Luke Gromen: 'Devalue The Dollar First' | Why DOGE Without Dollar Weakening Would Be 'Catastrophic
What this covers
Luke Gromen, founder of FFTT, joins the Julia La Roche Show to explain why he has "high conviction" U.S. policymakers will weaken the dollar in 2025 and why the Department of Defense, not the Federal Reserve, is now driving U.S. economic policy. In this wide-ranging conversation, Gromen explains why our hollowed-out defense industrial base needs rebuilding, illustrates why this requires significant spending that can't be constrained by bond market concerns, and warns why trying efficiency cuts (DOGE) before weakening the dollar would be "catastrophic." He also shares his portfolio strategy favoring gold, Bitcoin and T-bills over long-term bonds, noting bondholders will be the ones to pay the price as the government prioritizes defense spending over bond market concerns.
This episode was recorded on Dec. 16.
Links: website: https://fftt-llc.com/ Twitter/X: https://twitter.com/lukegromen
00:01 Introduction and welcome Luke Gromen 00:47 Two key themes for 2025 03:12 DOD driving economic decisions, not Fed/Treasury 04:58 Bond market dynamics and military spending 07:25 Defense industrial base concerns 09:16 Historical parallels to WWII financing 12:07 Currency as release valve 14:01 Impact on equities, Bitcoin, gold 16:04 Foreign vs. domestic bondholders 21:06 U.S. debt situation 24:03 Healthcare and entitlement challenges 31:10 Social Security reform mathematics 35:42 Historical dollar devaluations 41:10 DOGE and order of operations 44:15 Optimism about dollar devaluation 47:04 Portfolio allocation strategy 56:09 Strategic Bitcoin reserve discussion
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Gromen argues that the US faces a structural debt crisis requiring dollar devaluation rather than spending cuts, driven by a shift in power from Treasury/Fed to DOD/intelligence community pursuing reshoring and reindustrialization, creating an inflationary regime favoring real assets (gold, Bitcoin, equities) over long-term bonds.
- Interest expense now exceeds defense spending, making bond market constraints untenable for geopolitical priorities
- DOD-driven reshoring requires massive supply chain restructuring more disruptive than COVID, forcing inflation and currency weakness
- Cutting spending before devaluation triggers debt death spiral as dollar rises, foreigners dump Treasuries, and deficits explode
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US defense manufacturing is increasingly single-sourced or dual-sourced to China; an October 2018 unclassified report on the defense manufacturing industrial base shows the US is borrowing from China to build weapons to face down China using Chinese components, a problem that has only worsened.
“You can go back to October 2018. There's a uh unclassified version of the report uh assessing uh the defense manufacturing industrial base or something like that. And essentially, it's 128 pages of how increasing portions of the US defense industrial base uh is either single or dual source to China, which is a problem because we're borrowing money from China to build weapons to face down China, according to this report, using increasingly Chinese-made components.”
For the first time in US history, net interest expense on federal debt now exceeds Department of Defense spending; Niall Ferguson showed that every hegemon going back 300-400 years with interest above defense spending ceases to be a hegemon fairly soon.
“for the first time in US history, US interest expense on our debt, net, is higher than the defense department spending. And what he pointed out at the time is every hegemon going back 3 to 400 years that has had its interest go above its defense budget, ceases to be a hegemon fairly shortly.”
Investors should NOT be leveraged during the transition period because the timing and path of dollar devaluation is uncertain and volatility will be extreme; they should scale positions to sizes they're comfortable with and play for the ultimate outcome rather than try to trade the transition
“be unlevered. Do not lever. This is not something you want the average person wants to try to trade. This is not I think going to be a tradeable type of thing and it's not something you want to be levered.”
An unclassified October 2018 defense manufacturing industrial base report shows increasing portions of the US defense industrial base are single or dual source to China, creating a vicious cycle where the US borrows from China to build weapons to face down China using Chinese-made components
“There's a uh unclassified version of the report uh assessing uh the defense manufacturing industrial base or something like that. And essentially, it's 128 pages of how increasing portions of the US defense industrial base uh is either single or dual source to China, which is a problem because we're borrowing money from China to build weapons to face down China, according to this report, using increasingly Chinese-made components.”
NATO lost in Ukraine because they couldn't keep up production with Russia; the US and NATO defense industrial base failed to sustain sufficient ammunition (105mm, 155mm shells, Stinger missiles, tanks) against a Russian economy allegedly 1/10 the US size and under sanctions.
“NATO lost in Ukraine. Uh, and they lost cuz they couldn't keep up with production. And so when you start seeing objectively 105-50 155 mm shells, uh, millimeter shells, uh, Stinger missiles, tanks, etc. an inability for the US and NATO defense base to keep up with a Russian defense industrial base and an economy that is allegedly 1/10 the size of ours and under sanctions, you realize that and now we realized, uh, uh, that we've got a huge problem that needs to be fixed yesterday in terms of getting our defense industrial base back to speed.”
During WWII, FDR did not ask bond markets for permission to go to war; he announced the objective and told markets to figure it out. The Fed kept front-end yields at 3/8%, 10-year at 2.5%, shifted issuance to front-end, bought it, and grew the balance sheet 10x over 9 years while maintaining price controls and rationing.
“when we said, 'We're going to go to war with Japan and Germany at the same time. It's going to be really inflationary.' FDR didn't say, 'Well, I'm going to ask the bond market in Wall Street first.' Said, 'Get it done.' And what happened? What happened was the Fed kept yields at 3/8 of a percent at the front end. And they kept the 10-year at 2.5%. Most of the issuance was done at the front end. And the Fed's balance sheet off a low base grew 10x in in 9 years.”
