We explore inflation, retail investors, precious metals, and Bitcoin. We’re joined by Luke Gromen, Founder of The Forest for the Trees. We cover Luke’s perspectives on inflation, investing in alternative assets, and interpreting investment data.
We explore inflation, retail investors, precious metals, and Bitcoin. We’re joined by Luke Gromen, Founder of The Forest for the Trees. We cover Luke’s perspectives on inflation, investing in alternative assets, and interpreting investment data.
“My sense of where we are is... we're basically in the first bursting global sovereign debt bubble in 100 years.” – Luke Gromen
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This episode is our definitive guide to inflation, retail investors, precious metals, and Bitcoin. In it we cover:
ABOUT THE FOREST FOR THE TREES
Luke Gromen publishes a weekly macro research report read by institutional and individual investors alike, called Tree Rings. And he's also the author of Mr. X Interviews volume one and two.
After working as an analyst for 20 plus years, Luke founded the Forest for The Trees in 2014. Luke is known as one of today's best macroeconomic thinkers. His view is that as data becomes increasingly commoditized, free thinking becomes priceless. And that's exactly why I wanted to have him on the show. After an incredibly tumultuous 2021, I wanted to sit down with Luke to get his thoughts on the last year, the road ahead, and some of the toughest challenges we're facing today, from a multi decade high in inflation to shifts in how we collectively think about money.
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ABOUT OUTLIER ACADEMY
Learn timeless lessons on work and life from iconic founders, world-renown investors, and bestselling authors. Outlier Academy is the forever school for those chasing greatness. Past guests include Gokul Rajaram of DoorDash, Scott Belsky of Benchmark and Adobe, Joey Krug of Pantera Capital, Mark Sisson of Primal Kitchen, Luke Gromen of The Forest for the Trees, and Brian Scudamore of 1-800-GOT-JUNK.
ABOUT DANIEL SCRIVNER
Outlier Academy is hosted by Daniel Scrivner. Over the last 15 years, Daniel has led design teams at Square and Apple, turned around a $3M+ ARR SaaS business, and invested in more than 100 companies. He launched Outlier Academy in 2020 to learn from the world’s best founders, investors, authors, and peak performance experts.
Daniel Scrivner (00:00:05):
Hello, and welcome to another episode of Infinite Games where every week we sit down with a founder, operator or investor working at the edge of what's next. I'm Daniel Scrivner, and on the show today, I sit down with the one and only, Luke Gromen of the Forest for The Trees. Luke publishes a weekly macro research report read by institutional and individual investors alike, called Tree Rings. And he's also the author of Mr. X Interviews volume one and two.
Daniel Scrivner (00:00:31):
After working as an analyst for 20 plus years, Luke founded the Forest for The Trees in 2014. Luke is known as one of today's best macroeconomic thinkers. His view is that as data becomes increasingly commoditized, free thinking becomes priceless. And that's exactly why I wanted to have him on the show. After an incredibly tumultuous 2021, I wanted to sit down with Luke to get his thoughts on the last year, the road ahead, and some of the toughest challenges we're facing today, from a multi decade high in inflation to shifts in how we collectively think about money. And I can tell you that you're in for a treat. Luke does not disappoint.
Daniel Scrivner (00:01:05):
We also explore the biggest lessons he's learned as an analyst over the last 30 years. His thoughts on gold and Bitcoin. He likes both. What he's hearing from institutional investors and allocators, and his advice for new investors. You can find the full show notes for this episode at outlieracademy.com/78, including links to everything we discuss. For more from Luke, you can follow him on Twitter @lukegromen. That's Luke G-R-O-M-E-N. And you can find Forest for The Trees at fftt-llc.com. There, you can subscribe to Luke's weekly research report, Tree Rings, for just $97 a month, and you can also download Luke's Mr. X Interview volume one for free.
Daniel Scrivner (00:01:46):
With that, please enjoy my conversation with Luke Gromen of the Forest for The Trees. Luke Gromen, I am thrilled to finally have you on Infinite Games by Outlier Academy. Thank you so much for making time.
Luke Gromen (00:01:58):
Thanks for having me on, Daniel. It's great to talk and catch up. I'm excited to spend some time together.
Daniel Scrivner (00:02:02):
Thank you for taking the time. I mean, as someone that's listened to your interviews for a long, long time from Grant Williams, to real vision, to a bunch of other podcasts, it's a thrill to finally be able to talk with you one on one. So I wanted to ask, I thought it would be fun to kick things off... I'm sure some people listening will be familiar with you and the Forest for The Trees, but I'm sure there are some people that aren't. So I thought it would be fun to go back, and before we talk about the origin story of the Forest for The Trees, can you share a little bit about, I know you worked as an analyst for 20 years previous, what was some of that experience like? What were some of the lessons you learned during that 20 year period?
Luke Gromen (00:02:36):
It was a great experience. It was nearly 20 years and started off as a junior analyst at a small investment research firm in Cleveland, Ohio called Walston Research. They were part of a money management firm. And then moved on with a small group of people that left Walston Research to form a company called Midwest Research and this would've been 1996, I want to say, early 1996. I was literally, I think the ninth employee sitting in a temporary office space, licking envelopes as the junior guy, sending out letters to clients to explain the new firm and what we would be doing. And back then, the big source of investment researcher, a big source of investment research was talking to management teams. You'd call the management team, CFO, investor relations, get an update. And then the analysts and sales people would talk to them about the portfolio managers and analysts, their counterparts at the money managers. And it was a lot of how the business worked on the research side.
Luke Gromen (00:03:31):
And what we found beginning about '97, '98 was that managements didn't like to share bad news. They would only tell you good news. And so, we were finding ourselves blindsided in some pretty high profile stocks because managements had lied to us. And so, what we started to do as a solution to that, as a firm, was we were very early pioneers in bottoms up fundamental channel check work, classic building the mosaic type investment research, where we're talking to distributors, suppliers, private competitors and figuring out what's actually happening. And it was a really fun time. It was a great environment to learn the business. It was a unique way to learn the business because it was a unique niche. Wall Street was basically doing investment banking in the late 90's. It was the rich margin business. They were doing tech.
Luke Gromen (00:04:20):
Nobody cared about value names. Nobody cared about a lot of the stocks we were covering and we built this nice niche and we developed a real knack for having very accurate calls on what was actually happening. And as luck would have it, that was right around the time, '96, '97, that what I would call a hedge fund boom, took place. So you saw '96, '97, there were a handful of hedge funds. And over the next 15 years, the number of hedge funds just exploded. And as they exploded, they were performance driven. They weren't just collecting fees. They were getting 2%, but then 20% of the profit. So, they were highly motivated to work with and pay those firms that could actually tell them what was going on. And we were one of them. And so, our business exploded. I switched from the research side to the sales side early in my career.
Luke Gromen (00:05:05):
And our business went from a very small little business in '96 to a much larger business in '01, when we sold that firm to First Tennessee Bank out of Memphis. And then after that, we were FTN Midwest. And for the next five years, it continued to grow really rapidly, fast forward to '06, myself and another group of colleagues left to form Cleveland Research Company, where we were doing some of the similar types of research. Again, bottoms up research, channel check driven. And it was a really great way to do investment research. But then as it related to the macro for me, early on, I started writing a weekly piece for clients, I called on it for the firm where I was putting pieces together from the bottoms up work we were doing, and then marrying it with an overlay of macro and thematic work I was doing on my own.
