Luke Gromen: Bonds Are Now "Un-investable"

He sees real rates being deeply unfavorable going forward

We find ourselves in a time of transition, one that may increasingly be later described as upheaval.

In a week, we'll have a new US President, which will bring change both to the US and geopolitical theatres.

We already have a new interest rate regime as the world's major central banks have pivoted back to cutting rates.

And we may be seeing the start of a new era in bond yields, which have been marching higher despite the wishes of the central planners. If this continues as a secular trend, this higher cost of debt could prove destabilizing to the world's hundreds of $trillions in debt and entitlement programs.

To find out where this all is likely headed, and what investors should be tracking most closely right now, we're fortunate to welcome Luke Gromen, founder of macro research firm FFTT, LLC, back to the program.

In a nutshell, Luke sees the central planners as trapped; increasingly forced to cut rates and conduct yield curve control moving forward. As a result, he sees mid- to long-term sovereign bonds (especially of Western countries) as “un-investable”.

For a very important discussion with Luke, click here or on the video below:

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Adam’s Notes: Luke Gromen (recorded 10.28.24)

EXECUTIVE SUMMARY:

• Luke argues the Fed should have kept real interest rates negative for a longer period, at least two additional years, to manage the high debt-to-GDP ratio more sustainably. This would have preserved fiscal independence by allowing inflation to erode debt slowly. Instead, the Fed’s decision to raise rates aggressively back in 2022 increased interest obligations, narrowing policy options.

• Mid- to long-term U.S. sovereign bonds are increasingly “uninvestable” on a real basis, as rising inflation and constrained economic growth diminish their purchasing power. Luke points out that these bonds are increasingly unattractive relative to hard assets, as they provide a fixed yield that doesn’t keep pace with inflation, particularly for Western sovereign bonds.

• With debt levels at record highs, the Fed must keep interest rates low to sustain debt payments, effectively “engineering” inflation as a tool to manage debt serviceability. Luke sees this as a structural inflationary trend, which will benefit assets like