When 2000-2001 manufacturing offshoring displaced 10% of manufacturing employment in under 2 years, the deflationary drag was offset by giving those workers subprime loans to maintain consumption, which worked until the housing crisis
“we saw what happened in 2000, you know, 2001, you know, that derogatory, well, we're going to send all the jobs and factories to China, um, in in in manufacturing. That was 100% increased productivity. Sent 10% of manufacturing employment to China in in in under under 2 years. And how did we get around this drag, the deflationary drag of that? Because those people had mortgages and cars and houses. Simple, we gave them all subprime loans, right? Oh, you went from making 40 bucks an hour, full bennies at GM, and now you're a 12 $12 an hour greeter at Walmart, no bennies? Here, take a subprime. Go buy a bass boat. Go buy a house.”
Long-term bond holders will suffer on a real basis; the US government will pay every dollar owed, but the real purchasing power will be eroded via inflation, similar to what happened to WWII bond holders when S&P 500 rose 5x relative to bonds and real rates hit -13%.
“people who bought war bonds during World War II, they got paid every dime they were owed. It was just that the S&P 500 rose 5x from 1941 to 1951 or 1942 to 51 relative to their bonds. Um and you know, gold was not allowed to be owned uh by the US populace then, and we had rationing of consumer goods. So, that curtailed inflation for the first half of that period, and second half of it, they took the rationing off and inflation exploded. So, real rates, I think in the US bottomed at -13%.”
During WWII, FDR stated 'We're going to war' without asking permission from the bond market or Fed, and the Fed then kept yields at 3/8 of 1% on the front end and 2.5% on the 10-year, deployed most issuance at the front end, and grew the Fed's balance sheet 10x in 9 years—a precedent Gromen believes is repeating now.
“when the Japanese bombed Pearl Harbor in 1941, FDR didn't get on TV the next day and say, 'We're going to war in Japan and Germany if the bond market will let us.' He didn't say that at all, of course. He got on and said, 'We're going to war. Freaking figure it out, bond market. Figure it out, Fed.'”
The fundamental problem stems from the post-1971 dollar system; the way to 'cut the Gordian knot' is to change the reserve asset from Treasuries to a neutral asset like Bitcoin or gold; if the US shifts to a neutral reserve, dollar becomes the 'dirtiest dirty shirt' and will collapse.
“I have long thought that the way you fix this problem ultimately is you have to you have to the way to cut the Gordian knot of the post-71 dollar system causing this problem of forcing us to have, you know, borrow money from China to build weapons to face down China using Chinese components is you have to change the system. The way you change the system, the dollar system is that you settle in a neutral reserve asset. Historically, the primary reserve asset has been Treasury bonds.”
The global bond market is approximately $130 trillion; suppressing long-term yields below 4.5% on this enormous asset base will require massive liquidity injections and Fed balance sheet expansion to 'anesthetize' it.
“the global bond market is $130 trillion. And so, it is a very very big animal that you're going to try to hold down and not let it move. You know, basically, you're going to try to anesthetize it, you know. It's going to want to sort of move around a lot.”
The Fed has empirically demonstrated since 2019 that it will not allow rates to rise beyond a certain point, intervening five times: the repo spike, COVID, 3Q22, the banking crisis, and 3Q23 issues.
“rates won't be allowed to go up beyond a certain point. We know that. We've seen that empirically demonstrated four or five different times since 2019 starting with the repo rate spike, right? When when repo went to 8 to 10%. The Fed didn't say, oh look, the market's setting rate at 8% to 10%." No, the Fed said, "Oh god, the market's setting it at 8% to 10%. Market, you're wrong." 48 hours later, they did not QE, which was just holy cow, inject liquidity, get those rates back down.”
Foreigners like China and Russia stopped buying US Treasuries 10+ years ago and have instead been buying gold, real estate, copper mines, coal mines, and oil fields, realizing the inevitability of US debt problems.
“what have foreigners been doing? These foreigners have been realizing the inevitability of this for 10 years. China's not bought Treasuries, they've been buying gold. They've been buying real estate. They've been buying copper mines, coal mines, oil fields, et cetera. Ditto the Russians.”
The manufacturing job losses from 2000-2002 (offshoring to China) were offset through subprime lending—workers who lost $40/hour jobs with benefits at GM were given subprime mortgages to buy bass boats and houses despite now earning $12/hour at Walmart, creating deflationary pressure but allowing consumption to continue temporarily.
“when 2000, you know, 2001, you know, that derogatory, well, we're going to send all the jobs and factories to China, um, in in in manufacturing. That was 100% increased productivity. Sent 10% of manufacturing employment to China in in in under under 2 years. And how did we get around this drag, the deflationary drag of that? Because those people had mortgages and cars and houses. Simple, we gave them all subprime loans, right? Oh, you went from making 40 bucks an hour, full bennies at GM, and now you're a 12 $12 an hour greeter at Walmart, no bennies? Here, take a subprime. Go buy a bass boat. Go buy a house.”
We are in a regime shift where DOD and intelligence community are now driving marginal economic and policy decisions, not Treasury and Fed as they have for the past 40 years, triggered by Russian sanctions on FX reserves and NATO's production failure in Ukraine
“DOD and certain intelligence establishment parties are now driving the marginal economic decision, not and and policy, not Treasury and the Fed as has been the case for the past 40 years”
Reshoring and reordering US supply chains to reduce China dependency will be a structurally inflationary process; it will make COVID supply-chain disruption look quaint by comparison and will likely accelerate substantially over the next several years.