Luke Gromen (00:05:48):
And so it was the different way of approaching macro and learning macro than many people do, which was this happened, this happened, this happened, this happened. And boy, there's something happening really, almost like a building up a bottoms up building of macro was how I learned that discipline. And it was a fun way to learn that business. We had a number of really, really great calls in the '08 timeframe because of who we were talking to. We saw the great financial crisis happening in real time, ahead of time. We were able to help our clients greatly position for that whole thing. So it was a fun experience.
Daniel Scrivner (00:06:23):
And just to try to pair it that back, see if I get this right. So it's basically, you've always done this bottoms up almost 360 degree research, as you talked about, in part to de-risk management lying outright about things that were happening in the business, but also I'm guessing, to paint a bigger picture. And then as time went on, you would then marry that with a macro overlay. Do I have that right?
Luke Gromen (00:06:45):
Yeah. Our analysts would be doing research on individual company names. So you'd have the industrial guy and he'd be talking to distributors here and there and heavy duty truck dealers. And you could start to tease out themes. So the heavy duty truck dealer, we do a survey and you can read the survey work and there's 10 of the 30 people we talk to are raising prices. And then the next months, it's 15. And then the industrial distributors that you talk to, they're raising prices too. And this guy's raising prices. So you can start that, so going across those silos because corporate America, Wall Street especially, is very, very siloed. The healthcare guy does his thing and he does not talk to the retail analyst and everyone stays in their own little things and no one tries to step on each other's toes.
Luke Gromen (00:07:30):
And there was always, I saw this great opportunity to go across those silos and see what else is happening across a broader macro thematic. And it's what I did and started writing that piece internally, [inaudible 00:07:42] in the Midwest, back at Midwest Research and reprised that role at Cleveland research with a different piece called straight from the source. But these pieces ended up being remarkably widely read by... I started off just sending them to my clients and I would have other salespeople saying, "Hey, somebody from your client just sent this to my client. Can you put my client on your mailing list and send that out?"
Luke Gromen (00:08:02):
And I would end up just sending the report to my friends. And they would basically, on a private label basis, they would take my name off it and send it to their clients with their name on it, which I was fine with. We had a great team culture there. It was a lot of fun and yeah, that's exactly what we did. It was just going across these silos to build up a macro picture. That was, I think, pretty unique at the time.
Daniel Scrivner (00:08:18):
You talk about obviously sharing it, and I find this with your research now where I will frequently talk with friends. In fact, just literally this weekend, someone messaged me a tweet you shared over the weekend on inflation and supply chains. But what do you take from, when you read a report, when it starts to take off, what do you take away from that? Do you think that's because you're a relatively unheard voice in the broader landscape. What do you take away from that?
Luke Gromen (00:08:44):
Oh, what? That it made its way out there or?
Daniel Scrivner (00:08:46):
Yeah, that it becomes so viral because that doesn't typically happen with a lot of research where it gets passed around as readily. So, I'm curious for your perspective on why you think that is.
Luke Gromen (00:08:56):
I think it's a combination of being useful and I think being useful, thoughtful, and looking at something in a different way than everybody else's. I have a message on my phone, it's a quote from Arthur Schopenhauer, it says that, "The task is not so much to see what no one else has seen, but to think what no one has yet thought about that which everybody sees." And I think one thing I do really well is I think, I think things that are oftentimes very different than about things that everybody else sees is just like I do. And when those things are thoughtful enough or when they're useful enough, I think those are the things that go viral because they can help people understand the world better. In our business, when you understand the world better, that can help you better position your investments.
Daniel Scrivner (00:09:37):
Yeah. It's so interesting. I want to talk in a second about the origin story of actually founding Forest for The Trees in 2014, but what you just said makes me think of, one of the things I want to hit on is, I love this about your approach. So this is a quote on your website, "As data increasingly becomes commoditized, free thinking becomes priceless." And it's just this idea, which is, I think, has really taken off in modern times is, data has continued to explode the critical thinking and the what lenses do you put on that data and how do you interpret that data is 10X, if not more valuable than the data itself. Talk a little bit about that, your perspective there.
Luke Gromen (00:10:12):
That is our view 100%. And I think it's interesting just over the course of my career, when we talk about what we described before, when we started off, it was the data that was the most valuable. It was hard to get stock quotes. When I started this business, they weren't free. And the proliferation of data, it's gone from being hard to get to sipping from a fire hose. And it gets very important for... Much more important to your point. The value is increasingly in the usage of the data, the interpretation of the data, the ability to position the data, to understand the context, all of these things, right?
Luke Gromen (00:10:44):
I mean, I equated to a musician. Musicians all have access to the same eight notes on every octave going up and down. Yet, you've got the Beatles, you've got [inaudible 00:10:55] you've got... And then you've got a lot of people that they may be fine session musicians or great playing at a bar on a Saturday night, but they know they aren't able to put the notes together the way some artists can. And I think ultimately, it's something we're seeing, I think, across the economy, not just in research, but just the ability to make the data useful, to interpret the data, to make music out of the data, if you will. I think increasingly, I think you're seeing that dynamic across a lot of different sectors and the economy.
Daniel Scrivner (00:11:23):
Yeah. Which is fascinating. Because I mean another way to frame that is, the quantitative used to be much more important. Now the qualitative is much more important and something that I definitely see. And I'm sure this resonates with you as well too is, I think in a world where the interpretation of the data, which is inherently subjective, is the most important thing. It's just really difficult because there's so much noise. You're hearing so many opinions on every given topic that it really is hard to try to figure out where that signal is and what can it sometimes feel like just browsing Twitter, you could see the same news story interpreted five times in the course of five minutes scrolling through your Twitter feed.
Luke Gromen (00:11:58):
No, it's absolutely right. And I think someone had to quote it, "The barriers to entry are low, but the barriers to success are high in this world." And it's a very good way of phrasing it.
Daniel Scrivner (00:12:05):
That's a great quote. Okay. One more question, which is, you have this 20 plus year period where you're at a number of different research firms, you're developing your own style. What was the impetus for you to go and found the Forest for The Trees? And was there a goal from day one? Was it just to be independent? What did you hope, I guess you would be able to achieve?
Luke Gromen (00:12:26):
For me, going into the '08 crisis, I was doing some of the macro thematic type stuff in the seat I was in, primarily for clients of the firm that I called on. And to me, it was crystal clear what was happening, what was coming. I mean, I remember begging my father to sell all of his stocks and get out of all of... You go to a 100% cash in his retirement account in October of '07. Right? So the S&P's still at a high, Cramer's already had his famous meltdown a few months before, but everything was okay. Everything was good. To me, just the way the data spoke to me, it was clear to a number of us, not in the firm, that things were getting weaker. It was clear to me that the system was at risk of collapsing based on some of the things I had heard.
Luke Gromen (00:13:06):
And so, going into the '08 timeframe was doing a lot more macro thematic stuff as it was. When we came out of that, the policies that were put in place by U.S policy makers, to me, it now seemed clear, every bit as clear that the world was going to become much more macro and central bank driven. And so I was spending more and more of my time working on those types of things, even though we were known as a bottoms up fundamental channel check shop and ultimately, was doing more and more of that, my clients were really liking it and I didn't call on that many clients within the firm. We had a limited client list, because that was one of our niches. As we only sold our research to so many people.
