Ep751: Luke Gromen – Start Small, Then Grow as You Learn

Andrew Stotz 00:01
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community. We know that to win in investing, you must take risk but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives. And I want to thank you for joining that mission today. Fellow risk takers this is your worst podcast host Andrew Stotz, from a Stotz Academy, and I'm here with featured guest, Luke Gromen. Luke, are you ready to join the mission? I am. I've been waiting for this for a long time. So I'm really excited to introduce you to the audience. Luke has 25 years of experience in equity research, equity research, sales and as a macro somatic analysts. He is the founder and president of macro somatic research firm F F TT, which he founded in early 2014. To address and leverage the opportunity he saw by applying what clients and former clients consistently described as his unique ability to connect the dots during a time when he saw an increasing siloing of perspectives occurring on Wall Street. And in corporate America. FFTT caters to institutions and sophisticated individuals by aggregating a wide variety of macroeconomic thematic and sector trends in an unconventional manner, to identify investable, developing economic bottlenecks for his clients. So Luke, take a minute and tell us about the unique value that you are bringing to this wonderful world. Well, thanks for having me on.

Luke Gromen 01:37
Andrew, it's great to be here, what we do, I think one of my clients that have best said you have a PhD in dot connecting. So I've just always had a unique ability to put dots together in a way where you see patterns recognize bottlenecks, because in my experience, it's always been sectors that either benefit from or are being hurt by a bottleneck, as it develops are those that either underperform or outperform perfect example of that is in 2005, and six in the United States, it didn't matter if you own the best home builder. If you own the best home builder, you only lost 80 or 90% of your money instead of 90 or 95% of your money. And so sector themes and applying macro and thematic themes to different sectors, I've always found to be very important and helpful. And so that's what we do. We aggregate a large amount of publicly available data in a unique manner to try to help our clients make money. And for

Andrew Stotz 02:47
clients that subscribe to us service, what do they get? What's the flow of those reports and the research?

Luke Gromen 02:54
Sure, so we have an institutional product offering a mass market product offering the institutional product offering as a full, much more in depth on a single theme report every Tuesday or Wednesday, and then tends to run anywhere from eight to 12 pages. And then every Friday, both our institutional clients and our mass market clients receive 10 most interesting things, which is a weekly report that looks at a disparate number of things. And that is really just things that grabbed my attention. And then we flush out what grabs my attention about them how it's making me think about the world, that particular sector, how different or similar that is relative to consensus about that particular theme. And we've gotten great feedback about that product. So that's there's it depends on the on the, the client, but it's, those are the deliverables that we offer to our clients,

Andrew Stotz 04:00
and how, like when I think about investing, and I think about connecting the dots, I mean, obviously there's a lot of people in the market, who are just, you know, really playing checkers, and they're just looking at the next move, as opposed to chess where they're looking at many moves ahead, which I suppose is what you're talking about connecting the dots, like if this happens, this is going to happen. And if that happens, this or that could happen. If that happens, then this is where you need to be exposed. But let's just remove the mass market out of there, out of the investing sphere and say, there's a lot of very sophisticated men and women out there investing. How could they miss these things and they miss a lot of things, but how?

Luke Gromen 04:44
Well if there's a lot of ways to miss important things, and Heaven knows I've missed a lot of important things as well and it's possible to miss them because you're too focused on the second and third derivatives and not just the very next move of the of checkers, and it's possible to miss them because the opposite, right, if you're just focused solely, you know, it's like if you if you navigate an airplane by looking at the ground as you go whizzing by, you know, if, if you're where I am in Midwestern United States and you head west, you're gonna be just fine for about 1000 1500 miles looking at the ground, navigate your airplane, and then about 15 or miles, and you're gonna hit them out. And then you're in trouble. So there's, that is the, the art relative to the science of, of investing. And when you then layer in human emotions, greed, fear when you layer in politics, there are certain things. You know, we saw it, I was just watching the rewatching, The Big Short the other night with my wife, it was on TV, and you can just see, there's a great quote from Upton Sinclair from the 1930s, it's difficult to get a man to understand something when his salary depends on his not understanding it. And sometimes that it's as simple as that. So it's, it varies, it depends. But that's, a lot of times it has to do with some blend of a time mismatch, you should be focused on the long term, you're focused on the short or vice versa. There's political issues. And there are different incentives, there are emotions, and they can all play a role in getting things wrong. Yeah,

Andrew Stotz 06:33
in fact, that movie, the more I watched it, the more I got annoyed, because I felt like they're totally missing the role of the government. I mean, that was just all terrible bankers, when really, the fact is that, you know, the demands on on Fannie Mae and Freddie Mac, were so you know, strong from the politicians from a behind the scenes perspective, you know, they weren't, they knew forcing Fannie Mae and Freddie Mac to take on lower quality loans had a cost to it. And they didn't go out to the public and say, We need to borrow $5 billion, or whatever that number is to be able to finance being going down and providing options and opportunities for people's housing. Instead, they went in a, you know, behind the scenes way of doing it. And it was such a masterful political move, because in the end, the last, the last, the last act of the 2008 crisis was then to have their committee blaming all on greedy bankers, when, in fact, if there hadn't been this giant sucking sound at Fannie Mae and Freddie Mac, to have to get these low quality loans, that wouldn't have been such they wouldn't have started such a frenzy. I'm curious what your thoughts on that.

