a rapid and non-linear economic downturn. For the average worker, the next 5-10 years could mean sustained inflation or a period of industrial reinvestment and wage growth, depending on which political faction prevails. Inflationary periods can lead to negative real interest rates, benefiting risk assets like stocks, real estate, gold, and bitcoin, but are detrimental to bondholders.
Two paths for the US economy: exceptionalism or tax haven: The US economy's future hinges on whether it prioritizes domestic growth or becomes a tax haven, with consequences for inflation, economic stability, and global power dynamics.
The future of the US economy could go in one of two directions: either the US maintains its exceptionalism and invests in its own growth, or it becomes a giant exporter of dollars and treasuries, acting as a tax haven with a strong military. The former scenario benefits the US middle and working classes by prioritizing their wages and economic well-being, while the latter scenario prioritizes treasury holders and results in inflation and potential economic instability. The choice between these two paths depends on our priorities as a nation. The conversation also highlighted the historical trend of subjugating the US middle and working classes in favor of treasury holders, and the need for a reversal of this trend for the US to truly win. Ultimately, the outcome will have significant implications for the global financial system and geopolitical power dynamics.
Future of Global Currencies: The future of global currencies is uncertain and will depend on economic policies and global events. Large government spending could lead to a weaker US dollar, while a focus on domestic economies could strengthen it. The Euro, Yen, Won, and Ruble could also be impacted based on their respective economies and geopolitical factors.
The future of global currencies, particularly the US dollar, could drastically change depending on the economic path the world takes. If the current trend of large government spending continues, the Fed's balance sheet could grow significantly, potentially leading to inflation and a weaker dollar. However, if there's a shift towards strengthening domestic economies and reducing reliance on foreign debt, the dollar could retain its global reserve status. Other currencies, such as the Euro, Yen, Won, and Ruble, could also be impacted. The Euro could potentially challenge the dollar's dominance if Europe's economy recovers strongly. The Yen could benefit from safe-haven demand in times of economic uncertainty. The Won could strengthen if South Korea becomes a major global economic player. The Ruble could face continued volatility due to geopolitical tensions. Overall, the future of currencies is uncertain and will depend on economic policies and global events.
Dollar's strength due to European and Japanese instability, but may weaken soon: The dollar's strength against other currencies could be short-lived due to potential European and Japanese debt defaults or alternative currency use for energy transactions. The dollar's decline against commodity-linked currencies and commodities is expected to continue, while the Fed's intervention to finance the U.S. deficit may lead to dollar weakening.
The strength of the U.S. dollar, as indicated by the DXY index, is a result of the economic instability in Europe and Japan due to energy shortages. However, this dollar strength could be short-lived as these countries may soon be forced to default on their debts or turn to alternative currencies for energy transactions. The dollar's decline against commodity-linked currencies like the ruble and the real is expected to continue as long as the Fed does not significantly increase its purchases of U.S. Treasuries. Conversely, when the Fed does intervene to finance the U.S. deficit, the dollar is likely to weaken against most currencies and commodities, including oil and natural gas. Energy commodities are expected to be in a secular uptrend due to the need for higher prices to maintain the global debt structure and generate economic activity.
Energy market volatility: High debt, peak cheap energy, and policy over-tightening: High debt, peak cheap energy, and potential policy over-tightening could lead to significant price swings and potential oil shortages, impacting the economy and causing severe consequences in developing and emerging markets, while equities and gold are expected to perform well over the next decade
The energy market is expected to experience high volatility due to the combination of high debt, peak cheap energy, and potential policy over-tightening. This could lead to significant price swings and potential oil shortages as the world's biggest marginal producer, US shale, may see a significant decline in production. Additionally, energy is referred to as "nature's interest rate," meaning it plays a crucial role in the economy and has the potential to impact developing and emerging markets significantly. Europe's current energy crisis could lead to severe consequences, including hyperinflation, while in the weakest emerging markets, societal collapse and violent overthrows of governments are possibilities if energy and food needs are not met. Equities, on the other hand, are expected to perform well over the decade as Western governments rely on their central banks to maintain their solvency through money printing. Gold, as a store value commodity, is also expected to see increased demand as a neutral reserve asset, particularly from China, Russia, and Europe.
Gold to regain position as primary reserve asset, leading to price increase: Invest in gold and Bitcoin as energy proxy store of value assets, diversify portfolio, and stay informed about economic trends to avoid losses in volatile markets.
As we move into the next decade, gold is expected to regain its position as a primary reserve asset, leading to a significant increase in its price. Gold and Bitcoin are seen as energy proxy store of value assets, with Bitcoin being the last functioning smoke alarm due to its proof-of-work dynamic. However, investors should be cautious and unlevered, as historical examples like the Weimar German Marks hyperinflation show that even in the most volatile economic environments, being levered can lead to significant losses. Overall, it's crucial to have a well-diversified portfolio and to stay informed about geopolitical events and economic trends.
Stay unlevered or have low leverage during political instability and high debt: Diversify portfolio with cash component to weather volatility, avoid over-leveraging, bullish long-term outlook but choppy next few years, stay informed and cautious.
During times of political instability and high debt, it's crucial to stay unlevered or have very low leverage in investments. The speakers on this podcast emphasized the importance of having a diversified portfolio with a significant cash component to weather the expected volatility in the next few years. They also highlighted the risks of being overly leveraged, as seen in the case of the fund that lost all its money by shorting Luna. The long-term outlook remains bullish for equities, crypto, and gold, but the next 3-5 years are expected to be choppy. So, holding cash provides the optionality to wait out the volatility and invest on the other side. Listeners are encouraged to check out Luke's YouTube channel, subscribe to his newsletter, and explore other macro-focused podcasts for more insights. Remember, none of this content constitutes financial advice. Crypto and other investments come with risks, but staying informed and cautious can help navigate the frontier.