Luke Gromen (00:13:45):
And by about 2013, I went to my partners and I said, "Look, I want to do this full time." And they said, "You know what? That might be interesting. Let's talk about that a bit more." And we talked about it a bit more and I said, "Well, one last thing. I want to have complete creative control to write whatever I want to write." And that to me, was really important. Number one, that independence, but that independence to me, I think was really important because again, to me, it seemed crystal clear that things were going to get weirder and weirder...
Daniel Scrivner (00:14:12):
Which has turned out to be very true.
Luke Gromen (00:14:14):
It turned out to be very true. And quite frankly, I underestimated by an order of magnitude how weird it would get. But it just seemed like it'd be very important for me to have that freedom. And from a marketing standpoint, they had a hard time figuring out how we would position that. I'm a little bit of a different guy. And so what we did is we parted ways amicably. I'd worked with these guys for nearly 20 years at that point and have a ton of respect for them. And they helped took care of some healthcare stuff for me as I just started off et cetera, but it was a little scary. People say, "Hey, have money. Have skin in the game?" Well, I had skin in the game. And so basically, I walked away from a well paying job in investment research where I'd all this experience established basic clients, on what was basically a belief on my part that what I was doing and that the clients I had been calling on really liked, that I would be able to distribute that more broadly and that others would like it as well.
Luke Gromen (00:15:06):
I had no reason to believe that that was true other than conviction in my own abilities and what I'd seen from a very limited sample size and walked away. And the other thing I did too, within that was, is again, to that point of independence, I didn't take any outside investors because I didn't want anyone else having a say in what I could and could not write. And so, it was one of these things where basically me and Mrs. FFTT, as I call her, we're putting the house. We're putting everything on the line, putting all the chips back in the pot for a very big hand. And we had basically three piles of money. One of the initial pieces of startup capital I had was, I owned a 100 acre farm as a piece of investment property. I sold that. Set that money aside, set some other money aside, and that was pool number one that I fully expected to burn through.
Luke Gromen (00:15:49):
And then pool number two was, "Hey, if we get the pool number two, we maybe just got to start thinking about what do we do next?" And then pool of capital number three was this stuff where, if we burn through pools one and two, it would start to hit the rip cord time and it's time to look for something else. Maybe we sell the house, maybe we move, whatever. It was one of these things where I felt so powerfully, I just knew... You may have seen Jeff Bezos talked about his regret minimization framework when he talked about starting Amazon and FFTT is no Amazon, obviously.
Luke Gromen (00:16:19):
However, it was one of these things I read that. And for the audience, Bezos' regret minimization framework was, when he went to one of his mentors about starting Amazon in '96 or '97, his mentor said, "Look, project yourself forward to be age 60 or 70 and look back. And if you know you're going to regret not doing it, then do it. You can always come back and do something else." And I just knew with every fiber in my being that if I didn't give this a try as a standalone business, I'd regret it later on. And I knew I also had a finite window. My oldest was three years from going to high school. And then in two years to the next one. And so, three years ahead, my monthly nut was going to go up a bunch, and then go up a bunch more two years after that. And then you get to college and pretty soon you wake up your 55 and you're like, "Eh, I'll never do it."
Luke Gromen (00:17:00):
So, I knew I would regret it. I knew it was now or never. And then we did it and it was just a blast. I mean, it was horrifying. It was fun. The first several pieces I did were complete and total shit. But you just learned, you bring friends along, people come out of the woodwork to support you. It was just such a joyable, exhilarating, frightening, all rolled up into one.
Daniel Scrivner (00:17:22):
That's incredible. And I'm sure for your kids, an incredible example of a parent, literally putting everything on the line to make this big leap into something that they were incredibly passionate about. That could have been a total failure. And luckily, was not at all. It seems like you've had an incredible run. I love that line you just said, "Things were about to get weird," and you underestimated by an order of magnitude how weird they'd get. I first want to ask a question, which is, here we are towards the end of 2021, today, do you have that same advice for your dad? Put everything in cash, get out of the markets? What's your sense of where we are?
Luke Gromen (00:17:56):
No, I don't. My sense of where we are is, we're basically in the first bursting global sovereign debt bubble in a 100 years is where I think we are. And when you take a step back 2000, we have an equity bubble. It burst. The policy makers kicked it upstairs to the banking sector, right? I mean, Paul Krugman famously wrote in the New York Times in '02, "We need a housing bubble to offset the demand lost from the stock bubble." And he got it. He and Paul McCulley at PIMCO, both called for it. Policy was taken either directly to follow their advice. But the fact was, is that bubble was kicked upstairs to the housing market. And by extension, the banking system, by creating a housing bubble. When that burst, it was kicked upstairs to the sovereign level whereby government's backstopping everything.
Luke Gromen (00:18:42):
And there's nothing else to backstop the sovereigns except the currency. Basically you have to weaken the currency to make the sovereign obligations payable, and in nominal terms, because governments don't default. It's at least a political choice and they rarely choose to anomaly default. And at the same time, we just by luck of the draw, or unluck, if you will, the sovereign debt bubble, I would define broadly, you've had 80, 90 years of Western social democracies, consistently backstopping things or taking policies that pull forward demand and reduce the incentive to save. So social security, "Hey, don't save money, spend it now, we'll take care of you." So Medicare, Medicaid, "Hey, don't save up for your healthcare when you're retired, spend it now, we'll take care of you." And all these things make sense when you have a huge pool of young and a small pool of old, and they make a lot less sense when you have a much bigger pool of old people and a much relatively smaller pool of young people, relative to the amount of old people and all these things are coming due at the same time.
Luke Gromen (00:19:41):
So what do I tell my dad, is you got to own assets. I think it's going to be very volatile. So you have to, I think be under levered, but you need to... People say, "Well, historically, over the last 40 years we've had the growth, we've had value and we've had bonds." And generally speaking, it's always been, you own growth in bonds, or you own value in bonds and the bonds always make money and the growth and value you do okay, depending on how you shift back and forth and what's in Vogue. And I think for the next, probably five, 10 years, you set aside bonds and you've got growth and value. And then probably some alternatives, whether those are real estate, whether that's Bitcoin, whether that's gold, whether there's a number of other things, but you need to own assets that have a face value that can rise in price to compensate you or hedge what I think is the inevitable fiat currency, deflation or depreciation, devaluation that has to take place to make these promises good on a nominal basis.
Daniel Scrivner (00:20:34):
On that asset side, you talked a little bit, you hit on some of the assets that would make sense to own. On the flip side of the coin, what do you think today may look like an asset to some people that's probably not, and it's probably not what they want to be owning over the next three, five plus years?
Luke Gromen (00:20:47):
I think some things that might look like an asset today that aren't actually an asset would be, I think residential real estate in certain high tax, high liability, pension liability jurisdictions. I think if I was in certain desert climates in the United States or semi-desert climates in the United States, I would start thinking about where my water comes from and what the value of my real estate is. I'm going to pick on Las Vegas if lake Mead goes below that second intake valve, what's the value of real estate if you start hitting critical water thresholds, where you can only take a shower twice a week? Or those types of things have to take place for some period of time.
Luke Gromen (00:21:27):
I won't say they're completely unforeseeable, but climate things that could happen or water things that could happen where they're not completely predictable, but they're not unpredictable either, those types of residential real estate there. I think certain commercial stuff, I think you got to be real careful, which is, I don't think that's anything new in terms of what Amazon's doing with certain retail and commercial type stuff. Office spaces too, is another one too, where you got to start thinking, what does that look like? And real estate people are very creative. They know their business well. They can usually find other users for stuff. And that's ultimately all just comes down to price, right? It's price and location.
