Luke Gromen: The Bull Market That Loses You Money | #645
Luke Gromen discusses a major policy shift toward Hamiltonian economics (tariffs, protectionism, domestic industry protection) replacing 40 years of neoliberal globalization, with profound implications for asset allocation, inflation, gold, bonds, and real returns. He argues real rates must turn deeply negative to manage 120% debt-to-GDP, making traditional 60/40 portfolios vulnerable while gold, commodities, and selective equities positioned outside the U.S. become critical hedges.
Summary
Luke Gromen, founder of macro research firm Forest for the Trees, joins Meb Faber to discuss a fundamental shift in U.S. economic policy from neoliberal globalization to Hamiltonian economics—a framework emphasizing high tariffs, domestic manufacturing protection, and a neutral reserve asset. Gromen traces this shift across three different administrations (Trump, Biden, Trump again), citing explicit endorsements from Trump, Vice President J.D. Vance, Trade Representative Jameson Greer, and Treasury Secretary Scott Bessent. He characterizes this transition as comparable in magnitude to the fall of the Berlin Wall or Nixon closing the gold window.
The core problem Gromen identifies is the U.S. fiscal position: 120% debt-to-GDP, 6-7.8% structural fiscal deficits, with nearly 100% of tax receipts consumed by interest, entitlements, and veterans benefits. The nation cannot afford Treasury rates above approximately 4.6-4.8% without worsening deficits due to fiscal dominance. Under Hamiltonian economics, reshoring manufacturing requires reversing 40 years of offshoring-induced deflation, necessitating inflation and nominal wage growth. This creates a paradox: the government must pursue reflationary policies while holding rates down, requiring deeply negative real rates for 5-10 years—a scenario Gromen models after post-WWII debt reduction, which required negative real rates of -12 to -16% for five consecutive years.
Gromen argues the 60/40 stock-bond portfolio is strategically broken because investors only remember bonds' performance from 1982-2020 (a 38-year window of declining rates and capital appreciation), ignoring the 80-year period from 1901-1981 when long-duration bonds lost 1% annually to inflation. He emphasizes that under fiscal dominance and negative real rate regimes, bonds become "certificates of confiscation" and should be replaced with physical gold as the duration hedge.
On asset allocation, Gromen recommends a modernized Fugger portfolio: 25% gold, 25% cash, 25% real estate (preferably productive assets like farmland or timberland), and 25% dividend-paying equities, rebalanced dynamically. He personally holds over 25% in gold and maintains 20% cash for optionality, allowing him to buy dislocations. He argues everyone should hold at least 5-10% in physical gold as "table stakes," with allocations up to 25% defensible for those convinced of negative real rate scenarios.
On equities, Gromen recommends: (1) reducing U.S. equity exposure from typical 70% to approximately 50% given the U.S. representing 70% of global market cap (historically elevated); (2) diversifying into Japan, selective European manufacturing nations (Germany, Poland, Hungary), and emerging markets; (3) favoring industrials, particularly electrical infrastructure, aluminum, copper, and stainless steel due to a critical 20-year stagnation in U.S. electricity generation (flat from 2004-2023 despite soaring nominal GDP), indicating underinvestment in grid capacity. He specifically recommends GRID and PAVE ETFs and companies like Eaton, Parker Hannafin, Danaher, and Illinois Tool Works.
Gromen expresses significant skepticism about artificial intelligence valuations. While acknowledging AI's revolutionary potential, he argues the industry faces a "snake eating its tail" dynamic: massive capital borrowing competes with Treasury borrowing while reducing tax receipts through job displacement of high-income workers. With 100% of U.S. tax receipts already committed to interest, entitlements, and veterans benefits, AI-driven tax base erosion forces further deficit monetization. He draws parallels to the telecom boom (1996-2002), noting frontier companies were devastated while bankruptcy buyers prospered. He identifies valuation compression as imminent if Chinese AI proves competitive on price-to-performance, citing token usage data showing Chinese models growing from 3% to 45-50% of usage on OpenRouter in 18 months. He warns that thousand-time or hundred-time sales valuations collapse once "cheap and good enough" Chinese alternatives emerge, drawing from his Rust Belt perspective on how competitive dynamics typically resolve.
