MacroVoices #542 Luke Gromen: As The Conflict Turns

Larry Summers, former US Treasury Secretary, said 'When the Americans come, we get a lecture. When the Chinese come, we get an airport,' reflecting the practical value proposition China offers versus US moral hectoring.

“Larry Summers said, 'Look, when the Americans come, we get a lecture. When the Chinese come, we get an airport.' You as a former Treasury Secretary of the United States said that in 2018 or 2023.”

Wars are always inflationary, there has never been a deflationary war in history, and the longer the current conflict lasts combined with supply chain interruptions, the more sustained inflation will pressure global bond markets.

“when you look at what the West is doing, not only is war always inflationary, it's always inflationary. Always. There's never been a deflationary war ever in history. So war is going to last longer than expected. Supply chain interruptions going to last longer than expected.”

Global bond markets are currently straining upward in yield (US, Japan, Europe, UK, Korea) with the sole exception of China's bond market, which suggests Western central banks will eventually need to implement yield curve control, a moment China has strategically orchestrated.

“Look around the world. What's happening to global bond markets? Every bond market in the world, US straining on the upside, ch Japan straining on the upside, Europe straining on the upside, UK straining on the upside. The only bond market Korea is straining on the upside. The only bond market in the world that's not straining on the upside is China.”

Americans refuse to consume Chinese products (like BYD vehicles) due to political barriers, but the rest of the world is adopting them because they're cheap and good quality, showing that US consumers are being protected by policy rather than competing.

“I can't drive the dollar. You know what I can drive? I can drive a Chinese BYD. You know, well, I can't because my country won't let it in. But most of the world, like I was just over in London and Scotland, there are BYDs all over the place. There's other Chinese car brands all over the place because it turns out people like having cheap transportation.”

China is rated higher than the US in many parts of the world according to recent FT articles, and the issues the West has with China (authoritarianism) are not the same issues other countries have with China.

“Rest of the world, China's rating higher than the US is in a lot of different places. There's an article in the FT about it again today. All cultures are different. And the issues we have with China are not issues a lot of other places have with China.”

If all Western currencies implement yield curve control simultaneously, they will all weaken together against the yuan and gold, which may make them appear stable relative to each other but will result in massive upside inflation in all these countries, with equities rising in local currency terms but falling in gold terms.

“You'll get all those currencies, you know, weakening. They should all weaken together against the yuan and against gold. But if they all weaken together, then maybe maybe they all can look around at each other and you know they all fall at the same rate. Nobody's really looks like their currency is getting weaker. But inflation all these countries will be going bonkers on the upside. Their equity markets will be going bonkers on the upside in their local currency terms. Their their equity markets will be falling in gold terms because gold will really be going on the upside.”

China shifted 1.4 million barrels per day of oil demand to electric vehicles in the first half of 2026 alone, and reduced total oil demand by 3-4 million barrels per day overall, primarily through strategic reserves drawdown.

“in the first half of 26 alone they shifted 1.4 million barrels a day of demand for oil to EVs. They reduced demand overall for by 3 to 4 million barrels a day. That has to be in part a rundown of their PR reserves.”

US AI companies are 'real estate companies' not tech companies, and real estate problems emerge when the second derivative of growth slows and refinance becomes difficult, which is already happening in AI.

“there was this great substack uh in early July by somebody who writes as groundbreaker. So you Google groundbreaker substack and he put up this mindblowing substack on AI where he says look these are not tech companies these are real estate companies and when real estate has a problem it's not because demand falls. Demand almost never falls in real estate. It's when the second derivative of growth slows and you can't refinance your debt because the second derivative of the asset value falls and that is happening right now in AI”

China implemented helium export bans in the last week, despite helium prices being on the floor, suggesting China believes either Qatar (the second-largest helium producer) will go offline again or the US will curtail helium exports to China, implying China expects the war to escalate and last longer than expected.

“the Chinese had implemented helium export bans last week which I thought was a really really interesting signpost because first thing I said I did is I called up the price of helium and the price of helium's on the floor. Like it's they're giving the stuff away. So why would they need to export bands?”

Positioning data from Commitment of Traders reports shows gold speculators are near the bottom of their one-year range, indicating room for upside and a lack of broad washout in positioning despite the 30% correction.