Daniel Scrivner (00:22:03):
Yeah. It feels like the one good thing in real estate is it's a group of people that I think are naturally very risk averse, risk conservative. And so I think they're try to be well ahead of the curve. It's interesting some of the things you talked about there, especially water, because that's been something I've been following for a while, which is just fascinating and I'm glad you brought it up because I feel like it's under discussed, but your point around Lake Mead, it's fascinating and frightening at the same time.
Daniel Scrivner (00:22:24):
I remember earlier this year, watching the story play out in California where this summer, Gavin Newsom basically warned everybody that when the new fiscal year started, I forget if it was beginning of October, beginning of November. But basically if the new fiscal year started in California and water continued to be at the same level, and I forget the main tributary that they get it from, they were basically going to let everyone know it was time to start putting in limits on that water usage, on that water and so to your point, it's something where you can clearly see directionally where it's headed and it's not headed anywhere good in a lot of the dryer area climates.
Luke Gromen (00:22:55):
Yeah. I think I saw a headline or a story. This is probably two or three years ago where they said the last 100 years in California have been the wettest 100 years and 1,000 years. I don't know how they know the last 1,000 years, but I'm assuming that they're tracking tree rings. They're doing something right. If that's even close to true, California, beautiful climate, beautiful terrain. Beautiful... I mean, just, it's a great place. I love California, but it'd be one of those things where, we may actually have to start thinking about these things and they're not the only ones right? Tennessee and Georgia are currently in a water fight over in aquifer. Tennessee and in Alabama are in a water fight over in aquifer.
Luke Gromen (00:23:27):
I think there's going to be more of these types of things and maybe not even less here, but I think you're starting to see it in China where there's been a couple pieces of really interesting research. A friend of [inaudible 00:23:39] did a piece recently it's actually... And published a piece today in The Hill Magazine where it's starting to affect industrial production. So, all of a sudden that starts to change industrial supply chain. So I think water's going to be something we think about a little bit more when you say, "Hey, where are assets that are currently assets, that might be more of a liability than you think."
Daniel Scrivner (00:23:58):
I want to talk for a second, a little bit about inflation, but I want to go back to something you touched on, which is, you talked about these three pools of money that you've set aside when you were founding the company. And one of those was this 100 acre farm. Do you regret selling that 100 acre farm, especially in the inflation environment today? And then just any thoughts on, a lot of the examples you gave are real assets. I'm curious for your take on real assets in the vein of farms. And if you think that that's an effective way or other effective investments that people might use to combat inflation, and maybe you can combine that with just your general thoughts around it.
Luke Gromen (00:24:31):
Sure. So do I regret selling it? In a vacuum? Yes. I would love to still own it. Compared to owning FFTT? Hands down, it was the right thing to do. Do I think a farm is a good asset inflation? Yes, very much so. Depending again, on where you are. I think places like in the Midwest where I am, that have natural water, I think other places in the Southeast, Mississippi River base and some of those types of places where you have plentiful water. When we talk about a world, particularly in places like China, parts of Latin America, where you're starting to have some of this water scarcity, water's extraordinarily expensive to ship anywhere. It doesn't make any sense when you a fully loaded energy cost, because water's very heavy. And so, the best way or one of the best ways to export water around the world is via agricultural produce as you're basically shipping water.
Luke Gromen (00:25:23):
So, I think from that standpoint, if you think that we're going to have an increasing fresh water problem in parts of the world, particularly in places like in China, where there's a lot of people that eat a lot of food, then I think it's from a macro big picture standpoint. I think farms make a ton of sense. I think particularly here in the U.S, I looked at it as basically a bond portfolio with a floating coupon because the way I did my deal is, I had a friend of mine who's a fourth generation farmer. His family ran, I don't know, three or 4,000 acres. And so, my 100 acres was close to there. It was part of the reason I bought it. I just leased it to them, right? So they rent it from me, the rent floated up and down with crop prices on a lag.
Luke Gromen (00:26:05):
So when crop prices were high one year, they made money and then I raised rent on them and some landlords don't give it back. I gave it back because I wanted a long term greedy approach and a mutually beneficial relationship approach. You have the coupon of the land rising over time, hedging inflation, or excuse me, the principle. Then you have the coupon, which is your rental and your rent floats with actual inflation. It's not some CPI number that's hedonically adjusted or food being excluded. It's moving with food prices. So you're getting a hedge there. And then I think something that's an underappreciated heart of, or facet to farmland as an investment is, the cost of carries nothing because it's not CRP. I think it's CRP. CRP? No. I always screw up the acronym. But at any rate there's an acronym. The gist of it is that, if it's farmland, the taxes on it are basically nothing.
Luke Gromen (00:26:52):
So for example, on my 100 acres, I think I was paying about $600 per year in total on the entire farm. And so, your cost of carry is not getting eaten up with property taxes, et cetera. And you can feel pretty good about that because policy makers don't like to raise taxes on farmland because if they do, all they're doing is raising food prices. And nobody likes to do that because that just sets you up for higher inflation rates and political unhappiness. So you've got a low cost of carry. You've got a real coupon. You've got the principle. So it's interesting when you look... I don't know if you know who the biggest farmland owner in the United States is currently?
Daniel Scrivner (00:27:24):
Yeah. I don't know if it's Gates. I know of [inaudible 00:27:27] Malone. Yeah. Maybe [inaudible 00:27:29] Malone?
Luke Gromen (00:27:28):
Used to be Malone, but it's Gates now. So you have a guy who got rich in tech, is working with some of the highest tech, gets seen all these... And the guy owns, I think 230,000 acres give or take around the United States. And a lot of it is concentrated in these areas where there's endemic water supplies in Ohio, Illinois, Michigan and in the Gulf area. So to me, it makes a lot of sense as an inflation hedge hard asset. I'd rather own a farmland than a bond portfolio in the same amount. I'll put it that way.
Daniel Scrivner (00:27:54):
Yeah. Especially today. It's interesting too, you brought up obviously, the largest owners of farmland in the U.S. and the story I always heard around that is obviously, it's a great inflation hedge and you're taking money from these very volatile asset classes like tech, putting into something like farm. That's obviously not going to compound or not going to have the upside appreciation, but it can certainly retain the value. But I didn't know about the holding costs and how low the taxes were. So it even makes so much more sense, I guess, when you understand that piece of the picture as well too.
Luke Gromen (00:28:24):
Yeah. The cost of carries [inaudible 00:28:24].
Daniel Scrivner (00:28:24):
Yeah. One of your favorite quotes that I love is that the extremes inform the means and there's been no shortage of extremes in 2021 over the last year. So I want to talk about some of those and maybe the first one, just because we were just chatting about it, on the tactical side of what you might do to try to hedge from inflation. I think it would be good to talk about the inflation that we're seeing. And so, I'd just be curious if we rewind the tapes to the beginning of this year, how has this inflation story played out in your mind? What have you been observing? What have you been thinking about it as the story's played out in real time?
Luke Gromen (00:28:58):
Yeah. So as it's played out in real time, I guess I would take it back to somewhere around '19 and people can find this Online. It was on a real vision interview called the Fed to the rescue. And to me, it seemed clear that the U.S. had a balance of payments problem basically, and the foreigners weren't buying enough of our debt and it was going to culminate one of two ways. Either you were going to have a very big deflationary risk off, briefly, I thought. My base case was the Fed would come in and begin growing their balance sheet again effectively to help finance U.S. deficits. And we even never even had a risk off. We had the repo rate spike, which was really the only physical manifestation in the bond market from it, where you had 48 hours where repo rates at the front end of the treasury curve went to eight to 10%.
