MacroVoices #421 Luke Gromen: More Dollar Liquidity To Come…
Luke Gromen discusses his prediction that the US dollar will continue weakening in an orderly manner due to fiscal dominance, with the Fed forced to provide liquidity through various mechanisms. He argues that both geopolitical conflicts and potential US-China coordination support a managed dollar decline, making this bullish for gold, Bitcoin, and industrial assets.
Summary
In this March 2024 interview, Luke Gromen provides an update on his long-standing thesis about US dollar weakness, arguing that the 'Luke Groman moment' is finally approaching. He explains how the Fed's aggressive rate hiking in 2022 created a mistake by not allowing inflation to run higher for longer, given the US debt-to-GDP ratio of 120% versus Volcker's era of 35%. This has put the US into fiscal dominance, where higher rates become inflationary by pumping interest payments into the economy. Gromen details how treasury market dysfunction in October 2023 forced immediate policy responses, including Fed jawboning and Treasury Secretary Yellen's shift to front-end issuance, which he characterizes as effective QE. He speculates about a potential 'San Francisco Accord' following the Xi-Biden November meeting that could coordinate dollar weakness similar to the 1985 Plaza Accord with Japan. The discussion covers how banks are requesting permanent SLR exemptions for treasuries, which would essentially be 'QE through the banks.' Gromen sees both presidential candidates as supportive of industrial policy that would weaken the dollar, whether Trump's fossil fuel approach or Biden's green industrial policy. He recommends positions in gold, Bitcoin, electrical infrastructure, and US industrials while being underweight bonds, arguing that gold is becoming an oil currency for BRICS trade and will continue outperforming other commodities.
Key Insights
- The Fed made a critical error in 2022 by not letting inflation run higher for longer, given the US debt-to-GDP ratio of 120% compared to Volcker's 35% environment
- The US has entered fiscal dominance where higher interest rates become inflationary by pumping a trillion dollars in interest payments into the economy
- Treasury market dysfunction in October 2023 forced immediate policy responses, with the Fed jawboning the dollar down and Yellen shifting issuance to the front end
- Banks requesting permanent SLR exemptions for treasuries represents 'QE through the banks' - allowing unlimited treasury purchases with no capital requirements
- A potential 'San Francisco Accord' between the US and China may coordinate dollar weakness similar to the 1985 Plaza Accord that weakened the dollar from 166 to 85 against the yen
- Both Trump and Biden support industrial policy that would be inflationary and supportive of a weaker dollar, just in different directions (fossil fuels vs green energy)
- Gold is becoming an oil currency for BRICS trade, with the gold-to-CRB commodity ratio up almost 4x since Russia began accumulating gold in 2008
- The US geopolitically needs oil prices between $70-90 per barrel - below $70 cedes the market to Russia and Saudi Arabia, above $90 forces oil importers to sell treasuries
Topics
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