Top Three Videos – August 31, 2023

Quick Summary Bullets:

Economic Crisis and Sovereign Debt

• “The U.S is in the final Innings of a sovereign debt crisis that will upend much of the status quo as we know it.”
• Unlike Japan, the US cannot sustain deflation due to its twin deficits and negative net international investment position, making it unable to generate positive real rates of return.
• The Fed printing money and the repatriation of assets by foreigners could lead to deflation, a stronger dollar, and potentially higher interest rates that the US government may not be able to afford.
• If the purchasing power of the currency declines, the wealthy who own financial assets will be okay, but the average person may get screwed unless wages increase faster than the decline in purchasing power.
• The reckoning of the economy, fueled by irresponsible borrowing, has arrived, and the trigger for this recession is already here.
• Cutting six points of GDP permanently to stop inflation would lead to the collapse of the banking system and global asset markets.
• We need an economic or energy productivity miracle, such as fusion or small fission, to drive a productivity increase and potentially overcome the impending recession.

Asset Allocation and Investment Strategies

• Luke Gromen remains bullish on electrical vehicle related metals, such as silver, indicating his positive outlook on the future of the electric vehicle industry.
• “Gold is a derivative energy play, as it takes energy to extract it from the ground, making it a valuable asset in a world of peak oil.”
• If Russia, China, and Iran agree to announce that gold buys 60 barrels of oil in the Brix Block in Shanghai and Moscow, while it’s only 30 barrels an ounce in the Western markets, every hedge fund will engage in risk-free arbitrage, potentially leading to a depletion of gold inventories in New York and London.
• Luke emphasizes the importance of being conservatively leveraged or unleveraged in order to not just survive, but prosper in the upcoming volatility.

Transcript Summary:

• 00:00 Recession is inevitable due to increasing oil prices and the need to address commercial real estate, as China shifts away from the US and central banks stop buying treasuries, potentially leading to severe inflation in the US.
  • Recession is inevitable due to the expected increase in oil prices and the need to address commercial real estate, as discussed by macro analyst Luke Gromen.
  • China’s recent actions indicate a shift away from the traditional economic relationship with the US, as they sign LNG deals with other countries.
  • Central banks are buying treasuries as a temporary measure, but they are now going directly to the source and exchanging dollars for a 27-year supply of LNG, indicating a shift away from treasuries, and if rates go up without buyers, it could potentially bankrupt the US government.
  • The US is likely to experience a similar economic situation as Japan, but with severe inflation instead of deflation, due to the US having twin deficits and a negative net international investment position, unlike Japan.
• 05:06 The Federal Reserve printing money may cause deflation, a stronger dollar, and rising interest rates, potentially leading to a situation where the US government cannot afford it, and the average person may be negatively affected by inflation without a corresponding increase in wages.
  • The Federal Reserve printing money to support the economy may lead to deflation, a stronger dollar, and foreigners repatriating their assets, causing interest rates to rise and potentially leading to a situation where the US government cannot afford it.
  • Jerome Powell prints money to address the issue of not having it, and there are concerns about the potential “argentinaification” of America.
  • The speaker discusses the potential negative impact of inflation on the average person’s financial well-being and questions how they can avoid being negatively affected, particularly if wages do not increase at the same rate as the decline in purchasing power.
• 07:54 The working class is facing a potential uprising due to economic downturn caused by irresponsible borrowing, and options to combat inflation are limited, leaving a recession inevitable unless there is an economic or energy productivity miracle.
  • The working class is experiencing a social fracture and potential uprising due to the economic downturn caused by irresponsible borrowing.
  • Once oil prices decrease, it will have a destabilizing effect and the only options to combat inflation are to reduce treasury spending, cut interest rates (which would cause inflation), or significantly decrease entitlements and defense spending, which would not be well-received by the public.
  • Cutting six points of GDP permanently would cause the collapse of banks, the treasury market, and global asset markets, leaving no way to avoid a recession.
  • The speaker discusses the need for an economic or energy productivity miracle, such as fusion or increased productivity through technology, as potential ways to avoid the impending recession, but acknowledges that these solutions are becoming increasingly unlikely, leaving the options of inflation or collapse.
  • Cutting the deficit without collapsing the economy is impossible, as raising taxes, such as with Obamacare, led to increased government deficits, reduced consumer consumption, and higher global borrowing rates.
• 13:32 The speaker discusses the need for a decrease in the Boomer population and transfer of assets to their children to change the view on the inevitability of a recession, emphasizing the impact of oil prices on economic growth and the significance of energy costs on the value of houses in outer suburbs.
  • The speaker discusses the unlikely scenarios of a miracle or time machine and the need for a significant decrease in the Boomer population and transfer of assets to their children in order to change their view on the inevitability of a recession.
  • Oil prices will have a greater impact on economic growth than the decisions made by the Federal Reserve, as oil is a crucial factor in driving and controlling economic growth.
  • The value of houses in outer suburbs is significantly affected by the cost of energy, which is embedded in everything and acts as Nature’s discount rate.
• 16:50 A recession is inevitable, with lag effects leading to a major crisis in commercial real estate and a potential frozen market in the housing sector, but the impact may be milder due to Boomers buying houses for their children.
  • The speaker believes that those who think a recession has been avoided will be proven wrong, and that the lag effects are real and will lead to an inevitable recession.
  • Oil prices are expected to rise significantly, and commercial real estate is likely to face a major crisis, forcing the Federal Reserve to take action.
  • Commercial real estate could be a significant problem as developers struggle to refinance and banks demand more equity.
  • The potential shoe to drop in the retail housing market may result in a frozen market and a decline in asset prices, leading to a prolonged period of stability as Boomers buy houses for their children.
  • Boomers and the silent generation, who hold 75% of the wealth in the country, are more likely to buy houses and have others pay rent to them, leading to a mild housing market downturn rather than a severe one.
• 22:38 The housing market is unlikely to decline due to government intervention, and the speaker recommends a barbell strategy of various assets to own during a potential recession.
  • The housing market is unlikely to decline because the US government will be forced to print money to finance itself before the market breaks, due to fixed rates for homeowners and the need to smooth over assets for future generations, leading to a potential resumption of quantitative easing by the Federal Reserve.
  • The speaker recommends a barbell strategy consisting of being overweight in cash, short-term treasuries, gold, Bitcoin, US electrical infrastructure equities, energy, oil, and electrical vehicle related metals.
  • It is important to understand that the current situation is different in terms of scale and magnitude, so it is impossible to predict exactly how things will unfold in the next 12 months.
• 26:02 The speaker predicts a short-lived deflationary crash followed by sustained inflation, making cash, short-term treasuries, gold, and Bitcoin good investments, while also discussing the potential for a global economic shift involving the devaluation of the dollar against gold.
  • The speaker believes that a deflationary crash may occur, but it will be short-lived, and they recommend holding cash and short-term treasuries for liquidity and optionality, as they have high conviction that the government will have to print money leading to sustained inflation, explicit yield curve control, and bondholders losing on a real basis for around 10 years, making long duration and Western Sovereign bonds a good investment.
  • If the US cuts entitlements and defense spending, the speaker would be more inclined to invest in long-term treasuries for higher returns.
  • Gold and Bitcoin are the best assets to own as a hedge against the Federal Reserve’s printing of money, and gold is also a derivative energy play, making it a strong candidate for the next primary reserve asset.
  • Central banks have been buying gold for the past nine years, and the speaker does not believe that a separate currency will be launched, but rather that they will agree on something else.
  • Gold buying power in the Brix Block is higher than in London and New York, and if Russia, China, and Iran agree to announce a gold-to-oil ratio of 60 in the Brix Block, hedge funds will short oil in London or New York, buy gold, exchange it for oil in the Brix Block, and devalue the dollar against gold, potentially leading to a global economic shift.
• 31:17 Be conservatively leveraged or unleveraged to survive and prosper in the upcoming volatile years, and seek the guidance of a financial advisor who takes into account the unpredictable future.
  • Luke Gromen discusses his work and where people can follow him in the future, including his website and Twitter feed.
  • Luke Gromen discusses the unpredictable and volatile future, recommending viewers to work with a financial advisor who takes into account the issues discussed, and offering a free consultation with the financial advisors at wealthyon.com.
  • Be conservatively leveraged or unleveraged in order to survive and prosper in the upcoming years of volatility.