Luke Gromen: The Debt Dilemma and the Fork in the Road

Today’s podcast features the one, the only, the amazing Luke Gromen, the founder of Forest for the Trees.  We covered a LOT of territory, and it moves along so crisply you might find you have to listen to it at 1.0x speed.

We discussed:

• The flashing yellow warning signals being emitted by rapidly rising Japanese Government Bond (JGB) yields, unwinding Japanese Yen carry trades, and a mysteriously weak yen/USD.
• AI capital expenditures (CapEX) have shuffled over into bubble danger territory now that they are increasingly being funded with debt rather than from corporate cash flows.
• Bitcoin’s role as a rather pure play liquidity indicator seems to be indicating that global liquidity has suddenly dried up., possibly due to the yen carry trades unwinding.
• The fact that some “OG” Satoshi era wallets recently offloaded billions of dollars of Bitcoin is also a sign that deserves both scrutiny and consideration.
• Luke believes that some people, including Secretary Bessent, are inappropriately discounting China’s actual power and manufacturing dominance.
• Silicon Valley now has to contend with China as an actual competitor in technological progress. They haven’t had a peer competitor before.
• AI’s massive power demands (e.g., just one Meta data center consuming 0.5% of US natural gas daily production) will strain grids and natural gas supplies, with lags in infrastructure (e.g., 5-year generator waits) adding to the difficulties.
• Luke discussed the fact that US grid capacity has more-or-less stagnated since 2000, contrasted with China’s rapid expansion, which has added 100% of current US grid capacity over the past 10 years.
• Silver Market Dynamics: Industrial demand (solar + AI + ) is projected to exceed 100% of mine supply in 2025, forcing price rises or demand cuts; recent CME outage raises suspicions of market strains, including silver ETF fails-to-deliver.
• The K-Shaped Economy and Social Tensions: Widening wealth gaps (e.g., Michael Green’s poverty line debate around $140K for families) reflect a feudalistic divide, with the top 10% thriving while the bottom 90% struggles amid inflation, bankruptcies, weak consumer sentiment, and extremely weak hiring for recent college graduates.

But the main thread that wove throughout this podcast was The Debt Dilemma and the Fork in the Road we’re going to soon be forced to take.

Japan may well lead the way, and the choice is between saving its bond market (buy buying bonds with freshly printed yen)or saving the yen (by allowing the bond market to sell off and interest rates to rise to whatever heights are required).

Path A is a currency crisis (if not a collapse).

Path B is a bond crisis that will rapidly result in a government fiscal crisis (as well as any over-leveraged companies and individuals).

Following Japan will be Europe and the US, which, at 120% debt-to-GDP, also faces a choice between bond market collapse (deflationary crash) or currency debasement via yield curve control (inflationary, Argentina-like outcomes).

How did we get here?  Chronic short-termism since 1971 has led to problems requiring real investment and austerity, but instead we’ve been ‘treated’ to larger and larger print-a-thon bailouts of the financial class.  Also, Luke suggests oh-so-politely that perhaps allowing ourselves to be governed almost exclusively by lawyers wasn’t the best choice.

What’s Luke’s investment strategy for times like these? He advocates humility and diversification inspired by Jacob Fugger, the 15th-century German merchant.

The ‘Fugger’ portfolio places 25% each in:

1. Gold (no counterparty risk),
2. Land (productive yield),
3. Blue-chip/high-dividend equities, and
4. Cash

With such a portfolio, you are protected from each of the ‘fat tails’ (Path A and Path B from above) that will wipe out more conventional portfolios.  Along the way, you may need to rebalance as the risks tilt toward one path or the other, all while managing political/geopolitical exposures.

You will “lose some soldiers” with this approach, but you won’t be wiped out, Luke tells us.