Discuss the latest macroeconomic developments related to Bitcoin, including oil prices and market misconceptions.
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In this episode of Bitcoin MagazineOn the “Fed Watch” podcast, CK and I welcomed special guest, Luke Gromen. Gromen is the Founder and President of Forest For The Trees (FFTT), LLC, where he provides clients with macro insights and investment analysis of the global financial system. In this wide-ranging conversation, we dove deep into Russia, gold, oil, shadow banking, bonds – you name it, we probably talked about it in the episode.
“Fed Watch” is a podcast for people interested in central banking news and how Bitcoin will integrate or replace certain aspects of the aging financial system. To understand how bitcoin will become global money, we must first understand what is happening now.
Common market misperceptions
We started the show (after an awkward introduction from me that CK saved) with Gromen giving a summary of his model to visualize the current economic landscape. He pointed out two widely held misconceptions that have created the situation we find ourselves in: first, the value of the petrodollar is the dollar, not the petro; and two, thinking debt doesn’t matter. These are things that people believe, but are actually the opposite.
I tried to clarify the origins of these misconceptions, but I did it so badly. I believe that these misconceptions are due to the system in which they were born. In the long post-war history, however, these were not misconceptions. The value was in the petrodollar dollar and the US debt didn’t matter. They have only been wrong as this era ends. So what I was wondering is if these misconceptions caused the end of the era or did the end of the era cause the misconceptions to become false?
Achilles heel of the dollar system
In this part of the podcast, Gromen dove deeper into the tweet behind this interviewabout Russia possibly weaponizing gold, and in response, the US weaponizing bitcoin.
There is a fragile market for gold in the unallocated gold market centered on the LBMA and COMEX. Gromen’s claim is that if Russia wanted to, it could simply declare that it will sell oil for gold, which could crash those markets and instantly turn gold’s market capitalization to a size capable of handling global financial clearing.
According to Gromen’s interesting thought experiment, this move to a petro-gold standard would lead to fewer US securities being held in national reserves around the world and lead to a multi-currency trading network.
The dollar goes up, does not go down
One of the things we might expect, if the theory of a multi-currency futures contract were correct, is for the dollar index (DXY) to fall against other currencies. However, in the past two weeks the dollar has exploded higher, reaching 99.4, the highest since May 2020. This is a level of strength that the dollar has only reached for a few months in the past five years, mainly during this brief period. early 2020.
So I asked Gromen if he was surprised by the strength of the dollar. He said:
“I’m not surprised that DXY went up because it’s the funding currency, it has the giant Eurodollar system where you got dollar-denominated loans. So whenever you experience economic stress, the DXY will rise. That said, the dollar collapsed against oil.
What are the practical next steps for the financial reset?
Our position on “Fed Watch” for nearly a year has been that the Corona financial crisis will likely be followed by a second European debt crisis, just like the one that followed the Great Financial Crisis (GFC). It is predictable because of the way money, reserves and credit flow like a tide around the world. We have also said that Europe is financially the sick man of the world. One will wonder whether the euro and the EU will survive the next debt crisis. Now it seems they must also survive a physical threat to their carefully crafted reasons for existence.
Either way, our position is that the euro will face existential problems long before the dollar. We asked Gromen what his take on this dynamic was. He has a very nuanced process on next steps and has done a great job of detailing how the energy and commodities contagion will spread to European banks and then to US banks. As the contagion spreads to equities, which generate marginal spending and marginal tax revenue in the United States, Gromen said, we will eventually see it spread to U.S. sovereign debt.
As tax revenues fall and the United States faces a public financing crisis, the United States will turn to the Federal Reserve and insist that it resume quantitative easing (QE), because it is his only practical choice. Gromen said this is manifesting in a return to central bank easing with inflation still very high.
What if the oil fell from here?
Then we covered the possibility (which I think is most likely to happen) that Ukraine will be locked down much sooner than everyone thinks and not result in a quagmire. In that case, energy would start flowing from Russia again, but the market would also have overreacted and brought more US, Venezuelan, Iranian and possibly even OPEC production online. This could quickly turn the crisis from an oil shortage to an oil glut. Let’s not forget to put this price spike in the context of two years ago, when oil futures negative. Just 23 months later, we now have multi-decade highs. What if it goes down to $50 a barrel or goes down very quickly?
I pointed out that the chart looks like 2008 and a parabolic hit, not like a sustained regime shift to more expensive oil. Gromen countered by saying that this event is more important than that. What we have seen is a “marking in the market of relative global power levels”. This aligns well with Gromen’s position that cutting Russia off from SWIFT and seizing its foreign reserves was a fundamental shift in the global financial system.
Gromen eloquently exposed the theme that the world is witnessing at the end of not only American hegemony after World War II, but also the dollar system as we know it.
Here I asked him an interesting question: are bond prices more correct or is the price of oil more correct? Both markets are extremely deep and sophisticated, but oil seems to be more in an unsustainable position on the chart, very similar to 2008, while bonds remain in their long-term trend. I asked this question because of the old adage that the bond market is always right.
Gromen replied that he thought oil was more correct, although he cautioned that there could be a near-term correction due to a disappearance of the war premium we currently have. However, he brought it back to a fundamental aspect of his thesis, which is that US sovereign debt makes the difference this time around. The dollar is unable to continue to ease like Japan did when it had a similar debt-to-GDP ratio, as the US dollar is the world’s reserve currency.
From globalism to regionalism
CK brought us back to reality and the realm of bitcoin to wrap up the show. He asked Gromen about confidence in a future system and how that might manifest as a more local and regional world instead of such a global world, with all the vulnerabilities associated with globalism.
We briefly discussed the shrinking of supply chains and the rise of more autonomous and regional trusted trade networks. Gromen thinks this is also a great scenario for bitcoin, but ultimately thinks gold will shine as the most reliable asset on which to build the new system.
Surprisingly, we didn’t talk about inflation. With the total disaster that is global supply chains and the massive amount of “printing” done by the Fed, is it shocking that the CPI is only down 7% year over year? I think there’s a huge oversight in a lot of the dedollarization narrative that we haven’t even covered, mainly that the Fed isn’t printing money. Hopefully we can get Gromen back on the show to discuss this.
This episode was full of predictions and thought experiments. It was a fun conversation and a pleasure to meet Gromen. We were trying to apply some rational assumptions to practical next steps in the global financial system. It was a bit light on bitcoin, but before we can understand how bitcoin will become global money, we need to understand the seriousness of recent events, which is what this episode was all about.
This is a guest post by Ansel Lindner. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.