“If the United States does not want China making most {slash} all of its defense equipment in 5 to 10 years, it needs to completely reorder supply chains in a way that makes the disruption of COVID look quaint by comparison. So, you know, away from sort of this acute sort of COVID disruption, this is wholesale major It's going to start glacial, but I think it's going to accelerate pretty meaningfully. So yes, I think it's a very secularly inflationary environment over the next several years.”
Cutting entitlements changes consumer expectations permanently (they assume further cuts will follow), reducing consumption and GDP, which drives down tax receipts and increases deficits-to-GDP despite nominal cuts; this is not speculative but laid out by Greenspan, Fisher, and Lindsey in a 2015 Peterson Institute panel.
“They laid out in 2015 that if you cut entitlements, you're going to change the consumption patterns of the economy. In other words, if you tell people the money you thought was going to be there isn't going to be there, you're going to introduce first everybody's going to go, 'Okay, well, if they did one cut, that means they can do two or three or four right?' And you change psychology permanently around those benefits.”
Obamacare in 2014 was a tax increase (ruled legal by Supreme Court); Wall Street Journal stated the goal was to push healthcare costs from government to consumers to reduce the deficit; 12-18 months later, higher consumer premiums caused consumers to cut spending elsewhere, slowing GDP and tax receipts, resulting in higher deficits-to-GDP despite the tax increase.
“something I've been highlighting for our client for FTT clients for some time is we have an actual empirical example of this. We can go back to 2014 with Obamacare, which was a tax increase. It was a ruled a tax increase by the by the Supreme Court as being legal for that reason. The Wall Street Journal at the end of 2014 said the goal here is to put have consumers have more skin in the game to push healthcare costs from the government onto consumers to reduce the deficit. And 12 months later because consumer premiums had gone up, they all of a sudden had to pay more for their own care... Growth slowed, consumer spending slowed, GDP slowed, tax receipts fell and as a result uh the deficit as a percent of GDP was higher one year uh 14 18 months after the Obamacare cuts were put in place to reduce the deficit.”
Government spending is 25% of GDP; federal + state + local is ~30-35% of GDP; government and parasitic activities (finance, insurance, real estate, healthcare administration) make up ~45-50% of the economy; when a parasite grows too large, it consumes all nutrition and kills the host.
“So, 25% of the GDP is is is um government, federal government. It's probably, you know, add you probably add another five, 10 points of sort of state, local. Um generally that's, you know, they don't produce anything, right? They take a cut of every transaction, basically. They they exist on the back of the productive economy. That's the nature of government. Okay. So, you've got a something that exists on the back of something productive is also known as a parasite. Right? It's a parasitic activity. Which is fine. I'm not calling government workers parasites. To be clear. It's a parasitic activity. I'm trying to make an illustration here. So, 25% of GDP, at least, is a parasitic activity. Finance by definition is also a parasitic activity. It makes its money by taking a small cut of every transaction. Ditto insurance, real estate. So, finance, insurance, real estate in this country is another what? 15, 20%? Okay, we're up to 40% of the economy that is a parasitic activity. Uh-oh. Now, health care administration. They're not operating on anybody. They're just taking a little cut. So, what is that? Another five points, maybe? Three points, five points, seven points? I don't know. You're at almost half the economy that is by definitionally parasitic activities. What happens when you have a parasite? You get a tapeworm and and it gets too large. What happens? It eats all your nutrition and you die. That's sort of what's happening.”
The US has devalued the dollar twice in the past 80 years: in 1933 when FDR revalued gold from $20 to $35 and confiscated gold, and in 1971 when Nixon ended the gold standard, suggesting we are overdue for another devaluation.
“it's happened twice in the last 80 years. We're just about due. You know, we did it in 1933. FDR came out and was like, "Surprise! Dollar used to buy you $20 now it's now it's 35. Have a good day. And oh by the way, we're confiscating all your gold." That's yeah, the gold confiscation. Okay. Mhm. That was a dollar devaluation. Um the next dollar devaluation happened in '71. Ah. Nixon said, "Surprise! Gold again?"”
The release valve for inflation and cost pressures from reshoring will be currency devaluation and real depreciation of bonds; the Fed and government will print money to enable supply-chain reconstruction rather than let rates rise, and rates won't be allowed to rise beyond a certain point.
“it ultimately, you know, rates won't be allowed to go up beyond a certain point. We know that. We've seen that empirically demonstrated four or five different times since 2019 starting with the repo rate spike, right? When when repo went to 8 to 10%. The Fed didn't say, oh look, the market's setting rate at 8% to 10%. No, the Fed said, Oh god, the market's setting it at 8% to 10%. Market, you're wrong. 48 hours later, they did not QE, which was just holy cow, inject liquidity, get those rates back down.”
When 2-3 million healthcare administrators (and similar sectors) are cut from the government/healthcare system, they have mortgages, student loans, car loans; they cannot simply retrain and find equivalent work; efficiency gains create unemployment that must be absorbed via subprime loans or UBI, which adds to deficits.
“when it health care was smaller than it is today, when our debt was lower, what are these one to two three million people going to do? And by the way, these one to two three million people had they have mortgages, they have student loans, they have car loans. So, if we get efficient, you know, what are those people going to do? They're not going to all go learn to weld, you know, they're not going to all go learn to code, right?”
US real rates during WWII were negative 13%, which is the kind of magnitude that might be necessary in the current scenario due to the scale of reshoring required.