“the latest commitment of traders report from the CFTC, and the positioning definitely backs you up here. Gold speculars are near the bottom of their one-year positioning range, meaning there's room for that upside to 415, but there hasn't been a broad wash on positioning, which is why that protection at 370 is so valuable.”

US Treasury Secretary Bessant and US Trade Representative Greer have both publicly advocated for 'Hamiltonian economics' (high tariffs, neutral floating reserve asset), which aligns with China's 15+ year strategic goal and suggests the US is inadvertently moving toward the monetary system structure China has sought.

“Bessant come out four weeks ago and give a speech in New York where he said the US is moving to Hamiltonian economics. He in case anybody missed that or thought he was mistaken, he wrote an op-ed saying Trump's economic plan is based on Hamiltonian economics. Um, that echoes something US trade representative Greer said back at Davos in January, right before we started all this silliness in Iran where he said, 'The US is shifting to a Hamiltonian economic plan.'”

The US policy of tariffs and sanctions against China ('turning over the chessboard') is failing to achieve its stated goals because China has demonstrated it can reduce oil imports, grow exports, and increase yuan-denominated trade, suggesting sanctions are counterproductive.

“American strategy appears to be we're going to turn over the chessboard and and try to squeeze you with the dollar until you comply. And the more they squeeze, look, you can see it showing up in yuan payment volumes. You can see it showing up in Chinese export volumes. even see it showing up in Asian EV or Asian solar panel electricity generation. It's not working, you know.”

The war's prolonged nature provides China an opportunity to continue selling military components and weapons to all sides of the conflict, generating revenue and influence while keeping the US militarily and economically overextended.

“keep these conflicts going so that they can keep selling components and weapons to everybody. They can keep selling lots of EV, batteries, solar panels to everybody, gaining clout there.”

Kissinger Mahubani (Singapore statesman) recently stated that the West is 'sleepwalking into its downfall' and asked 'where is your reflection about how many people you have killed around the world over the last 30 years,' pointing out the Western hypocrisy in criticizing other powers while ignoring its own body count.

“Keshor Mahubani and he gave a speech last week or two weeks prior. There's a guy very serious, very high degree of gravitas, saying that the west is sleepwalking into uh its downfall. And one of the things he said was just fascinating. He said, 'Where is your reflection about how many people you have killed around the world over the last 30 years?'”

Private electrical infrastructure companies are seeing lead times 'open field running for years' of orders, with 3-5 year visibility on revenue growth that public companies won't admit to because it would signal unsustainable expectations.

“they are seeing lead times just open field running for years, years and years, much more than what the public companies are willing to admit. Because look, if you're a public company, there's no upside to you saying, 'Hey, we think our revenues are going to double over the next five years.' They will never say that. But those are the types of things, not specifically, but those are the types of things from this private company like, 'Oh yeah, our big public companies are are could not be more excited. They've got three to five years of really good open field running.'”

Japanese equities, particularly industrials, will outperform because Japan is critical to US reshoring efforts and the US cannot reshore without Japan; China will not build critical infrastructure for the US, so Japan becomes the essential partner.

“the US is not going to be able to reshore without Japan. If you want to build something these days, you're going to have to have Japan build it for you or China build it for you. And China is not going to be the one to build it for us for obvious reasons. Korea can help on the margins. Germany maybe can help on the margins maybe. But if it's not going to be that and America just we waited too long to do this. don't have the ability to make stuff without just crazy inflation.”

The US should pivot to building out its own economy, fixing what it messed up, and then competing with China on the basis of producing better products rather than relying on dollar dominance.

“America needs to pivot into like basically building ourselves out, fixing what we messed up. And then once we fix that, we're going to have really good products to offer people and compete on that basis versus like we're behind. Let's just dump the whole freaking chess board and you know, woohoo, we're going to win because of the dollar cuz we're not.”

Large speculators in WTI crude oil actually sold into the recent rally, cutting 13,000 contracts despite price surging, with their positioning score at just 12 points, indicating this move is running on fundamentals not speculative buying.

“last Friday's cult report, which is for positioning that took place on July 14th, the WTI data actually surprised me. WTI has actually been ripping higher, and you'd expect speculators to be chasing it, right? But they actually did the opposite. As of the latest report, large speculators actually sold into the rally, cutting another 13,000 contracts. And their positioning score, it's down to just 12 points.”

