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Speaker A: Most people are still assuming dollar equals oil. They're assuming the denominator is the same. And I think they're different. And not even I think I know they're different. I can show it to you on the charts. S and P 500 total return since January 1, 2020. In dollars, up 75%. In gold, up 15%. In bitcoin, do... |
Speaker B: Welcome to bankless, where today we're exploring the frontier of energy empires and maybe the end of the petrodollar. |
Speaker A: Ooh. Whoa. |
Speaker B: This is Ryan. Sean Adams, and I'm here with David Hoffman. And as usual, we are here to help you become more bankless. Energy is the base layer of money. That's how our guest Luke Groman puts it in today's episode. We look at money and empire through the lens of energy costs, and we see why Luke says the pri... |
Speaker C: Understanding what Luke means when he talks about the relationship between energy and money is certainly interesting. I think any topic that unpacks a little bit of how money comes to be is worth discussing. Definitely learning from this episode. Before there was money in finance, there was just resources an... |
Speaker B: Bankless nation. We are very excited to bring on Luke Groman. He is the founder and president for Forest for the trees. That's FF TT, where he helps investors see the big picture so they can prepare for the future. And we're going to be doing some of that preparing, I hope, on the podcast today, because Luke... |
Speaker A: Thanks for having me on, guys. Great to be here. |
Speaker B: So let's start with a question, maybe just a frame up, the entire conversation we're about to have. I think every good investor has a thesis for how things will play out. It's just like something that they believe the market is fundamentally mispricing. So for bankless, our thesis has been, hey, the world do... |
Speaker A: I think the market is not seeing that. I guess two things. Number one, the productivity enhancements implied by AI, humanoid robotics, etcetera, are, over time, exponentially deflationary and fundamentally incompatible as a result with the global sovereign debt backed and based monetary system. What does tha... |
Speaker C: Can you illustrate? Why does it mean that? |
Speaker A: Simple. Because I just saw in Korea there's a Starbucks running with two people and 100 robots. There was an article on Rethink X last month, earlier this month actually suggesting that wages, that humanoid robotics wages will go towards a dollar by 2035 and $0.10 by 2045 an hour. Who can afford their studen... |
Speaker B: So, Luke, you really think the market really hasn't priced these things in, and you're kind of like maybe front running this? I want to ask you to give us an energy lens on things, because this is something we've not really explored deeply in our content. We've explored all sorts of different lenses on, like... |
Speaker A: Energy is the base layer of money. Why? Because human life is finite. As much as we'd all like to live forever, none of us are going to live forever. Okay, so if we have finite lifetime, during our lifetime, we work. How do we work? We expend energy. So when we work, we work for money. Money comes to us. Wor... |
Speaker B: Okay, so do the central bankers know this? Does the Fed know this? Does treasury know this? Does, do the lawmakers know this? Does the, does the president, like, know this? How come we have this energy blindness? How come so many people, if energy is the base layer of money, how come people so many people ha... |
Speaker A: Sure. Because you get the media to tell people that you're not in Iraq because of the oil, it's because of freedom, it's because of weapons of mass destruction. Why is there something called the Carter doctrine that existed from the seventies up until just recently, which translates to no Russians in the Mid... |
Speaker B: I'm going to call the US an empire for a second. I don't know if you use that framing, but I've heard others use that framing, so let's go with that. To what extent do you think every empire in history has based their empire on having access and securing a cheap source of energy? Is that a thing that is just... |
Speaker A: It's central to the life of empire. It's central to the life of every living thing on this planet. Right? Energy is just food. You stop eating, you're going to die. Full stop. I can tell you within roughly a couple days when it'll happen. So you have to secure enough energy. There's something called, there's... |
Speaker C: When we've done macro episodes talking about, like, the primacy of the us dollar, there's always kind of this connotation of an arc to the dollar. And like, growing up as a child, maybe it was just because I was naive, maybe. Maybe it was because in the United States was in good times in the nineties when it... |
Speaker A: I think it's well underway. I think when you, again, when you watch the behavior of players at the highest level, I think it's been well underway for ten years. So when global central banks stop buying treasury bonds and buy gold instead, they're telling you, in essence, we are nervous about the purchasing p... |
Speaker B: It's really interesting when you're looking through an energy lens and you're looking at what is money? And you're answering that question. We often talk about money as a store of value, medium exchange unit of account. You could just add, I guess the suffix for energy. At the end of each of those, what is a... |
Speaker A: Oil is still. You can look at that chart, right? Especially if we take out traditional biomass out of it. We're talking about coal, we're talking about oil, we're talking about gas, and then there's nuclear, renewables and everything else. And it's oil. Eyeballing it looks like it's probably still 40% of the... |
