May 29, 2024 • 59min

BTC184: Q2 Macro w/ Luke Gromen (Bitcoin Podcast)

We Study Billionaires - The Investor’s Podcast Network

In this episode of the Bitcoin Fundamentals podcast, host Preston Pysh interviews macroeconomic expert Luke Gromen to discuss the economic outlook for the rest of the year. They cover a wide range of topics including Federal Reserve and Treasury policies, potential changes to housing inflation metrics, infrastructure backlogs, commodity trends, the Japanese bond market, and implications for Bitcoin.

0:00

-0:00

Key Takeaways

The Federal Reserve and Treasury are likely to continue providing dollar liquidity to keep the treasury market functioning and rates at sustainable levels
There is a potential $1.8 trillion housing stimulus coming through Freddie Mac guaranteeing second mortgages, which could inject significant liquidity
A massive backlog exists in transmission interconnections for the power grid, indicating major infrastructure investment is needed
Copper and uranium are likely to see increased demand and higher prices due to electrification trends and AI development
Japan's bond market is seeing a major sell-off, potentially signaling broader fixed income market stress
Stablecoins may become an important mechanism for financing U.S. government debt, especially short-term Treasury bills
The current debt-based financial system is fundamentally incompatible with deflationary technologies like AI
Bitcoin is seen as one of the cleanest ways to position for the macroeconomic shifts discussed

Introduction

In this episode of the Bitcoin Fundamentals podcast, host Preston Pysh interviews macroeconomic expert Luke Gromen to discuss the economic outlook for the rest of the year. They cover a wide range of topics including Federal Reserve and Treasury policies, potential changes to housing inflation metrics, infrastructure backlogs, commodity trends, the Japanese bond market, and implications for Bitcoin.

Topics Discussed

Federal Reserve and Treasury Policies (1:46)

Luke Gromen argues that the Federal Reserve and Treasury will continue to provide dollar liquidity as needed to keep the treasury market functioning and interest rates at sustainable levels. He notes:

There has been some dollar weakness recently, with the DXY index falling about 2.2-2.4% from its highs in April
The Treasury's recent Quarterly Refunding Announcement and the Fed's changes to quantitative tightening indicate a move towards providing more liquidity
The goal appears to be maintaining treasury market function and keeping rates "politically and economically sustainable"

Gromen believes there is likely a cap on how high treasury yields will be allowed to go, potentially around the 5% level seen in late 2023. To prevent yields from rising further, the dollar may need to weaken.

Potential Housing Stimulus (8:19)

A major potential source of liquidity injection discussed is Freddie Mac potentially guaranteeing second mortgages. Key points:

This could inject up to $1.8 trillion in liquidity into the economy
It would effectively allow homeowners to tap home equity for consumer spending
Gromen calls it "COVID stimmy 2.0" - a government-backed consumer spending boom
The proposal has had very little public attention or scrutiny so far

Gromen notes this could significantly boost nominal GDP growth but would likely be inflationary.

Changes to Bank Regulations (11:35)

Another potential source of liquidity discussed is changes to bank regulations:

Banks have successfully pushed back on regulatory reforms that would have counted Treasury bonds against capital requirements
This allows banks to potentially buy "infinite amounts of Treasury bonds" without capital constraints
Gromen argues this is effectively "QE through the banks" without officially calling it QE

He sees this as another way the government is changing rules to allow for more liquidity and deficit financing.

Infrastructure and Energy Backlogs (24:06)

Gromen highlights a massive backlog in power grid infrastructure:

There is currently a backlog of 2,600 gigawatts in transmission interconnections
This is larger than the installed capacity of all current U.S. power plants
Indicates a huge mismatch between stated electrification goals and current grid capacity

He argues this backlog, combined with trends like AI and electric vehicles, will drive significant demand for commodities like copper.

Commodity Outlook (28:25)

The discussion covers bullish outlooks for several key commodities:

Copper: Likely to see major demand increases due to electrification trends
Uranium: Growing recognition of nuclear as necessary for baseload power capacity
The U.S. government is implementing programs to stimulate domestic uranium production

Gromen argues commodity-related stocks may deserve higher multiples given their importance to technologies like AI.

Japanese Bond Market Stress (37:24)

The conversation turns to stress in the Japanese government bond market:

Japanese bond yields have risen sharply to levels not seen since the 2008 financial crisis
The yen has weakened significantly against the dollar
This could force Japan to sell some of its large holdings of U.S. Treasury bonds

Gromen sees this as a potential "canary in the coal mine" for broader fixed income market stress.

Stablecoins and Government Debt (51:56)

An intriguing discussion emerges around stablecoins potentially becoming a mechanism for financing U.S. government debt:

Politicians like Paul Ryan have started discussing the importance of stablecoins
Stablecoins backed by short-term Treasury bills could provide a new source of demand
This could allow the government to shift more debt issuance to short-term securities

Gromen argues this trend is part of a broader shift away from the post-WWII debt-based financial system.

AI and the Financial System (48:02)

The conversation touches on fundamental incompatibilities between AI and the current financial system:

AI and other deflationary technologies put downward pressure on wages and prices
This is fundamentally at odds with a debt-based system that requires inflation
Gromen argues this will eventually force central banks to "fully reserve all the debt"

He believes this dynamic is not yet widely understood by markets.

Bitcoin Outlook (1:00:19)

The discussion concludes with thoughts on Bitcoin:

Gromen is hearing that institutional demand for Bitcoin is very strong
He sees Bitcoin as "one of the cleanest, easiest ways to play" the macroeconomic shifts discussed
Argues Bitcoin is still in "very early days" given its relatively small market cap

Conclusion

This wide-ranging discussion covered several major macroeconomic trends that could significantly impact markets in the coming years. Key themes included ongoing liquidity provision by central banks and governments, major infrastructure investment needs, commodity demand driven by electrification and AI, stress in bond markets, and fundamental shifts in the global financial system. Gromen sees these trends as broadly supportive of Bitcoin and other scarce assets, while presenting challenges for traditional fixed income investments.