“So, real rates, I think in the US bottomed at -13%. So, inflation was 13 points over the yield on the on the Treasury bond. And that's the kind of thing we'd be talking about.”
Interest expense on US debt now exceeds defense department spending for the first time in US history, and every hegemon in the past 300-400 years that had interest exceed defense spending ceased to be a hegemon fairly shortly
“for the first time in US history, US interest expense on our debt, net, is higher than the defense department spending. And what he pointed out at the time is every hegemon going back 3 to 400 years that has had its interest go above its defense budget, ceases to be a hegemon fairly shortly.”
US electrical infrastructure needs massive capacity expansion (multiple gigawatts in next 3 years) and the US currently has only 60-80% of the required capacity; electrical infrastructure companies will build regardless of cost because they're regulated utilities with pass-through pricing and don't refuse jobs due to cost
“You can Google US electrical capacity and you know, images on on Google and it'll call up any number of charge. You can Google it on X or you can search it on X, excuse me. And you'll find these sort of you know, the US needs you know, X gigawatts in the next 3 years of capacity and the US currently has X divided by you know, XX, you know, 0.8 X or 0.6 X of that capacity.”
If AI/robotics were to eliminate 10% of administrative jobs in finance, insurance, real estate, and healthcare administration, it would be functionally identical to what happened when 10% of manufacturing employment was sent to China, and would produce the same outcome: either UBI/subprime mortgages or financial crisis
“if AI comes out and takes 10% of administrative jobs across finance, insurance, real estate, and health care administration, that is functionally indistinguishable from sending 10% of manufacturing employment to China. Except, it's a much bigger share of employment and we know how that worked out.”
Reshoring and reindustrialization of US defense manufacturing will require breaking supply chains across China, Vietnam, Mexico and other countries, causing structural supply-chain disruption far exceeding COVID in scope and duration, which will be inflationary on a secular basis over the next several years
“If the United States does not want China making most {slash} all of its defense equipment in 5 to 10 years, it needs to completely reorder supply chains in a way that makes the disruption of COVID look quaint by comparison.”
The Federal Reserve will be forced to keep long-term Treasury yields suppressed below market equilibrium by repeatedly injecting liquidity when yields spike, as demonstrated by the repo crisis in 2019, COVID in 2020, Q3 2022, banking crisis 2023, and Q3 2023, because allowing rates to rise would choke off government spending on defense and strategic reshoring
“rates won't be allowed to go up beyond a certain point. We know that. We've seen that empirically demonstrated four or five different times since 2019 starting with the repo rate spike, right? When when repo went to 8 to 10%. The Fed didn't say, oh look, the market's setting rate at 8% to 10%. No, the Fed said, Oh god, the market's setting it at 8% to 10%. Market, you're wrong. 48 hours later, they did not QE, which was just holy cow, inject liquidity, get those rates back down.”
If the US cuts spending (via DOGE or entitlement cuts) before devaluing the dollar, it will trigger a debt death spiral: spending cuts cause recession, recession causes dollar to rise (as foreigners short $13 trillion in dollar debt), rising dollar forces foreigners to dump $8.5 trillion in Treasuries to raise dollars, Treasury rates spike in a recession (opposite of normal), receipts collapse as economy weakens, deficits explode despite cuts, forcing exponentially higher issuance into selling foreigners
“if you try DOSE or you cut too many healthcare administrators, with 36 trillion in debt and 30, you know, over 7% plus deficit of GDP, you're going to go into a debt death spiral, basically. Because what's going to happen is you're going to actually the US government, by the way, is also 25% GDP. So, you're going to shrink part of GDP, you're going to go into a recession. When you go into a recession, the dollar tends to rise.”
Domestic US investors (banks, money market funds, pensions, retail investors via mutual funds) own 60-70 percent of the 7-30 year Treasury issuance in recent years, while foreign central banks and sovereigns have stopped net buying 10+ years ago, making US retail/pension funds the primary victims of bond devaluation
“central banks stopped buying US Treasury bonds on a net basis 10 years ago. China stopped buying over 10 years ago. Uh Russia stopped buying 10 years ago. So, like, the Japanese have barely bought”
If the US restricts immigration while simultaneously reshoring manufacturing, it will create labor shortages that drive up domestic wages and narrow wealth inequality between asset holders and the working class for the first time in 40 years, which is beneficial for the middle and working class
“if we stifle immigration, um instead of the release valve being 10 million more people in this country, if there's not 10 million more people in this country to do the work, and the work actually goes up, then the release valve will simply be the price of that domestic labor. Uh and so what you would actually see is a is a is a narrowing of wealth inequality in this country between asset holders in the middle and working class for the first time in 40 years.”
Long-term Western sovereign bonds should be avoided, full stop; T-bills and short-term Treasuries offer better yields (4.5%) with optionality; gold and Bitcoin are superior to long-term bonds because they are 0% yielding bonds of finite issuance with flexible face value, vs 30-year bonds with finite duration and infinite ultimate issuance.
“Long-term bonds should be avoided, especially long-term Western sovereign bonds. Um full stop... I look at gold, I look at Bitcoin, these are just 0% yielding bonds of finite issuance, infinite duration, and flexible face value. That is superior in every way to a 30-year bond, which is a finite duration, fixed face value, and infinite ultimate issuance.”
The market regime has shifted from Treasury-Fed control to DOD and intelligence establishment control of marginal economic and policy decisions, a change that began 2-3 years ago with Russian sanctions on FX reserves and is now permanent.