Luke Gromen (00:29:40):
And then the Fed came in and started growing their balance sheet again. And they've been growing it pretty much ever since. And my view on this was that, this was ultimately going to be inflationary, focused more on the asset inflation side at that point. When you fast forward then to March of 2020, and we watch what the government did, which was this marriage of the fiscal side with QE, with monetary stimulus, that historically has been very powerful in terms of how they'd react. And there too, we'd written a lot in late 2019, there was a BlackRock white paper in August of 2019 by former Fed vice chair, Stan Fisher, and a couple other former central bankers from around the world. And what they said is, "Look in the next crisis. We're out of ammo. And what we're going to do is, the fiscal side's going to spend a lot and we're going to buy it up. Then we're going to cap yields."
Luke Gromen (00:30:25):
And this is a classic definition of helicopter money, the government hands out money and issues debt. And we buy the debt. So that's basically helicopter money, which is inflationary, not just for assets, it's inflationary for everything. So as we move through this year, that's what we've seen. And it snuck up. I think the thing that surprised me, like a lot of people, is I was not as close to the supply chain difficulties that we've seen, which I think were a forcing factor along with obviously, COVID disruptions, I think were obviously, another forcing factor to this, but it's pretty clear historically, that you can generate inflation when you say extremes inform the means, right? You can always generate inflation.
Luke Gromen (00:31:02):
If the government came out and handed us all a billion dollars each and then issued however many quadrillions or quintillions of dollars of debt that is to offset it and the Fed buys it all, we're going to have inflation. A lot of inflation. And so, if we can assume that, then we say, "Okay, well the Fed they didn't hand out a billion to everybody, but they handed out whatever it was. Four grand, 10 grand, whatever the heck it was." And the Fed bought it all. And we're seeing that on a lag, there were some other contributing factors, but I think that as you walk through it is how we've seen it develop.
Daniel Scrivner (00:31:32):
I think it might be helpful to just pause for a second and hopefully this isn't too much, but to have you try to explain how that creates inflation, because I think if you're someone that's studied and gone deep down the rabbit hole of how inflation works, it makes a lot of sense. I think for most of us, it's a little hard to grasp why giving money, buying that up, suddenly creates inflation. Can you try to just, at a high level, explain that? How that works?
Luke Gromen (00:31:56):
Absolutely. So I'll back it up to 2008 when they did QE and why, myself included initially, I thought there might be inflation. Then you start reading about the differences of what they did in '08 versus what they did in 2020 and why there wasn't that much CPI inflation then and why there has been this time. Back then when the Fed buys an asset, it's not like the Fed has money saved up. The Fed is creating that money out of thin air. And so when they then go and buy these assets, in '08, these were assets that and a lot of times had fallen in price. And so, they're basically writing an asset back up and they're creating asset inflation and then there's a bleed off effect of, "Hey, my portfolio's worth more, so I'm going to spend more here or whatever." And that was how '08 worked, but it's why you didn't have this broad scale CPI inflation that we've seen in the aftermath of COVID.
Luke Gromen (00:32:40):
If you fast forward 12 years to 2020 reaction, what we had was the government hands everybody money, and then offsetting that, they raise money in theory. They raise money in the markets by going around and borrowing that money. The theory of it, as you think about in your head, well, the government just spent it. And so, the government then goes to everybody that saved money and those savers buy the bonds from the government and there's no net change in the money supply. And that's how I think, a lot of people think it works. The reality is, the government spends the money, hands it out, and then they issue those bonds. But there aren't enough buyers for all these bonds. And so what happens is, again, the Fed creates money out of thin air to buy these bonds. Well, if the Fed creates money out of thin air, hands it to the government and then the government hands it to the people. What we're really having happen is the money supply is increasing.
Luke Gromen (00:33:32):
It's just a case of more money chasing the same or fewer goods in the case of what we've seen in the last year, due to supply chain disruptions, due to some corporations. I mean, I was here in this last summer, earlier this year was something that corporations learned during COVID when they had to shut down these supply chains. They might have been running six production lines and they went to three. And what they found was, let's just go back to four and raise prices 20%. And our returns on capital for our shareholders will be vastly greater by doing that, than if we just bring all six lines back. And so, there's been a lot of that type of behavior where the corporate systems are so good. They can run those analytics now and they know exactly how to profit maximize along some curve of price and volume. And I think in addition to the money supply increases that supply chain disruptions, there's probably been a lot of profit return on capital maximization decisions made across corporate America and across the world over the last 12 to 18 months.
Daniel Scrivner (00:34:29):
Yeah. Which is hard to fault. Obviously it's not great, but it's hard to-
Luke Gromen (00:34:32):
That's what happens when you have concentrated industries too, right? I mean, when you're very fragmented industries, but we've been moving towards much more. I wouldn't say monopolistic, some areas are monopolistic, but much more monopsimistic. I don't know, oligopolistic how's that? That's when much fewer bigger competitors that they're not coordinating, but maybe they gave each other a wink wink, nod, nod and everybody gets a little richer for them.
Daniel Scrivner (00:34:52):
Yeah. I think it's also interesting to reflect on a lot of these businesses also went through the existential shock of COVID feeling like just an absolute knockout punch to their business. And so I imagine too, amidst that setting, it's really hard if you run a company to not then try to be very smart and very strategic about how you bring that back and how you try to recover from what's been this massive disruption.
Luke Gromen (00:35:14):
Well, yeah, especially when you start layering in the labor problems that they've had and getting people to come back for any number of reasons. If your choices run four lines or run six lines then you probably can't hire people for the fifth and sixth line anyway, then why not just run for inject prices up? It's what I would do.
Daniel Scrivner (00:35:30):
That's fascinating. I want to talk just the last point I'd love to get your thoughts on around inflation is, and I'm going to frame it in the most cringeworthy way, but just transitory versus not transitory. And part of why I want to ask you this question is, I think a lot of people has felt like the reporting, the news around inflation has been very disingenuous. Where even people I know that don't really care about economics or business or money in general, I think everybody realizes that wages have gone up prices have gone up and these aren't things that you can easily undo. And so, I don't know, I would just love your thoughts on what do you think one, about the rhetoric and then what do you think is the reality that we're in today and that's going to play out as we move forward and you can pick whatever time horizon you want, even the next three to six months.
Luke Gromen (00:36:12):
Yeah. Do I think they're understating inflation? Absolutely, I do. And when people say, "Well, what would you point to?" I'd point to used car prices up 65% this year? Okay. So you can tell me CPI six. I understand the new guy, the new auto makers have had production problems, semiconductor issues. Used car prices are up 60% this year. And so to me, it's strange credulity, that's one where it's an apples to apples type of comparison, right? Because then you get into hedonic adjustments, you can see home prices being up 15, 20, 25%. It's hard to do, but you can do per unit costs at the grocery store, right? Where they shrink the package and then 30% in the package and the price is the same. So there's a lot, I think, to suggest inflation is running well above even the hot number or what was perceived as a very hot number, that 6.2% CPI number that we saw at the headline in October.
