MacroVoices #254 Luke Gromen: The FED Faces No Easy Choices

Episode Summary

Executive Summary: Macro Voices episode 254 centered on the rising Treasury yield backdrop, its impact on equities, gold, oil, the dollar, and Luke Groman’s thesis that COVID accelerated a secular shift away from the U.S. dollar’s reserve-currency dominance. The discussion argued that large stimulus, Fed monetization, and rising deficits are likely to support risk assets in nominal terms while weakening the dollar and eventually pushing inflation higher.

Main Topics: Treasury yields and stimulus expectations (Priority: 5/5): Eric argues that rising Treasury yields are being driven by expectations for massive Biden stimulus and the associated flood of new Treasury issuance, with the Fed likely to absorb much of it via balance-sheet expansion or yield control. U.S. dollar reserve status and structural decline (Priority: 5/5): Luke Groman frames the dollar’s weakness as part of a longer-term reordering of the global monetary system, where foreign reserves shift away from Treasuries toward gold and other currencies as commodity trade becomes increasingly multi-currency. Gold, real yields, and the inflation setup (Priority: 5/5): Both hosts link gold’s near-term weakness to rising real yields, but argue the long-term bullish case remains intact because fiscal stimulus, monetization, and future inflation should drive real yields back down. Oil and broad commodity reflation (Priority: 4/5): Oil’s persistent uptrend, supported by inventory draws and tight structure, is presented as part of a broad commodity rally that reinforces the reflation trade and weak-dollar narrative. Stock market resilience versus bubble risk (Priority: 4/5): Patrick’s chartbook suggests equities may continue higher amid stimulus, but several sectors are showing late-stage parabolic behavior reminiscent of the dot-com era, implying localized blow-offs even if the broad index holds up. Fed policy trap: defend the dollar or support the economy (Priority: 5/5): Luke argues the Fed is caught between allowing yields to rise and damage the economy or suppressing yields and risking dollar weakness; he expects a form of yield curve control or monetization eventually. Bitcoin, gold, and debt jubilee mechanics (Priority: 4/5): Luke treats Bitcoin and gold as complementary hard assets, and proposes that debt monetization, gold remonetization, or student debt forgiveness are ways policymakers could engineer a de-leveraging/debt jubilee.

Key Arguments: Treasury yields are rising mainly because markets expect large deficit-financed stimulus, not because the long-term inflation regime has already changed. The Fed is likely to become the marginal buyer of Treasury issuance, limiting any sustained rise in yields. The dollar’s role is eroding structurally as energy and commodities are increasingly priced in multiple currencies, reducing global demand for reserves. Gold’s current weakness reflects short-term real-yield moves, but the medium- to long-term setup remains bullish because monetization and inflation will likely reverse real yields. Oil’s trend remains intact; inventory draws and a strong time-spread structure support higher prices, potentially toward $65. The equity market can keep grinding higher in nominal terms under continued liquidity, but speculative sub-sectors may experience sharp mean reversion. The Fed and Treasury are trapped: raising rates or defending the dollar too aggressively could break the economy; suppressing yields too aggressively could accelerate dollar decline and inflation. Bitcoin and gold both serve as debasement hedges, but gold has the advantage of being a central-bank balance-sheet asset and not requiring ongoing energy input. Luke’s framework implies deficits already matter, because since 2014 foreign central banks have stopped adding Treasuries on net and the Fed has had to step in as buyer of last resort. A politically palatable response to debt and inflation pressures could be a form of debt jubilee, potentially including gold remonetization or student-loan forgiveness. Stock market leadership is becoming more speculative and narrow, echoing late-cycle behavior seen in 1998-2000. Inflation may first appear in asset prices, then increasingly in the real economy as fiscal spending, bank lending, and political pressure sustain money creation.