About this episode
Today’s guest is Luke Gromen, founder of the macro research firm Forest for the Trees, or FFTT. In today's episode, Luke argues that free trade is dead, and the US is pivoting to Hamiltonian economics: tariffs, reshoring, and a neutral reserve asset. He explains why the US Treasury can no longer be the world's reserve asset, why long bonds have become certificates of confiscation, and why gold belongs in every portfolio. To close, Luke explains why AI has become a snake eating its own tail on the government's tax base. (0:00) Introduction (2:38) The Stupid Washington Consensus and Hamiltonian Economics (9:14) Portfolio positioning and real rates in the current regime (15:19) Sponsor: Upwork (16:17) Importance of real returns and gold (21:18) US fiscal challenges and bond market outlook (27:21) Gold performance, allocation strategies, and diversification (35:09) Evaluating non-US equity markets and sectors (40:54) Investing in electricity and industrials (45:11) Risks, competition, and national security in the AI sector ----- Sponsor: Upwork is the world's largest human and AI-powered freelance marketplace to hire top talent—trusted by businesses and professionals worldwide. Follow Meb on X, LinkedIn and YouTube For detailed show notes, click here To learn more about our funds and follow us, subscribe to our mailing list or visit us at cambriainvestments.com ----- Follow The Idea Farm: X | LinkedIn | Instagram | TikTok ----- Interested in sponsoring the show? Email us at [email protected] ----- Past guests include Ed Thorp, Richard Thaler, Jeremy Grantham, Joel Greenblatt, Campbell Harvey, Ivy Zelman, Kathryn Kaminski, Jason Calacanis, Whitney Baker, Aswath Damodaran, Howard Marks, Tom Barton, and many more. ----- Meb's invested in some awesome startups that have passed along discounts to our listeners. Check them out here! ----- Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com).
Key Insights
- Gromen claims the shift toward Hamiltonian economics across three different administrations represents an equally significant policy rupture as the fall of the Berlin Wall or Nixon closing the gold window, making it a structural regime change rather than political theater.
- He argues the U.S. government mathematically cannot repay its debt in real terms without either achieving impossible productivity growth that doesn't reduce employment, or allowing real rates to decline to -12% to -16% for sustained periods, forcing a fiscal dominance scenario.
- Gromen contends that the 60/40 stock-bond portfolio represents a dangerous anachronism because investors extrapolate from 1982-2020 bond performance while ignoring the preceding 80-year period (1901-1981) when long-duration bonds averaged negative 1% real returns annually.
- He identifies a critical stagnation in U.S. electricity generation from 2004-2023 (flat output despite soaring nominal GDP) as proof of financialization and service-economy shift, arguing this must reverse for economic credibility and indicating massive infrastructure capex requirements ahead.
- Gromen claims AI companies face a structural profitability crisis where massive capital borrowing competes with Treasury financing while simultaneously reducing the tax base through white-collar job displacement, creating unsustainable fiscal dynamics.
- He argues that Chinese AI achieving cost parity or superiority (evidenced by token usage shifting from 3% to 45-50% toward Chinese models in 18 months) will collapse thousand-times-sales valuations to 2-5 times sales, paralleling previous U.S.-China manufacturing dynamics.
- Gromen asserts that gold's 5,000-year monetary history and 1-2% real return premium, combined with its multipolar-world price discovery advantages over manipulated CPI, makes it superior to conventional inflation hedges for real asset anchoring.
- He claims Treasury Secretary Bessent's recent currency market interventions and attempts at financial engineering (stable coins, FEMA swaps, yen intervention) represent "bargaining stage" denial rather than solutions, with mathematical acceptance of negative real rates being the inevitable end state.
Topics
Transcript
Tell us what the stupid Washington consensus is. The stupid Washington consensus is what Vice President J.D. Vance referred to the financializing of the U.S. economy. It's as big or bigger than the Berlin Wall coming down in 90 and every bit as big as Nixon closing the gold window in 71. 120% debt to GDP, multiple dumb wars. 120% debt to GDP, multiple dumb wars. Welcome to the MedFaber show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here. MedFaber is the co-founder and chief investment officer at Cambria…
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