Luke Gromen (00:37:06):
What do I think is likely to happen going forward? To me, I look around and I see a lot of the structural disinflationary or deflationary components. They're all flipping around to inflationary, right? So for example, let's start with energy, right? Shale has been a disinflationary contributor. There was an article in the financial times, a couple weeks ago, it's something we've been doing a lot of work on over the last year. There is a lot to suggest that without significant price increases in the price of oil and gas, that Shale will never produce more than it produced pre-pandemic, just due to the nature of that business. Very high decline rates, very high costs of capital and a world that doesn't want to give those guys a lot of capital anymore. So the energy side I think is flipping around.
Luke Gromen (00:37:53):
There's been under investment in that sector structurally for a decade, in the core energy, in the core non-Shale business. You go to China. China's been a massive disinflationary force over the last 20 years, you are seeing China raise prices. You are seeing U.S. trade war. You're seeing talk about reassuring stuff here or moving stuff out of China. All of that is all else equal inflationary. Something I think is underappreciated and very counterintuitive as an inflationary driver, I would make the case that historically, deferral of cash compensation today, into deferred retirement platforms, 401ks, IRAs 403Bs. These are people that were going to get cash and spend it into the economy at the time they were paid, but instead were incented by tax treatment to defer that consumption, put it into stocks and other assets, which rose significantly in price. And basically, in doing so, sterilized inflation at the time.
Luke Gromen (00:38:52):
That was inflation that should have happened. Then instead it went into asset inflation and now, given demographics, baby boomers start having these massive required minimum distributions of call it two, 3% of an estimated 20 to 30, $35 trillion. That's a lot of money when you look at in the context of personal consumption expenditures, personal consumption expenditures growth that has to come out, it has to be spent. So basically, these sterilized upsized by asset appreciation and now, it's coming back out into CPI inflation, and oh, by the way, to a group of people that have been scared out of their minds by COVID, they, "Hey, we have all this, we got 10, 15 years of retire," and now it's like, "Hey, spend and live for today." The mentality you get post pandemic. I think that this disinflationary sterilization dynamic of deferred accounts is now going in reverse, which is 180 degrees opposite of what most people would tell you, which is that the demographics of the U.S. with all the old people having most of the money is disinflationary or deflationary.
Luke Gromen (00:39:52):
I think it's very likely the exact opposite. They don't have to do the spending themselves. They pay for their grandkids' college that creates money supply for the parents. They buy help with the down payment for their kids. You're seeing, you hear these stories, you ask around enough, you hear it and it makes sense. It's what you or I would do for our kids or our grandkids if we were in that position. So, there's a number of structurally inflationary factors that I think have switched. They're never going back to way they were. Now tactically, within that, what the Fed does, the tightening, some of this, I think we've seen some disinflationary impulse tactically in the last several weeks as the Fed has suddenly gotten much more aggressive. But I think away from these tactical moves, I think we've switched for up to a new regime of much more inflationary pressures than the disinflationary regime we have been in for the last 20, 30 years.
Daniel Scrivner (00:40:40):
Yeah. It's a fascinating perspective. And I feel like you laid that out in a way that I haven't heard anyone articulate it. Bringing all those pieces together. Obviously, would suggest moving forward, we're going to face a very different environment. To ask the follow on question of that, I'd be curious for your perspective. And I think one thing that's really helpful when you think about inflation. And I always feel like that's, I forget the term, but I always feel like that's a very quaint, very nice way to talk about what's really happening, which is the basement. Your dollar is becoming worth less and less and less and less. Inflating sounds like this wonderful, maybe positive things happening. This balloon is growing when actually, the opposite is happening.
Daniel Scrivner (00:41:15):
Obviously the piece about inflation I think is under talked about, or the connection is higher inflation suggests that the hurdle rate for being able to make a return at any level, whether you're an endowment, whether you're a pension goes way, way up, which then starts to be an input towards changing your investing framework and maybe investing more into alternative assets. Assets that are likely to be higher returning. Thoughts on that? Do you think this will continue to propel investment in alternative assets and then, any just interesting perspectives around how this basically raises the bar, raises the hurdle rate that people need to achieve to actually grow money?
Luke Gromen (00:41:53):
Yes, it's interesting because when you look back to the 70's, when we had the last great inflation in the United States, at least, U.S debt to GDP was at 25%. Demographics were young. We were much more industrial, much less financialized. In other words, our economy was much less sensitive to a rise in interest rates. And when you fast forward to today, we have debt to GDP of 125%, we've allowed policy to evolve over time so that we've gotten rid of a lot of the industrial stuff. And we have a very asset price sensitive consumer... Asset price sensitive consumption, asset of price sensitive as a result GDP, asset price sensitive tax receipts, which is to say, we've got a situation where, unlike the 70's, where when inflation took off, interest rates could... Maybe they were behind, real rates were after inflation were negative still in the 70's, but rates were rising.
Luke Gromen (00:42:47):
Rates could be a release valve. You contrast that to now, where rates really can't be a release valve in any real way, because ultimately, with 125% that the GDP, of course, you can't go too far before your interest expense for the government becomes greater than your tax receipts for the government. The central bank prints the difference. And once you get that point, you will get some version of Argentina-ization or hyperinflation and I'm not talking about VMR per se, but you're going to get really, really face peeling inflation. And what's been interesting is, to me, in terms of the investor thought process evolving, from say 2015, if you would've said that versus now, if you would say that, and in 2015 you were a handful of crazy people just saying, "Hey foreign central banks stopped by in treasuries in 2014 and on a net basis basically. And we're going to have to finance it ourselves and they're not going to let rates rise to attract capital, because that'll blow up."
Luke Gromen (00:43:43):
So they're going to have to eventually really grow their balance sheet again. And that was crazy talk back then. And as events have played out, that's essentially been what's happened. And I think this... Ben Hunt does a great job calling it, "The common knowledge game," right? Where it's always been true. I think everyone's always known, "Well, yeah, rates can never rise because it'll blow up everything. It'll blow up the government, it blow up every government." But now it's actually gotten to the stage where, it's actually critical. One data point we always highlight in our research is what I call the U.S Government's true interest expense, which is treasury spending, plus the pay as you go portion of entitlements, those went over 100% of tax receipts in the aftermath of COVID.
Luke Gromen (00:44:22):
And that's the point where either, you tell baby boomers, "Sorry, we can't pay you everything we promised you." Or you default on treasuries or you slash other treasury spending, which you really can't because they're helping support the economy or you have the Fed print the difference. That was always, in 2015, that number, which is over 100% of tax receipts, today was more like 60. So the speed at which this has gone from, "Well, yeah, eventually that might happen if a number of things go bad." To "Holy crap. We're now in the rear view mirror of that key threshold took six years, five years." And so, it's been interesting to see investor mindset change around that inflation. Now, what does that mean for investing? To me, you have to decide.
Luke Gromen (00:45:03):
Are they going to let rates rise and blow everything up or are they going to go through periods of time where are they threatened to let rates rise, shake things up. You have some risk offs, but ultimately, you keep your eye on the end game, which is, real interest rates have to get really negative to inflate this debt away. And to me, it's just crystal clear, it's the latter. And once you understand that, then it comes down to, okay, it's a poker game, right? It's about managing your chips and understanding, not getting too far over your skis with leverage because these types of situations in history have been very, very volatile. So you don't want to be wrong for the right reason. Pigs get fat, hogs get slaughtered.
Daniel Scrivner (00:45:40):
Really interesting. The point you made there of obviously needing to let real rates get negative, because you need to inflate away and get out of this giant debt bubble that we've created. And I know that seems like maybe one north star that you can use, people can use to try to navigate and frame up where to go from here. Are there others that you think about as much today and maybe another way of phrasing that would be, are there other north stars that you're looking at outside of that truth and that balancing act on the inflation rate side?
