BTC045: Luke Gromen on China, Evergrande, Macro, & Bitcoin

Episode Summary

Executive Summary: In this episode, Preston Pisch and Luke Groman discuss the macro landscape, focusing on the Fed's struggle to manage inflation and debt, the Evergrande crisis in China, supply chain disruptions, and the potential for a shift to Bitcoin as a store of value. Groman argues that the Fed is stuck between needing to inflate away debt and maintaining credibility, and that the current system is unsustainable, with a high probability of high inflation or hyperinflation.

Main Topics: Fed's Dilemma and Monetary Policy (Priority: 5/5): Discussion of the Fed's inability to fine-tune inflation, the switch from dial to binary on/off, and the use of taper talk while maintaining liquidity through standing repo facilities. Evergrande and China's Real Estate Crisis (Priority: 5/5): Analysis of Evergrande's $300 billion liabilities, its potential as a Lehman-like event, and the contagion risks through supply chains and global demand. Supply Chain Disruptions and Inflation (Priority: 4/5): Examination of COVID-related port shutdowns, container shipping capacity issues, and potential Chinese 'slow steaming' as factors driving inflation beyond monetary policy. Labor Market and 'Great Resignation' (Priority: 4/5): Discussion of disincentives to work, including unemployment benefits, gig economy wages, and mandates leading to widespread career changes. Bitcoin and Gold as Alternative Assets (Priority: 3/5): Exploration of Bitcoin's potential to reach a million dollars to be taken seriously by fixed-income investors, and the alignment of SEC and Chinese Communist Party on crypto regulation. Peak Cheap Oil and Electric Vehicle Shift (Priority: 4/5): Argument that global automakers' rapid shift to EVs is driven by national security concerns over fossil fuel supply-demand imbalances, not just virtue signaling.

Key Arguments: The Fed is operating a switch, not a dial, due to high debt levels, making fine-tuned inflation control impossible. Evergrande is not a Lehman-like event for the banking sector due to state-owned nature, but contagion risks exist through supply chains and luxury goods demand. Supply chain disruptions are a perfect storm of COVID, container shipping capacity, and potential Chinese strategic actions. The U.S. government's transfer payments as a percent of PCE (33%) are unsustainable and driving inflation. Bitcoin needs to reach a market cap multiple of gold (around $1 million per coin) to be taken seriously by fixed-income investors. Global automakers' shift to EVs is likely driven by national security concerns over peak oil, not just climate virtue signaling.

Data Points: U.S. 10-year Treasury yield: 1.32% - Compared to 5% CPI, creating a negative 4% real return. CPI print: 5.3% - Last month's CPI, with 5% for the last five months. Evergrande liabilities: $300 billion - With $200 billion in halfway constructed real estate. U.S. government transfer payments as % of PCE: 33% - One-third of two-thirds of the economy is government transfers. Historical debt-to-GDP default rate: 98% - 52 countries hit 130% debt-to-GDP since 1800; 51 defaulted via high inflation. Bitcoin market cap: ~$800 billion - At $50-55k per coin; gold is ~$12 trillion.

Pivotal Quotes: "The issue is not whether we can generate inflation. We know this will generate inflation. Governments hand out money. We buy the bonds. It's the very definition of helicopter money. This will generate inflation. The challenge is that there are no examples in history of using this to generate just a little bit of fine-tuned inflation." — Luke Groman (quoting Stan Fisher): Discussing the Fed's inability to fine-tune inflation and the binary nature of monetary policy. "If a state-owned company defaults to a state-owned bank in the state currency, just like you move it from this side of the ledger to the other, and no one's out. It's a domestic political problem for China." — Luke Groman: Explaining why Evergrande is not a Lehman-like event for the banking sector. "The communists are trying to make housing more affordable and they're trying to let capital markets work and let somebody take a loss to learn a lesson. And the capitalists are doing whatever they can centrally plan to eat the exact opposite." — Luke Groman: Highlighting the irony of China's common prosperity policy vs. U.S. housing policy.

Implications: Listeners should prepare for high inflation or hyperinflation as the likely outcome of sovereign debt crises. Bitcoin and gold may serve as hedges, but Bitcoin needs to reach ~$1 million to be taken seriously by fixed-income investors. Supply chain and labor market disruptions will persist, and the shift to EVs may accelerate due to peak oil concerns.