Speaker B: And so I guess a follow up to this. One thing I've, I've just learned in my investing journey, and this is probably one of the most important learning lessons in general, is pick your denominator very wisely for how you measure investment returns. It's like, what is your denominator? Is it dollars? Or maybe ... |
Speaker A: I think about, when I think about what oil is, I think gold is just a proxy. I think about bitcoin. Bitcoin is just a proxy through the proof of work expenditure of energy, gold. You have to expend energy to mine it and refine it. And then you have it, you hold it, and there it is. So I think about the denom... |
Speaker B: So you said a few things before. So it seems like gold is better able to preserve its oil, its energy purchasing power. And you've said this gold is re becoming an oil currency, which is interesting and maybe taking some of the place of the dollar and the petrodollar at just like the highest of levels. Luke,... |
Speaker A: Trey, question we can go back to 1970. US oil production was peaking and rolling over. We were the worlds biggest oil producer. It was starting to roll over and you could see that it was going to leave us dangerously dependent on the Middle east. We were starting to see oil imports rise, what have you. You c... |
Speaker B: I think this is part of the reason that many of us have an energy blindness, is because the last 40 years, energy has been relatively cheap. So we've just lived in that world. We've never lived in a world of energy costs, spikes and this type of thing. But, Luke, before we get into how this affects the monet... |
Speaker A: I think you can always. It's always a question of what's the miracle and what are the second derivative impacts? Right. So AI can be a productivity miracle. And what are we going to do with the 10% of population that's unemployed by AI? Or are they all. The happy version of that is, oh, they're all going to ... |
Speaker C: So we have been in a paradigm of the petrodollar, which I'm sure bankless listeners are familiar with that term, like the formal coupling of basically energy, petrol and the dollar. And this has been like the equilibrium that we've been in for many, many decades, and we've been watching over in the east, Chi... |
Speaker A: Well, I think the dollar is going to remain the reserve currency, but gold is empirically replacing treasuries as the primary reserve asset, and that will force a repricing much lower of the dollar. Ultimately, in my view, you can understand why energy is forcing a change by putting ourselves in the shoes of... |
Speaker B: That was great. I want to bring some data points to what you're saying. The first is this. This is a New York Times headline. China is buying gold like there's no tomorrow. And as you were saying there, Luke, this looks to be mostly physically settled. The global price of gold has reached its highest levels ... |
Speaker A: In essence, what this evolving new monetary system does is leave insufficient foreign demand for treasuries and exponentially rising supply of treasuries. And in any asset class, if you have more supply than demand, you're going to have the price go down. Well, when the price of a treasury goes down, rates g... |
Speaker B: Bond market at the expense of the currency. So every time they're making that choice, are they sort of just printing money, like who wins and who loses? In these scenarios here and the scenario you predict most. |
Speaker A: You could call up a chart of the S and P 500 over TLT, long bond ETF over the last five years. It looks like this. You call up Nasdaq over TLT. |
Speaker B: This is literally looking at hockey sticks. Yeah, hockey stick up. |
Speaker A: Hockey stick up. Bitcoin over TLT. Hockey stick up. Gold over TLT. Ever since global central bank stopped buying, treasury started buying gold in 2014, it's an exponential hockey stick. That is because that describes who wins and how they win. Home prices over TLT over the last five years. If theyre going to... |
Speaker B: Preston, you said the US will be just like Japan, but feel like Argentina. Can you explain that? What does that mean? |
Speaker A: Yeah, you can read any number of strategists and economists and investors who said, well, Japan's got way more debt than us and they're fine. And of course they've gotten a lot quieter in the last three to six months when all of a sudden the whole Japan's fine thing is not working out so well. But they had a... |
Speaker B: Sounds kind of bad. |
Speaker A: What's bad? What's bad, right? Like, what's normal for the spider is chaos for the fly. You own a bunch of long bonds. Yeah, you're going to get paid every dollar you wrote if you own a bunch of long term treasuries. But they're going to go from buying you diamonds to buying you cubic zirconia to buying you ... |
Speaker B: Look, I don't expect a lot of bankless listeners will own a lot of bonds. Right? It's just I think they're hedged into different asset sets. Definitely skews younger skews crypto, not the bondholder type. But in all these scenarios just described, bondholders take a massive haircut. I guess my question, thou... |
Speaker A: So the financial repression side, we're already ten plus years into that. In 2014, the Fed regulated us banks into holding more treasuries as high quality liquid assets. And we saw how that worked out last spring, right? With BTFP, the bank started selling treasuries, or they couldnt sell treasuries because ... |
Speaker B: You just revalue the gold. Because the US has a ton of gold, right? I mean, it's like the most gold reserves of any country in the world. It's like, what do you mean revalue it? You could just like name your price. I mean, don't they have to go for a market value? |
Speaker A: What's the market? Men with haircuts like mine and guns tell you what the price is. |
Speaker B: Wow. |
Speaker A: It's in the Federal Reserve operating manual. |
Speaker B: So there's levels. |
Speaker C: I didn't know the Fed has an operating manual. |
Speaker B: Right? |
