Luke Gromen: A U.S. Recession Remains Highly Unlikely

Tom Bodrovics welcomes back Luke Gromen, the founder and president of FFTT (Forest for the Trees). They discuss the implications of the recent 50 basis point interest rate cut by the Fed and its potential impact on the US fiscal situation. According to Gromen, this cut signifies growing concerns from the Fed about the US true interest expense reaching an unprecedented level since the COVID-19 pandemic. The Fed's two options are either allowing true interest expense to crowd out global dollar markets or cutting rates to alleviate it and stimulate receipts with a weaker dollar and higher inflation. Gromen also mentions four destabilizing events: oil prices exceeding $80 per barrel, an increased US deficit outlook, the Japanese 10-year yield breaking through, and a politically disruptive event occurring in August 2023, which led to a US downgrade. With tighter financial conditions for the private sector but loosest for the US government despite interest rate sensitivity, Gromen predicts a potential gap between the Fed funds rate and two-year discounts, suggesting a recession instead of a soft landing. Luke also touches upon the connection between treasury receipts and recessions, where they usually decrease significantly during a typical economic downturn. With the US already experiencing an 8% deficit of GDP, a potential recession could push it up to 13-14%, making the country less attractive for long-term debt investment, potentially leading to inflation and economic instability. Gromen believes that large investors or 'whales' are influencing financial markets by buying gold, stocks, and selling Treasuries in anticipation of the Fed's response to positive real rates. The scenario is likened to a movie where smaller traders react month-to-month while whales steer the economic 'Titanic'. The text also outlines two potential bearish scenarios: austerity measures from the US government causing a downturn in all markets or capital controls and taxation driving investors to seek safe havens outside of the US. The ongoing debate about introducing a sovereign wealth fund by both Trump and Biden administrations is discussed, with concerns over its feasibility given the current financial situation. Instead of running a surplus, governments plan to borrow money and invest it in assets, creating a 'sovereign wealth fund with an asterisk'. The speaker also explores alternative solutions like increasing spending or rebuilding domestic production capability but acknowledges that someone must ultimately own the $35 trillion in US debt. Luke discusses various economic ideas and scenarios impacting the global financial system, including the potential for revaluing gold mechanically to inject more money into the US Treasury or raising its price significantly to invest trillions into the Treasury General Account. The significance of a decreasing Baby Boomer entitlement spend due to an increase in mortality rates and China's approach of allowing the yuan to float against gold are also touched upon. Throughout, there is an emphasis on understanding trade-offs and making informed decisions based on economic realities. Time Stamp References:0:00 - Introduction0:46 - Feds 50-Basis Point Cut2:47 - 4-Destabilizing Things5:26 - Discounting Recession?10:15 - US Debt Buyers17:04 - Yellen & Stealth QE?19:47 - Yield Curve & Signals21:33 - Refinancing The Debt23:52 - Debt Oscillations25:52 - Math Doesn't Care29:50 - Political Decisions34:40 - Noise & Whales41:14 - Equity Bear Scenarios46:55 - Sovereign 'Debt' Fund50:40 - Grow Out of Debt?55:57 - Possible Solutions?59:05 - China & Dollar1:01:10 - BRICS & US Strategy1:07:18 - Gold/Oil Proxy1:11:30 - Carry Trade Unwind1:13:52 - Wrap Up Guest Links:Twitter: https://twitter.com/lukegromenWebsite: https://fftt-llc.com/ Luke Gromen began his career in the mid-1990s in Research at Midwest Research before moving over to institutional equity sales and becoming a partner. While in sales,