Large and small speculators are now both crowded long on S&P 500 and Dow after small specs added ~30 points of positioning in one week, putting both groups at the 90th percentile of one-year positioning range, which increases vulnerability to downside volatility if sentiment shifts.

“the story on flows this week is all about who just joined the party. Large specs, they've been crowded long on the S&P and the Dow for weeks now, but now small specs are piling in too. And that was the biggest jump in positioning on the board. Almost 30 points on each of the index in just one week. That puts small speculators in their top dile positioning from the last 12 months. Both groups now are sitting at 90 on their one-year positioning score.”

Large speculators on currency futures remain pinned at the very top of the range without adding or selling, while euro, yen, pound are at extreme short positioning and Canadian dollar speculators are short 48% of entire market, the most abandoned trade on COT report.

“they're still pinned at the very top of the range. They didn't add, they didn't sell, they barely moved a single contract all week. And across the major pairs is the mirror image. The euro, the yen, the pound, just like you said, all sitting at extreme short positioning. But here's the one that jumped off my screen. The Canadian dollar. Speculators are now short almost half the entire market. 48% of open interest. The most abandoned trade on the entire commitment of traders report this week.”

Copper recently demonstrated that an extreme crowded positioning reading (score of 100) does not automatically signal a crash; instead, the market can digest the overcrowding through time rather than price correction, with copper cooling its positioning from 100 to 75 over 6 weeks without breaking lower.

“Back in May, copper was a crowded trade. large specs hit 100 on the COT signal score. Now most people see a reading like that and think crowded means sell but that's not how this works. An extreme is a condition not a signal because there are two ways a crowded trade resolves. One, the price can crack and the crowd gets flushed out in a correction. or two, the market simply digested through time. And Copper this time chose time. Over six weeks of sideways action, specs quietly trimmed 14,000 contracts. And the score still cooled from 100 back down to 75, right back inside that normal range. But price never really broke down.”

Despite the oil supply crisis from the Hormuz blockade, China's exports to the world were up 27% year-over-year in May 2026, and China's corporate profits were up 19-20% year-to-date, indicating China weathered the conflict far better than other major economies.

“China's exports to the world were up 27% year-over-year in May. Uh China's corporate profits year-to date up 19 20%. they have weathered it much better than I or I think anyone else would have thought.”

If US AI companies have problems, semiconductors will get dragged down alongside them in the short term, but this would create an opportunity to add semis as the longer-term China competition thesis plays out.

“if USAI has a problem, semis are going to get dragged down alongside it and that's probably an opportunity to add them because I don't necessarily think that's the right thing, but I think that's what would happen.”

Bessant does not have ultimate decision authority on economic policy; Trump retains final decision-making power even on economic matters, and evidence suggests bad news does not reach Trump, creating an information problem similar to dysfunctional organizations where CEOs filter out negative information.

“I've heard that bad news does not get reported to Trump. I've heard this from multiple different people that don't know each other. And I've worked for organizations where the CEO doesn't like to get told bad news and so he doesn't. And it those aren't good organizations. Those are companies that don't do well.”

The US has higher military casualty counts than China over the last 30 years, making it harder for Global South nations to accept Western moral criticisms of Chinese conduct, especially when China offers practical economic benefits through infrastructure and technology.

“Nobody's got a higher body count than America in the last 30 years. And I say that not because I hate America, but simply as I look at this as an objective analyst and go, I don't think the rest of the world is going to have the hang-ups of using Chinese equipment that will better their lives the way a lot of American analysts and investors think they will.”

China can now leverage its dominance in solar panels, EV production, and lithium-ion battery manufacturing as a sales pitch to other nations to reduce oil dependence and dollar exposure, while simultaneously offering yuan swap lines to further de-dollarize global trade.

“they just showed a whole bunch of potential customers, hey, watch what we can do. We by using our solar panels, our EV setups, uh, our EVs, our battery array setups, which oh, by the way, China dominates the production of globally. you can shift your oil consumption down meaningfully and begin to isolate yourself or hedge yourself from the oil policy and the foreign policy of the United States. So, let us sell you a bunch of solar panels. Let us sell you a bunch of EVs. Let us sell you a bunch of lithium ion battery arrays.”

