Luke Gromen: Panic In The Bond Market Will Continue Unless Oil Or Dollar Relent
Sep 28, 2023
01:16:06
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Luke Gromen, founder of Forest For The Trees, discusses the steep sell-off in the bond market and its consequences. Topics include the relationship between declining ISM and the bond market, impact of higher interest rates on the economy, potential breaking points in the financial system, brokenness of banks and treasury market, challenges of reducing government spending, and comparing the US economy to Argentina.
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Quick takeaways
The bond market could experience a meltdown unless the dollar weakens or oil prices decrease significantly.
High deficits have an impact on economic growth and rising rates contribute to a feedback loop that could lead to disorderly market conditions in the future.
The limited depth and liquidity of the US bond market may not be able to absorb the large deficits generated by the government, potentially requiring intervention from the Federal Reserve.
Deep dives
Bond market sell-off: Is it a meltdown?
The speaker discusses the recent sell-off in the bond market and questions whether it's a meltdown. They suggest that unless the dollar weakens or oil prices decrease significantly, the bond market could experience a meltdown. They compare it to the repo market turbulence in 2019 and discuss the potential impact on the TLT. They also explore whether the sell-off is driven by economic conditions or supply factors.
The link between growth, deficits, and rates
The podcast episode delves into the relationship between economic growth, deficits, and interest rates. They highlight the impact of high deficits on economic growth and argue that better growth is linked to higher deficits. They emphasize that the prevailing view fails to grasp the second derivative of this relationship, which is the interplay between growth and deficits. They contend that the high deficit levels and rising rates contribute to a feedback loop that is likely to lead to disorderly market conditions in the future.
The challenges in financing US debt
The speaker discusses the challenges in financing the US debt and the potential implications. They emphasize the limited depth and liquidity of the bond market, suggesting that it may not be able to absorb the large deficits generated by the US government. They highlight the need for international buyers to support the Treasury market, but also point out that higher rates and a stronger dollar could lead to foreign selling of US treasuries to defend their currencies. They argue that the current trajectory could ultimately lead to the Federal Reserve having to intervene by buying bonds or deploying other facilities to ensure market stability.
The Fragility of the US Treasury Market
The podcast episode discusses the fragility of the US treasury market, highlighting the need for buybacks to boost its resilience. The speaker questions why a deep and liquid market like the US treasury market requires such interventions. They draw parallels to the movie 'A Few Good Men' to emphasize the need for action despite the market's apparent resilience. The episode explores the potential risks and implications if the market fails to function properly, pointing to the current decline in US shale production and the impact on oil prices and inflation expectations.
The Role of Gold and Bitcoin in a Fiscal Crisis
The podcast delves into the role of gold and Bitcoin in a fiscal crisis and their performance in relation to fiat currencies. The speaker explains that during a fiscal crisis, gold and Bitcoin serve as safe-haven assets with longer durations and fixed supplies. They highlight that the US, along with other countries, is facing fiscal problems that make these assets appealing. The episode discusses the potential transition of gold as the primary reserve asset and the significance of peak cheap oil in supporting its value. Additionally, the speaker addresses the idea of a potential return to a fixed reserve system involving gold and the dollar, while affirming that the reserve currency will remain the dollar but with alignment to Russia and China's movements.
Luke Gromen, founder of Forest For The Trees, returns to Forward Guidance to share his views on the steep sell-off in the long-end of the U.S. Treasury market. Filmed on September 25, 2023.
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Disclaimer: Nothing discussed on Forward Guidance should be considered as investment advice. Please always do your own research & speak to a financial advisor before thinking about, thinking about putting your money into these crazy markets.
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