“I've just been watching a lot of signs and hearing a lot of we'll call credible rumblings that the market regime that really began changing uh a at least a little over two years ago, almost three years ago, with the Russian sanctions on FX reserves in a way that I would summarize as uh DOD and certain intelligence establishment parties are now driving the marginal economic decision, not and and policy, not Treasury and the Fed as has been the case for the past 40 years.”
Obamacare demonstrated empirically that increasing consumer healthcare costs as a budget-neutral policy (shifting costs from government to consumers) reduced consumer spending, contracted GDP, and increased the deficit-to-GDP ratio 14-18 months later despite being intended to reduce the deficit
“The Wall Street Journal at the end of 2014 said the goal here is to put have consumers have more skin in the game to push healthcare costs from the government onto consumers to reduce the deficit. And 12 months later because consumer premiums had gone up, they all of a sudden had to pay more for their own care”
Foreign sovereigns (China, Russia, others) recognized the inevitability of dollar devaluation 10 years ago and have been reallocating reserves from Treasuries into gold, real estate, copper mines, coal mines, and oil fields instead of US bonds
“what have foreigners been doing? These foreigners have been realizing the inevitability of this for 10 years. China's not bought Treasuries, they've been buying gold. They've been buying real estate. They've been buying copper mines, coal mines, oil fields, et cetera. Ditto the Russians.”
Scott Bessent has stated that US-China trade needs to rebalance; Gromen believes a grand deal is possible in the next 4 years where US produces more of its consumption and China consumes more of its production; a neutral reserve asset would facilitate this rebalancing.
“You've seen Scott Bessent come out and say US and China needs to rebalance. And I think we're going to have a grand deal in the next 4 years. And the US needs to produce more of its own consumption. China needs to consume more of its own production.”
Wall Street's base case assumption is that the bond market will force fiscal discipline through yields rising, but Gromen asserts the odds of this happening are 'basically zero' while 'everyone on Wall Street' prices in this scenario as base case
“When you start from that point of is the US DOD and the US establishment going to stand aside and say, "Oh gee, we have to respect market pricing of the bond market, and in so doing cut back on defense investment, and cut back on entitlement investment, so that we can pay our bond holders?" In my opinion, the odds of that happening are basically zero. What's fascinating is the odds that Wall Street appears to still be placing on that happening is like that's everybody's base case.”
Scott Bessent's three arrows policy framework (dollar down, deficit reduction, growth) cannot work unless the dollar is lower; tariffs and DOGE could drive the dollar up in the interim, creating a risk-off air pocket.
“When you look at Scott Bessent's three arrows, for example, none of them work unless the dollar's lower. Um pretty much full stop.”
The Trump administration will likely pursue reshoring and reindustrialization ('MAGA'), which is a major change in trade flows regardless of political views about it, and Wall Street is still pricing as though bond vigilantes will constrain this when they actually won't
“objectively, there's a major change in trade flows that we're talking about. And most of Wall Street, to me, seems to still be thinking, well, you know, when are the bond vigilantes going to show up? What are I don't think they're going to care.”
Tax receipts above 18% of GDP trigger recessions; in 1933 onward, every time US tax receipts exceed 18% of GDP, the US has a recession; we are currently at ~18% of GDP in tax receipts, and raising taxes further would push over 18%, causing GDP to fall.
“Tom McClellan had a great post couple days ago I I I where he highlighted you go back to 1933. Every single time that US tax receipts go over 18% of GDP, US has a recession, full stop, every time. Even in 1920 or excuse me, even in 2022, uh we had two down quarters of GDP when it went over 18% in a row. So it wasn't technically a recession but GDP falls when you go over 18%. And we're basically there right now.”
Investors should be unlevered in their positioning; do not use leverage in this environment because volatility will be significant; scale positions to a size that does not cause panic during drawdowns; play for the ultimate outcome (rule change) rather than trying to trade the volatility.
“be unlevered. Do not lever. This is not something you want the average person wants to try to trade. This is not I think going to be a tradeable type of thing and it's not something you want to be levered. I think you want to just play for the ultimate outcome of the rule change and be ready you know, scale your positions in a size that you're not freaked out by any volatility and I think you're going to be really happy both as an investor and as an as an American and as a world citizen at the end of it.”
The implication of long-term bond losses from devaluation is that it would be 'great for the stock market,' 'great for gold,' 'great for Bitcoin,' 'great for America,' 'great for domestic wages,' and represent a narrowing of wealth inequality, making the outcome positive despite being negative for bond holders
“It's great for the stock market. It's great for gold. It's great for Bitcoin. Uh it's great for America. It's great for domestic wages. You know, long-term bond holders are going to pay the price on a real basis.”
NATO lost the conflict in Ukraine because it could not keep up with production—the US and NATO defense industrial base could not match Russian production of artillery shells, missiles, and tanks despite Russia allegedly having an economy 1/10 the size of the US and operating under sanctions.
“NATO lost in Ukraine. Uh, and they lost cuz they couldn't keep up with production. And so when you start seeing objectively 105-50 155 mm shells, uh, millimeter shells, uh, Stinger missiles, tanks, etc. an inability for the US and NATO defense base to keep up with a Russian defense industrial base and an economy that is allegedly 1/10 the size of ours and under sanctions, you realize that and now we realized, uh, uh, that we've got a huge problem that needs to be fixed yesterday”
Every time US tax receipts have exceeded 18% of GDP since 1933, the US has entered a recession, with no exceptions; even in 2022 when receipts went over 18%, GDP fell for two consecutive quarters
“Tom McClellan had a great post couple days ago I I I where he highlighted you go back to 1933. Every single time that US tax receipts go over 18% of GDP, US has a recession, full stop, every time.”