Speaker A: There's a financial accounting standards manual. Yeah, you can look it up, google it. It's right there. And so, yeah, so what happens is Yellen gets $5 trillion deposited into the TGA and she buys back 5 trillion in bonds. Boom. Overnight. Now the us debt to GDP is between taking out 5 trillion in bonds and ... |
Speaker B: That's the author of the great taking. What is the thesis of that book? |
Speaker A: The thesis of that book is pretty straightforward and it's very meticulously researched and annotated and footnoted, which is over the last 30 years, us and global policymakers have quietly converted ownership of most financial assets from an ownership from legal ownership to. I forget the legal term, but it... |
Speaker B: They just take your assets, just confiscate the. |
Speaker A: They already took your assets. You just don't know it yet. Wow. That's the, the great taking was something that unnerved me in a way that I haven't been unnerved in some time. |
Speaker B: I'm adding that book to my reading list because it was just like so fascinating when I stumbled across it. Luke, maybe just two more things. We've talked about energy. We've talked about the monetary system change. Who's going to lose from that? Who the beneficiaries of that might be. I want to talk to you a... |
Speaker A: Why am I still bullish on the US? So the US has still, I think, the best legal system, property rights, etcetera, it's not using it to its advantage as I think it might eventually. And I think importantly, it's certain more areas, certain areas of the US I'm much more bullish on than others. And ultimately t... |
Speaker B: Well, hopefully the US can take its turn in the spanking machine, swallow its medicine and come back stronger. And it certainly seems like that's the necessary course of action and that it won't be the end of the world to go through that. |
Speaker A: Well, yeah. I mean, look, a big part of the US has been in this banking machine for 40 years. The US has spent the last 40 years subjugating the us middle and working classes to support the bond market. Wall street and Washington DC and Washington DC has generally made horrible decision after horrible decisi... |
Speaker B: What'd she do there? |
Speaker A: She came out and said, for 40 years we were taught that if someone wanted to send you cheap goods, you should send them a thank you note. Note. I would never ever again send China a thank you note. National Security advisor Jake Sullivan last year to the Brookings Institute went up and gave a speech. Us econ... |
Speaker B: So maybe this is exactly what the US needs then, Luke. |
Speaker A: 100% it is. |
Speaker B: Well, maybe to close this out. I guess the last question is for individuals when it comes to preparing, we talked about a world of high energy prices, at least denominated in dollar terms and fiat terms. And this whole monetary system change the shift. How do investors prepare for this? Does this, everything... |
Speaker A: Look, if I wanted to keep it really simple, I think 60 40 is dead. The 40% that's in bonds, I would keep 10% of the 40% or a quarter of it, maybe even half of it. If you're conservative in t bills at 5%, I've got a lot of t bills. I'm happy to clip a five and a quarter coupon and roll the paper. I see no int... |
Speaker B: That's it. It's not hard. |
Speaker A: Not hard. I mean, like I said, people say, oh, it's going to be so bad again. What's normal for the spider is chaos for the fly. |
Speaker B: And you keep the stocks. You think equities are going to perform okay in this environment? |
Speaker A: I think they'll be fine. I think they'll be fine. Like it's, it's I, and I think low leverage and low leverage and low consumer loans. Right? Like I wouldn't go taking out a huge mortgage to buy a house unless you're really cash flowing it and it's in some sort of luxury area or something like that. Like don... |
Speaker B: I think that go to the beach part is essential too, because what that implies is you're just kind of buying and holding and just relaxing. You're forgetting it. You're not trading all that volatility, you're not sweating those details and going on margin. |
Speaker A: Yeah, that's, people think they can trade this, why bother? What's happened? I mean, a why bother? But even if you were inclined to. Okay, good luck. But what's your analog for what's happening? Peak G. Boyle first global sovereign debt bubble in 100 years. A quadrillion in derivatives. The geopolitical situ... |
Speaker B: For the average investor listening, are not. |
Speaker A: Yeah, I think it's important to just understand that having low leverage is really, really important in terms of managing through this volatility. |
Speaker B: For the average investor, this is playing out now. How long will this take to play out? This entire thesis, does it happen quickly? Are we talking months to years or are we talking still? They could continue to kick the can and get another decade out of this old rusty cardinal. |
Speaker A: We're ten years into this shift US interest expenses above defense spending. You can see the geopolitical impacts. I think the world could look very different in a good way by the end of the next presidential. By the time we're sitting here getting ready for the election of 2028, I think the world could look... |
Speaker B: Luke, this has been so great. Thank you so much for joining us. I learned so much about energy and some of these related topics. It was great to pick your brain today and I think bankless listeners will benefit as well. So we certainly appreciate you. |
Speaker A: Thanks. For me on Ryan, it's great being here. |
Speaker B: Also, bankless nation, some action items for you today. You know, what you need to do is go sign up for Luke's weekly report. It is absolutely fantastic. Dives in deep in some of the topics we've been discussing today. We'll include a link in the show notes for that, as well as his Twitter account where we s... |
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