The US, UK, Japan, Korea, and Germany have simultaneously shifted from being structural creditors of the global economy (running surpluses) to borrowers in order to fund defense spending, a coordinated policy shift that appears to have been orchestrated within the last 3 weeks and represents a transition to 'defense stimulus' comparable to COVID consumer stimulus.

“in 3 weeks time the US, the UK, the Koreans and the Japanese all seem to come to the same idea simultaneously, which is and the Germans, excuse me, as well. They all came to the same idea, which is, hey, we need growth. We need supply chains. Let's all borrow money and build our defense base.”

Bessant's plan to lower oil prices to $50-60 per barrel and increase US oil production by 3 million barrels per day equivalent was declared impossible by oil analysts Bessant consulted, but Bessant rejected this advice, and the plan has failed entirely with the 'three arrows' strategy now in the toilet.

“when he said he was going to lower oil prices down to 50 60 bucks and he was going to grow production by 3 million barrels a day of equivalent as part of his three arrows plan. And I know for a fact that he had oil analysts telling him that was impossible. and he told those oil analysts, I don't believe you. And yet here we are a year and a half later and guess what? That part of the three arrows, actually the whole three arrows are all right in the toilet”

Bessant told Tucker Carlson in April 2025 that the US has all the leverage and China doesn't, but within two months he reversed this position, suggesting either he was engaging in bravado, expressing dogma rooted in anti-China ideology, or failing to communicate honestly to President Trump about US geopolitical reality.

“when he was on with Tucker Carlson in April of 2025 and he told Tucker Carlson with a straight face that we have we as the deter nation have all the leverage, not the Chinese. Within two months, he was eating his words, which was very obvious at the time. So was that bravado? Was that you know just dogma since he really does not like China and has not liked China for a long time? I don't know.”

The US has a strategic plan to shift toward Hamiltonian economics (high tariffs, gold settlement) as the north star, but the tactical execution of that plan (particularly the Iran war) is failing and not achieving strategic objectives, creating a gap between strategy and execution.

“I think they have a north star they are aiming for which is this Hamiltonian economics that we discussed uh earlier that Bessant talked about four weeks ago. Tactically, I think they're just messing it up as they go. This Iran thing is just a disaster in terms of trying to achieve that. It is not working out for them the way they thought.”

In the last 10 months, gold was the US's number one export in 8 of 10 months, larger than pharmaceutical preparations, jet engines, or oil, suggesting the US government is actively building the commodity reserves that would be necessary for a gold-backed monetary system.

“in the last 10 months, eight of those 10 months, gold has been the US's number one export. Bigger than pharmaceutical preparations, bigger than jet engines, bigger than oil. Two months that it wasn't, it was oil and it was pharmaceutical preparations.”

Chinese AI has recently begun to threaten to disintermediate US AI models at the frontier, repeating a historical pattern Luke has seen 6-8 times in 25 years where Chinese products go from 'cheaper but worse' to 'cheaper and better' in various industries.

“Chinese AI is suddenly starting to threaten to disintermediate US AI models at the frontier, which is something that nobody thought possible, which again, to me, you know, the first time, you know, shame, you know, fool me once, shame on you, fool me twice, shame on me. You know, how about fool me six or seven times? How many times have we heard, you know, hey, the Chinese, they're cheaper, but they'll never be better.”

Oil prices did not move as high as Groman and Townsend expected despite the Hormuz closure lasting far longer than consensus anticipated, suggesting the normal relationship between supply shock and price response has been disrupted, likely by Chinese demand reduction and possible intervention.

“where we got it wrong was really twofold. Number one, the price obviously. Uh if you would have told me, hey, Hormuz is still going to be closed, I would have thought equity indices would be lower. I would have thought inflation higher and I would have thought oil higher.”

Forest for the Trees identifies developing economic bottlenecks through analysis of large amounts of publicly available data, because sectors benefiting from bottlenecks generate excess returns while those hurt by bottlenecks don't.

“We aggregate large amounts of publicly available data trying to identify developing economic bottlenecks. We're basically trying to see where excess returns will occur because in I've been doing this over 30 years now which is frightening to say and in my experience sectors that are set to benefit from economic bottlenecks earn excess returns and those that get hurt by it don't.”