Raising taxes beyond the current 18% of GDP level will cause GDP to fall, which will reduce tax receipts, which will increase the deficit by 600-1200 basis points (6-12 percentage points), making the deficit worse, not better
“The last three times we've had the deficit or we've had GDP fall, deficit has risen 600 basis points, 800 basis points, and 1,200 basis points of GDP. So, your deficit, if you try to raise taxes here, your deficit will go from 7 to somewhere between 13 and 20% of GDP.”
The current system became unsustainable after 1971 (when Nixon closed the gold window) because it required the US to run chronic deficits to supply the world with reserve currency, which incentivized borrowing from China to fund consumption while hollowing out the productive base
“we are by far and away the biggest debtor, the biggest trade debtor, current account debtor. Again, by virtue of the post '71 dollar. So, we have to. We have to run these deficits to supply the currency for the world.”
Government spending is approximately 25-30% of GDP and finance, insurance, and real estate (FIRE) is another 15-20%, and healthcare administration is another 3-7%, meaning 40-50% of the US economy consists of parasitic activities that extract value without producing goods
“25% of the GDP is is is um government, federal government. It's probably, you know, add you probably add another five, 10 points of sort of state, local. Um generally that's, you know, they don't produce anything, right? They take a cut of every transaction, basically.”
When interest becomes too close to or exceeds 100% of government receipts, the US government either defaults on its national debt or prints money; both outcomes result in hyperinflation because the dollar is backed by debt and all other assets are priced in dollars.
“once you get interest just even too close, let alone over 100% of receipts, you're done. You either default on your national debt or you print the money. Now, conveniently, both of those basically end in hyperinflation for a period of time because the debt backs the currency and sort of all other assets out there.”
Gold and Bitcoin are 0%-yielding bonds of finite issuance, infinite duration, and flexible face value; they are superior in every way to 30-year bonds, which have finite duration, fixed face value, and infinite ultimate issuance; therefore, duration exposure should be in gold and Bitcoin, not Treasuries.
“I look at gold, I look at Bitcoin, these are just 0% yielding bonds of finite issuance, infinite duration, and flexible face value. That is superior in every way to a 30-year bond, which is a finite duration, fixed face value, and infinite ultimate issuance. Um so and ditto any other long-term sovereign.”
FDR devalued the dollar in 1933 by announcing that the dollar used to buy you $20 of gold and now it buys you $35, and confiscated all private gold holdings; this was a dollar devaluation combined with gold confiscation
“We did it in 1933. FDR came out and was like, Surprise! Dollar used to buy you $20 now it's now it's 35. Have a good day. And oh by the way, we're confiscating all your gold.”
The US could shift international settlement of deficits from Treasury bonds to Bitcoin or gold as a neutral reserve asset, which would allow the dollar to collapse against Bitcoin/gold while trade partners accept Bitcoin/gold and rebalance their currencies, enabling trade to balance and the US to compete without requiring external financing
“if you settle in a neutral reserve asset like Bitcoin like gold...the US will start settling deficits in Bitcoin effectively. You know, is is a potential message of a strategic Bitcoin reserve”
US policymakers will devalue the dollar in 2025 because the debt is too high and the deficit is too high for any other mathematical solution to work; devaluation is the only mechanism that doesn't require cutting the safety net and can work given current leverage levels
“I have very high conviction that US policymakers will dollar um in 2025”
Equities, Bitcoin, and gold will all benefit from dollar devaluation because the money supply expansion required to keep Treasury yields suppressed will flow into these real assets, making them 2-5x returns likely, while long-term bond holders suffer negative real returns
“they're going to pay to get it done. And they're not going to let the bond market yields rise to try to stop it. And so ultimately, that cash is going to flow into equities, into Bitcoin, into gold.”
Electrical infrastructure and related industrial equities will do well; US electrical capacity needs to grow significantly (searching 'US electrical capacity' shows need is 0.6x-0.8x of future demand); utilities are price-inelastic buyers (will not skip building transformers or steel because they're expensive) and will pass costs to consumers via utility commissions.
“I think anything related to uh US electrical infrastructure and industrial tangentially will do uh is is going to do very very well. Um You can you can Google US electrical capacity and you know, images on on Google and it'llcall up any number of charge. You can Google it on X or you can search it on X, excuse me. And you'll find these sort of you know, the US needs you know, X gigawatts in the next 3 years of capacity and the US currently has X divided by you know, XX, you know, 0.8 X or 0.6 X of that capacity. They're going to build it, right? We're not going to turn off the lights. They're going to build it. And so, uh I think electrical infrastructure and related industrial equities, they had good runs. I think they're still probably cheap relative to what earnings may ultimately be for these because they are very price inelastic earnings.”
If fiscal consolidation triggers a recession, foreigners who are short 13 trillion dollars in dollar debt will sell dollar assets (including 8.5 trillion in Treasury bonds) to cover shorts, driving Treasury yields up during recession rather than down, amplifying deficits.
“Foreigners are short 13 trillion dollars worth of of dollar debt because thanks to Bernanke and the Fed and awake, the dollar was turned into a funding currency. So, now they're short 13 trillion in debt, the dollar starts going up on them, they have to start selling something to raise dollars. What do they have? Well, they've got 57 trillion dollars in dollar denominated assets, including 8 and 1/2 trillion in treasury bonds. They're going to start dumping treasury bonds to get dollars.”
A likely 2025 surprise devaluation will cause gold to skyrocket, Bitcoin to skyrocket, stocks to skyrocket, and may be accompanied by soft regulations requiring someone to buy Treasuries and soft yield curve control to finance deficits.