Luke Gromen (00:46:07):
Yeah, that's one big one, right? I think the one big one is, "Hey we're in the first bursting sovereign debt bubble in 100 years and real rates have to get shockingly negative. That's how this always works out. You either get shockingly negative real rates for a period of time or you get the giant devaluation, which is another way out of that. But the real rate situation, I think is one north star. I think another big north star is around, I think really energy markets. Really twofold, which is number one, peak cheap oil is a reality, you can see it. The oil we've been finding has been getting more and more expensive, and that has been filtering into other resources as well. And so, I think peak cheap oil is another real north star around that. And then I think too, is that energy and real rates intersect, energy's only priced in dollars or at least it used to be, on the margin is not anymore.
Luke Gromen (00:46:57):
But if the U.S. goes to inflate away their debt, as we think they must, ultimately in the end, I think it's the only mathematical or political, economically palatable outcome. If you're on the other side of that, if you are a creditor nation or region, that is an energy importer like China, like Europe, like Japan in particular, what the opposite side of that coin to you is my energy bill is going to inflate to the moon as the Americans print all that money. And as my energy bill inflates to the moon, my industrial production, basically, I'm going to run out of dollars to buy energy. And then I'm either going to have to collapse my economy, or I'm going to have to devalue my currency. And that has all kinds of unpleasant political outcomes for those places, particularly China. And so, we've seen this move accelerating over the last six, seven years, particularly out of China to move their energy import bill away from dollars, exclusively.
Luke Gromen (00:47:55):
And so, they've been buying some of their energy in [inaudible 00:47:58] some of it in euros, basically starting, it looks like, to balance their energy import bill in particular, but commodity import bill more broadly to mirror their trade patterns. Right? So getting away from the dollar. Now, this all reverberates back because now, China needs to buy even less treasuries, because they can buy more of their energy in non dollars as can the rest of the world. And so, this, is other north star is this enlightened self interest from these creditor region, energy importers who don't have a choice. If the U.S. is going to choose to inflate away, which they must, then these people all must choose to move away from the dollar for energy and commodity trade, which then reverberates back into the U.S. going to have to monetize more. So we're in this vicious cycle around and what it ends up being. It is pretty inflationary, over time. Again, over time.
Daniel Scrivner (00:48:47):
It's something I'm going to be thinking about, I think a lot coming out of this interview is, just how much or underscoring that the forward looking perspective is no shortage of inflation. It sounds impossible to get anything other than inflation, just given everything that's happening. I don't know. It's just fascinating perspective.
Luke Gromen (00:49:03):
Yeah. And it's one of these things where we have a chart that we've used a number of times, our friend Dan Oliver at Myrmikan Capital, who's brilliant guy and a brilliant economic historian. And he has this chart and again, extremes inform the means. So to be clear, I'm not calling for the US to be a Weimar Germany, hyperinflation. But it was very illustrative to me is, when you read the history, everyone's somewhat familiar with the wheelbarrows of money Weimar Germany. Okay, great. The best way to play that is you want to borrow a bunch of money and buy assets and then the inflation pays off your debt and you are left with the assets. So, that's what you get if you look at it from 1920 and 1923, after the currency is hyper inflated to zero in an extreme case.
Luke Gromen (00:49:41):
Dan has this great chart showing the price of gold in German Reichsmark as the currency is hyper inflating to basically zero over a three or four year stretch. And what's fascinating is, if you had borrowed money and bought gold in German Reichsmarks, you would've lost all of your money three or four or five different times because it's a hyper volatile, hyper political situation where no one knows this is going to happen.
Luke Gromen (00:50:05):
It's "Oh, hey, we're back. Oh, hey, we're back. Hey, we're back." Again, it's not to say we're Weimar Germany, but it is to say there's echoes of that today where it seems crystal clear from the debt lows and everything I laid out, they're going to have to inflate it away. Real rates are going to have to go to very negative levels for some period of time to get out of this. Doesn't mean the Fed can't come out three weeks and go and say, "Hey, we're going to tighten way more." And so now, gold down and [inaudible 00:50:31] goes down and you have this countercyclical move where the market still believes, "Oh wow, they are going to tighten." And they have the ability to do that without breaking something. And I don't think they do, but it all comes down to, as you're thinking perspectively, it's about managing those chips well. It's about not being over levered so that, okay, play for inflation, but don't get greedy on it. Don't get over levered. Just stay within yourself.
Daniel Scrivner (00:50:54):
You touched on it there. And I know I have to ask you this question because I think you'll have a fascinating perspective on it and that's just around gold and Bitcoin. I know these are two things that you're bullish on. It obviously, I think I would guess that that relates in a lot of ways as a hedge against inflation, but I don't want to put words in your mouth. Talk a little bit about why you think those are interesting. And maybe on top of that, why those are interesting looking forward, especially against this inflationary backdrop?
Luke Gromen (00:51:19):
I like them both for, I think the reason a lot of people do. I mean it's finite issuance and they're a neutral reserve asset. They're nobody else's liability. I mean, you can make a case that Bitcoin has a liability in the form of the grid staying up in some pretty extreme scenarios where none of us want to think about, in terms of those are no longer true. So I'm bullish on them for those reasons. And I think they'll do very well over time in the environment of negative, real rates that I think increasingly we have to be in to square the circle with where policy has brought us to.
Luke Gromen (00:51:48):
The other thing I think is a different angle and why I like them both is the energy angle. And I don't think a lot of people spend a lot of time on the energy angle. But when you talk about peak cheap oil, you talk about, to oversimplify, it was actually really why I first got interested in gold was if you have the reserve currency issuing nation, the United States, who's effectively printing money to finance itself, which is what they're doing. It's what they've been doing. And at the same time, you're having peak cheap oil, which is clearly playing out where the incremental sources of energy are getting more and more expensive. My thought processes was nations are not going to be able to store their reserve balances in sovereign debt,, whose balances are growing significantly, and basically depreciating massively in energy terms. You're going to need some neutral reserve asset with a floating rate, face value that can compensate these creditor nations.
Luke Gromen (00:52:45):
And you've seen that around the world. It hasn't really been reflecting the price of gold, but if you look at, we have a chart that shows foreign central bank buying of treasuries and foreign central bank buying of gold, in aggregate, around the world since 2013 and foreign central banks, I think have bought 20 or 30 billion worth of treasuries in that time, which is nothing against $12 trillion in issuance. And they've bought about $200 billion in physical gold, which is a ton of physical gold. And so, it's been happening. It hasn't reflected in price. That's a bit of a separate rabbit hole to dive down, but I think gold is effectively compressed energy. It's basically stored energy. You're trying to take energy from today. You're hedging rising energy costs.
Luke Gromen (00:53:23):
Bitcoin in the same way might do it even more effectively where, I think of Bitcoin as a battery effectively. And I know, that's stealing from Michael Saylor, it's stealing, there's a Norwegian or Scandinavian energy concern that coined it, I think first, and I've seen Saylor talk about it. I saw Jordan Peterson talk about it with [inaudible 00:53:39], but I explained it to one of my sons. I said, "Look, if we have a creek in our backyard, and if there was a waterfall on that creek that was fast enough that we could put a turbine up to it, there is no way running all the infrastructure to hook that up to the grid, even if we could get the regulatory approval, which we couldn't. But if we hooked up a turbine there and hooked up a mining rig to it, a Bitcoin mining rig, then all of a sudden we could literally capture the value of that energy."