Data Points: Macro Voices episode: 254 - Episode identifier for the show discussed in the transcript. Recording date: January 14, 2021 - Date the episode was recorded. Stimulus expectation: $1 trillion to $2 trillion - Eric’s estimate of the size of expected Biden stimulus and related Treasury issuance. U.S. crude oil inventory change: -3.2 million barrels - Weekly draw reported during the market wrap. Cushing crude inventory change: -2 million barrels - Weekly draw at Cushing, Oklahoma. Gasoline inventory change: +4.4 million barrels - Finished products build offsetting crude draws. Distillates inventory change: +4.8 million barrels - Finished products build offsetting crude draws. U.S. oil production: 11 million barrels/day - Production was unchanged for another week. WTI crude price: $53.61 - February contract price at time of recording. Oil time spread move: from -320 to -280 - Eric’s favored Z1Z2 spread moved $6 in his favor. Oil target mentioned by analysts: $65 - Art Berman and Goldman Sachs both cited $65 oil, with Goldman calling for it by summer. Gold move after prior episode: -$80/oz - Gold fell sharply the day after the prior week’s recording. SPX level: around 3,800 - Equity market trading range discussed during the wrap. Dollar index: around 90 - U.S. dollar index hovering near this level. 10-year Treasury yield: above 1% - Yields had backed up meaningfully from prior lows. 10-year China yield: 3.25% - Luke cited Chinese yields as higher than U.S. yields. Fed 2020 Treasury buying: more than 100% of net issuance - Luke argued the Fed financed the U.S. government’s net issuance in 2020. 2021 net issuance gap: $1.8 trillion more than Fed buying - Luke said projected 2021 issuance would exceed Fed purchases by this amount before additional Biden stimulus. U.S. net international investment position: negative 60% of GDP - Luke used this to illustrate external vulnerability. Gross foreign ownership of U.S. dollar assets: $40 trillion - Luke cited foreign gross dollar asset ownership. Net foreign ownership of U.S. dollar assets: $12 trillion - Luke cited foreign net dollar asset ownership. Gold holdings in Russia FX reserves: higher than dollar holdings - Luke referenced a Bloomberg article noting this as a sign of reserve diversification. Gold physical volumes: up 700% year over year - Luke cited strong physical gold demand. U.S. big three expenditures vs tax receipts: 140% - Luke cited Treasury Borrowing Advisory Committee data on entitlements, defense, and interest expense. True interest expense plus pay-go entitlements vs tax receipts: 120% - Luke cited another TBAC-based measure of fiscal strain. U.S. revenues: $3.3 trillion - Used in his debt-to-revenues valuation analogy. U.S. debt: $27 trillion - Used to argue Treasuries are extremely expensive relative to revenues. Potential remonetization math: $4,000/oz ≈ $1 trillion to TGA - Luke’s estimate of how gold revaluation could finance the Treasury General Account. Potential remonetized gold level: $40,000/oz - Example level used in Luke’s debt-jubilee scenario. Inflation multiplier: 1.5x - Luke used this to estimate stimulus impact from a TGA-funded spend. Potential TGA-funded stimulus: $7.5 trillion - Luke’s projected economic impact from a $5 trillion TGA increase times a 1.5 multiplier. U.S. debt-to-GDP: 130% - Luke repeatedly used this level to show the lack of room for Volcker-style tightening. Volcker-era debt-to-GDP: 30% - Used as the historical comparison for why old inflation-fighting tools no longer work. Physical gold market growth: 700% YoY - Same demand statistic as above, highlighting strong buying interest. Gold downside discussed: 5% to 10% - Luke and Patrick discussed possible near-term downside before a stronger longer-term setup. Bitcoin threshold: $20,000 - Luke said he added substantially when Bitcoin broke above this level.

Pivotal Quotes: "I think we are really getting into the process." — Luke Groman: Luke’s response on whether the dollar’s reserve-currency decline is now underway. "I think the only politically palatable choice is to supply whatever the Biden administration wants." — Luke Groman: Luke’s view that the Fed will ultimately support fiscal expansion through monetization or yield control. "There is no Paul Volcker coming this time." — Luke Groman: Luke’s point that today’s debt burden makes a 1980s-style anti-inflation crackdown unrealistic.

Implications: Listeners should expect continued support for hard assets and nominal risk assets if fiscal expansion and monetization intensify. The key risks are rising real yields, dollar volatility, and sharp sector rotations within equities as speculative excess unwinds.