“I think there's a really good chance we see some sort of Sunday night surprise in the first half of 25. Um, and I don't know exactly what it look like looks like. I'll know what I when I see it, but I think the symptoms of that will are a lot of what we've seen, which will be over some brief period of time, we will see gold skyrocket. We will see Bitcoin skyrocket. We will see stocks skyrocket. Um, you'll probably see some sort of soft regulations to sort of make somebody new try to buy treasuries and and and uh certain other interests have said, 'Here's what's going to happen. Figure it out.' And so, that has some very important market allocation um things we can dive into, but those are kind of, as I sit here today and look out, my two big things, which is I've no idea, you know, next 3-4 months we're in between two trapezes, but then I think ultimately we're going to get a weaker dollar in 2025.”
We are mathematically past the point of no return; entitlement cuts, efficiency measures, and tax increases will all fail to reduce the deficit-to-GDP ratio and will instead increase it due to demand destruction and leverage dynamics.
“Is it is it too late for us to course correct without a major rule change of the sort that I'm describing without really impairing the real value of long-term bonds? Yes, it absolutely 150% is. It's way too late. It's over.”
There is extreme conviction that the US will devalue the dollar in 2025, but zero conviction in what happens over the next 3-4 months, creating a period of complete uncertainty described as 'between two trapezes' where investors are in mid-air between one regime and the next
“I have very high conviction that US policymakers will dollar um in 2025. I do not have any conviction in what they will do over the next three to four months. Um and I and so I'm thinking about right now is a period of sort of uh in between two trapezes”
The bond market bull run of the past 40 years is over and the rules have changed; historically, buying long-term US Treasury bonds never went wrong, but that rule has now broken and is unlikely to return without a major rule change involving currency devaluation
“the bond market was in a 40-year bull market. Like, you never went wrong buying long-term US bonds. I mean, yeah, you had some countercyclical moves. Um and that rule has changed.”
Scott Bessent (likely Treasury Secretary under Trump) has proposed that the US and China need to rebalance trade flows, with the US producing more of its own consumption and China consuming more of its own production, which is nearly impossible without a neutral reserve asset arrangement
“You've seen Scott Bessent come out and say US and China needs to rebalance. And I think we're going to have a grand deal in the next 4 years. And the US needs to produce more of its own consumption. China needs to consume more of its own production.”
If immigration is restricted and labor supply does not increase, the release valve for labor pressure will be wage inflation; this would result in a narrowing of wealth inequality for the first time in 40 years, which is beneficial for the working class and middle class.
“presumably, if we if we stifle immigration, um instead of the release valve being 10 million more people in this country, if there's not 10 million more people in this country to do the work, and the work actually goes up, then the release valve will simply be the price of that domestic labor. Uh and so what you would actually see is a is a is a narrowing of wealth inequality in this country between asset holders in the middle and working class for the first time in 40 years.”
Lower dollar valuations will raise nominal GDP; combined with rapid economic growth from reshoring investment, this will shrink the deficit-to-GDP ratio and reduce the absolute deficits requiring financing.
“it's going to require a lot of dollar printing, a lot of liquidity. And you know, importantly, it doesn't have to last forever because the lower the dollar goes, the higher we get nominal GDP as a result of what we're talking about here, which is severe financial repression for a compressed period of time. Uh the deficits you need to finance will shrink.”
Historically, Gromen believed gold would be the neutral reserve asset; but the Bitcoin strategic reserve discussion in Trump administration circles and growing Bitcoin market cap (approaching gold) make it possible that Bitcoin could serve that role.
“I've always thought it was gold, to be honest, but the strategic Bitcoin reserve discussion uh along with various political discussions around it with the incoming Trump administration that have taken place in the public realm make me wonder if it couldn't be Bitcoin. But the point is this, if the US shifts to a neutral reserve asset, the dollar is the dirtiest dirty shirt.”
The Americans always do the right thing after exhausting all alternatives; the US has tried everything else (trade deals, military interventions) so devaluation will happen because it is the only option left.
“Americans always do the right thing after they've exhausted all the alternatives. That's something that uh um Churchill apocryphally said. And Americans always do the right thing after they've exhausted all the alternatives. We tried everything else. We've tried it all. We you know, we've invaded other people, we've done trade deals, we've done like we're out of runway. Now, that's ties back to my initial point of like I have high conviction they will weaken the dollar next year.”
The current macro environment is a 'really exciting and scary time' simultaneously (crisis and opportunity), and Gromer is more excited than scared because reshoring/rebalancing dynamics need to happen and are likely to be 'super bullish for America'
“I think we're in a really exciting and scary time. Um, you know, it's the old sort of you know, crisis and opportunity all at once. Uh, kind of whatever that whatever that meme is. Um, but I'm I find myself more excited than scared simply because there seems to be a greater recognition of okay, these rebalancing dynamics need to happen. And I think it's going to happen. I think it's super important for people to understand that and I think ultimately it's super bullish for America and for much of America.”
The phrase 'end game' is unhelpful; the game never ends, only the rules change, and the biggest money is made or lost when rules change—Gromen's entire thesis is about a rule change from 40 years of Treasury/Fed dominance to DOD-intelligence dominance.
“I have come to really abhor the phrase the end game, right? Because the game never ends. It's just the rules change. Hm. And it's when those rules change that you make or lose the most money. And what I'm talking about here is just a rule change. You know, we've had 40 years. I mean, and it I would argue again, the rule change probably started two, three, four years ago. You even go back to COVID, maybe, right? But like the bond market was in a 40-year bull market.”