Luke Gromen (00:54:03):
And Michael Saylor does a tremendous job and then email this energy to Tokyo, literally for pennies. So it's fascinating to me that Bitcoin is effectively an energy solution, a neutral reserve asset of energy in the same updated and digital form that gold is. They're basically both a manifestation of energy. So I like them both for that reason in a world where you have to have negative real rates and you have peak cheap oil.
Daniel Scrivner (00:54:28):
Yeah. That's a fascinating perspective. And I haven't heard that case laid out for being stored energy, but I think that example you just gave of being able to effectively do something on your own property to generate energy, capture that in Bitcoin and be able to then transmit that in a very lightweight way around the world. It's a fascinating perspective there. I've got so many questions on my piece of paper I'm going to have to skip over. So I'd love to have you on again.
Daniel Scrivner (00:54:53):
I want to ask two closing questions and one is, I know you're a huge fan of historical books. I think that's also something that investors generally, especially younger investors, especially in the period we're in now, where we're embarking into a different regime and that we're going to see a lot of changes and we've already seen those. I think it's something that we should all be spending a little bit more time with. What are some of your favorite historical books around investing? What do you widely recommend that people read?
Luke Gromen (00:55:16):
I would rush out and buy two in particular, vis-a-vis now. The first is Lords of Finance by Liaquat Ahamed and it is a biopic of the central bankers of U.S., UK, Germany and France from 1918 or 1919 through 1930 or 31. And it sounds boring as hell, but it actually reads really, really easily, very interesting gentlemen. And the thing that's fascinating about historical books like this to me is that, the one thing that never changes throughout history is human nature, right? It's always about fear and greed. And so, when you put humans in similar situations, you can learn a lot by seeing how they reacted to it before. I read this book, I think it came out in '09. I read it in 2010 or 2011. And it has been so helpful to just handicapping the odds of "No, no, no. They're going to have to print again." "Oh no, no, they won't print again." Trust me, they're going to print again. Right? So that's the first is, Lords of Finance. The second is, 1931 Debt Crisis And The Rise of Hitler by Martin... Oh, I apologize, Martin. I forget.
Daniel Scrivner (00:56:18):
Oh, no worry. We'll find it and link too in the show notes.
Luke Gromen (00:56:20):
Yes. It came out in 2020. I want to say it's 230, 240 pages. And it's absolutely fascinating again, because the extreme informed the means. Weimar Germany was in the same situation the U.S. is in now. De-industrialized, they didn't have a reserve currency, but they had these massive reparations due for the war, massive internal debt. And the book is all about this counterbalance between the foreign creditors and the domestic odd political audience, which had very competing interests and trying to balance them both. And at one point it's hilarious in the book, the chancellor of Germany says... The president of Weimar Germany says, "We're going to tell the creditors that we're going to pay the reparations, but we're going to tell the domestic audience that we're not going to pay the reparations." And they were hoping, because there was no internet then, right. They could go with this lie for a time.
Luke Gromen (00:57:08):
And the lie worked. They told the Americans, "We're going to pay every dime." And then they ran the domestic political and German going, "There's no way we're paying the Americans and the British." So it's really useful as an extremes inform the means way of seeing, again, these competing interests as it's trying to ride two horses with one ass of, we're going to inflate the debt away. We're not going to inflate the debt away that we're in now. And so, I just think they're both really useful books just to frame up that human nature angle and game out in your mind, how it could play out this time.
Daniel Scrivner (00:57:37):
Yeah, those are fascinating. And I haven't read either of those, so we will, as I said, find those, link to them in the show notes and people can find that at outlieracademy.com/gromen. I want to ask one more question. I want to ask this in the vein. I know you have a couple of children, but I think your eldest Connor is in college and he's at the age where it sounds like maybe he's started investing a little bit in crypto, but I want to ask this question for young people that are at a point where they want to start investing or they want to start learning. What would your advice be for someone today in terms of how to start investing money into the market? And I think especially because obviously, it's incredibly turbulent, there's all sorts of things you can invest in today that didn't used to be the case like NFTs and collectibles and you can go on and on and on. Where would you point people and what would your advice be to someone that's just getting ready to leave college?
Luke Gromen (00:58:27):
Yeah, that's my oldest boy Gavin, that's done some work in crypto. And I think what I would say to them is, get on Twitter and start following people that you're interested in. And then once you start to have a base, start a YouTube channel and start just making videos, you're going to be terrible at first. And that's okay. You're 18, you're 19, you're 20. You're supposed to. But just do that talking about this interest of yours, whatever it is, in investing, in finance, because there's going to be more experienced people that you're going to learn a lot from. And there's going to be a lot of experienced people that are going to be willing, if you're humble and not a troll, especially when they find out that, "Hey, I'm 20, I'm trying to learn this." It's amazing how much people will go out of their way to help you.
Luke Gromen (00:59:10):
I would start there. And then I would say, make sure to understand the fundamentals of listen, here's a cash flow. Here's an asset. If you're having to shell out cash, it's not an asset, it's a liability. I don't care what anybody else calls you... And some of these very basic principles of, if the coupon isn't covering the mortgage, it's not... And once you understand that, then build from there of, okay, some of these newer asset classes, crypto in particular, Bitcoin in particular. And I think just really learning those basics and then immersing themselves in some of these tools that really you and I didn't even have in college, where you can have access to veteran professionals. You can go on to MITs website and take all their finance courses for free and just soak it all in. Don't go sit there, look at funny videos on TikTok all day like I tell my kids. I'm like, "Listen, go have some fun, but you've got a phone, use it to get smarter, not dumber."
Daniel Scrivner (01:00:07):
Yeah. I love it. It's almost like learned by doing, by researching and then trying to teach others. And then at the same time, learn the fundamentals, which I want to just underscore, because I think to your point, especially in a world where the quote unquote and I'm really... These are big air quotes, investible assets have exploded. I think knowing those basics can help you to avoid some of the pitfalls because there's so much today, I think, that's marketed as a good investment and ultimately, everyone has to be the judge of that for themselves.
Luke Gromen (01:00:33):
Right? No, I think that's exactly right. And at least if you have that baseline end of the fundamentals, you can start there and you can adjust that process as you go. But if you don't have your feet under you, you've got no starting base.
Daniel Scrivner (01:00:42):
Yeah. That's great advice. So I know people can follow you on Twitter at Luke Gromen and they can also find the Forest for The Trees at fftt-llc.com. Thank you so much for the time, Luke, huge honor to have you on and getting to chat-
Luke Gromen (01:00:55):
Well, thanks for having me on Daniel. It was great catching up, but I look forward to doing it again.
Daniel Scrivner (01:00:59):
Thank you so much for listening. For links to everything we discussed, as well as the show notes and transcript, visit outlieracademy.com/88. At outlieracademy.com you can also find more incredible interviews with world class investors like Robert Cantwell of Compound Kings and Dan Roller of Moran Capital Management, as well as interviews with the founders of Superhuman Levels and Rally and many bestselling authors. You can now also find us on YouTube at youtube.com/outlieracademy. On our channel you'll find all of our full length interviews as well as short clips from every single episode, including this one. You can also follow us on Twitter, Instagram, and LinkedIn under the handle @outlieracademy. From our entire team, we hope you enjoyed the show and we hope to see you right here next week on Infinite Games.