Obama (18 years before his presidency) acknowledged that healthcare administration employs 1-3 million people, creating a political constraint on efficiency reforms—cutting those jobs would require retaining or retraining millions of workers with mortgages and car loans, which is politically and economically costly.
“I read read a fascinating interview of Obama 18 years ago. 18 years ago, before he was elected president, a reporter, I think for the Wapo at the time, I think it was David Sirota, was talking to him and said, "You seem to be backing off your Medicare for all. Why?" And he said, "Look, there's one, two, three million people employed by healthcare administration. What are we going to do with those people?"”
The current environment is 'both a crisis and an opportunity'—while potentially bumpy with volatility in the near term, Gromen sees it ultimately as bullish for America and for much of the world, with the rebalancing creating better long-term outcomes.
“I think we're in a really exciting and scary time. Um, you know, it's the old sort of you know, crisis and opportunity all at once. Um, but I'm I find myself more excited than scared simply because there seems to be a greater recognition of okay, these rebalancing dynamics need to happen. And I think it's going to happen. I think it's super important for people to understand that and I think ultimately it's super bullish for America and for much of America.”
US policymakers will devalue the dollar in 2025 with high conviction, though Gromen has low conviction about what happens in the next 3-4 months before that devaluation.
“I have very high conviction that US policymakers will dollar um in 2025. I do not have any conviction in what they will do over the next three to four months.”
If DOGE (Department of Government Efficiency) cuts government spending before the dollar is devalued, Trump will become a lame duck before the midterms, Republicans will be swept from Congress, and all Trump economic policies will be discredited.
“It depends on the order of operations. If they devalue the dollar and the debt significantly first, yes. If they don't, um then they will fail spectacularly. And Trump will be a lame duck by before the midterms. Um the Republicans will get swept out of Congress because the economy and the crisis will be so bad that everyone they will completely discredit all Trump economic policies basically immediately.”
Gromen does not have conviction that Elon Musk and Trump will not attempt DOGE before devaluing the dollar; powerful people may need to be 'scared to death' via market crashes (401K losses) to realize the consequences; political dynamics around this are opaque.
“Do I have high conviction that you know, Elon Musk is a very persuasive man by all appearances. So am I convinced that he won't convince Trump to say hey this is a good idea. Let's doge first. No, I have no conviction, no visibility in that. I I I hope he doesn't. It will be a catastrophe for a month, two months, three months in markets. I don't know. Uh but we we ultimately know Trump is not going to stand aside and go oh look the stock market's down 30%. Oh, let's keep doging Elon. This sounds like a good idea. That's not who Trump is.”
The current situation is described as 'between two trapezes' in a Coldplay lyric sense—the US is leaving the old monetary/fiscal regime but hasn't yet grabbed the new one, creating a 3-4 month window of uncertainty
“I have very little conviction in what could happen over the next two to three months, three to four months. I guess. That's sort of point one. So, there's sort of two discrete periods. Uh next three to four months and then beyond.”
Gromen's strongest conviction allocations are: (1) gold, (2) Bitcoin, (3) equities broadly, with particular strength in industrial and electrical infrastructure sectors.
“So, I I those are sort of my strongest conviction areas. Um gold, Bitcoin, and you know, equities broadly, but especially industrial and electrical infrastructure equities.”
Long-term Western sovereign bonds should be avoided; short-term Treasury T-bills are acceptable at 4.5% yields because they provide higher yields than long-term bonds and optionality for future deployment if near-term volatility creates buying opportunities.
“Long-term bonds should be avoided, especially long-term Western sovereign bonds. Um full stop. I I have had and continue to have a decent chunk of exposure in US Treasury T-bills, you know, basically cash. I'm happy to lend money to the US government for 3 months at whatever it is right now, 4 and 1/2, you know, percent. Great. I am not happy to loan money to the US government for 5, 7, 10, 20, 30 years at less than 4 and 1/2%. That makes like less than zero sense to me.”
Trump will not allow stock market to fall 30% due to DOGE efficiency cuts; he will fire Elon Musk, intervene with Fed (cut rates to zero or threaten to fire Powell), or create a shadow Fed board to reverse the policy, demonstrating that political tolerance for market pain is low.
“we we ultimately know Trump is not going to stand aside and go oh look the stock market's down 30%. Oh, let's keep doging Elon. This sounds like a good idea. That's not who Trump is. Yeah. They would they would yeah. Elon will be out on his ear. Trump will be saying okay, Elon made a mistake. Here's what we're going to do. Powell, fix this. Cut rates to zero or I'll fire you. Like and I and or put up a shadow fed. I'm going to put up a shadow fed board.”
Stable coins have a role to play in the coming financial repression period because they enable certain parties to be financially repressed while others are not
“I think stable coins have a role. We can talk about that later in terms of being who can be financially repressed.”
Narrowing wealth inequality between asset holders and working class would be 'a great thing' because it's 'great for everybody' except long-term bond holders who must absorb the real loss so that the system doesn't collapse.
“It'd be a great thing, though. It'd be a great thing. Oh, it's It's It's great for everybody. Like, so it's great for everybody except for you know, people that own too much in long-term bonds on a real basis.”
Fart coin (a meme cryptocurrency) is currently worth more than 40% of all publicly traded companies, which is a symptom of extreme liquidity and shows the US is not even generating enough receipts to cover interest and entitlements
“with fart coin being worth more than 40% of publicly traded companies, the US isn't even is not even generating enough receipts to cover their interest and their entitlements.”