Luke Gromen 07:49
For me it? What is it? Charlie Munger says show me an incentive. And I'll show you the outcome. Yep. You know, the entire system, from the politicians down to the bankers down to the homebuyers down to the more everyone was operating on sort of two key principles. Number one, home prices can never fall nationally because they never have even though that was wrong, because they had fallen into depression. And realistically, the underlying view there is we can't have another oppression. And then the second thing was a Zeitgeist, a cultural zeitgeist in America, from our leaders from our business leaders from our political leaders, who have get mine while the getting's good. And the there was, there was actually an acronym for it, why BG IBG, you'll be gone, I'll be gone. Do the deal. Because by the time it blows up, you'll be gone, I'll be gone, we will collect our bonuses. And, you know, or in the case of the politicians, by the time it blows up, it will be on somebody else's watch. And that's just sort of that's just sort of standard human operating procedure. Unfortunately, that's just human nature. It's the greed and fear dynamic that we could never get away from. And they thought it would be different this time. I'm Human Nature never changes.

Andrew Stotz 09:14
Yeah. When I started in 93, as a bank endless I would did 10 years covering the Thai banks. So I was covering them in the boom times. And then in 1997, when everything fell apart, and then following that the recovery and recapitalisation in the peak of our crisis, the non performing loans were 55% of total loans outstanding. No other banking system has ever faced something like that. And we just had a legal system that was you know, it was like that it was like the truck that the Beverly Hillbillies rode into arrive in Beverly Hills. It just was crushed under the weight and they had to reconstruct the whole banking, the whole bankruptcy system. But what's interesting when you compare most countries compared to the US is we don't have a secondary market for mortgages. So Any bank that's issuing mortgage loans is going to have those on their books until those expire. And, you know, you could argue that having a robust secondary market for mortgage loans is, you know, a valuable thing for an economy. But I would argue that Fannie Mae and Freddie Mac should have been privatized many, many years ago. So that they wouldn't be basically subsidized by government affiliation, and having very, very low interest rates. And therefore, Fannie Mae and Freddie Mac would have had a more reasonable long term rate. And the great thing about Fannie Mae and Freddie Mac, and the reason why there's a place for secondary, you know, organization is that, you know, you do need to if you want to get these long term loans, which we don't have, we don't 30 year mortgages in most countries around the world, but you could get there by having a private sector, secondary market, where they're funding it, you know, five, 6%, whatever. And, you know, you just have something that's much more realistic, but there's a business there of funding at five or 6%, and then bringing on, you know, you've got locked in long term funding, and you're bringing on long term assets, meaning long term mortgage bonds, there's nothing wrong with that. It's just when the government is able to manipulate what that secondary market is doing, then you totally distort the system.

Luke Gromen 11:19
Yeah, and it's one of these things where it's unintended consequences, right? So when you are the US and you start, you run up these deficits, and so you need to finance deficits. And so what do you do? Particularly in the late 90s, when you have Southeast Asia having their crisis, so all of a sudden, Southeast Asia is no longer in a position to finance us deficits. In the aftermath of the launch of the euro, Ben Bernanke, provide a wrote a paper gave a speech highlighted the data, the Europeans by and large, stopped financing us deficits. So you need to find you need to do you either need to slash government spending, which is never popular for the government at least. Or you need to find sort of a new sugar daddy to you know, foreign sugar daddy to finance you. And that foreign sugar daddy was China. And so you say, Okay, well, if we can't reduce these deficits, that we need to find some of the finance the deficits, okay, then we need to offshore, our industrial base to China and create these trade flows such that they send us stuff and we send them dollars, and they recycle those dollars back to finance our deficits. which sort of makes sense. If you then use those dollars to reinvest, retrain, restructure your economy, rather than just run up debt. So now by sort of deforming this side of the economy out of a unwillingness to right size government spending, you end up setting up this situation where now okay, we need, you know, for us for a little bit, we were able to offset it with a stock bubble. And then that burst. And Paul Krugman famously said, you know, citing comically, we need to create a housing bubble to offset the last demand from the stock bubble, because we need to keep the demand going to keep buying the stuff from China to keep running the deficits. But what they didn't say to finance the government. So there's this incentive then to sort of, okay, we need to get how do we get rates below their where they might otherwise be set in a free market, as you noted? And how do you do that you get the government involved, and you get them to guaranteeing loans that otherwise would not have been made. And it all sort of works until it doesn't work. And then when it stops working, you get what we had them. So it's it's, there's all of these connections that lead up to it. And it seems each discrete step along the way, often seems that they get the very least a non issue and at most a good idea or, but that's, you know, it's a symptom of flying the plane by looking at the ground as you go by. It's when you're constantly addressing things based on a two year election cycle based on you know, what is the best short term trade off to appease voters? You get yourself and it's not a problem unique to the US. It sort of happens around the world. Everyone has their domestic political pressures are constituencies they have to pander to. But that's how you get to that spot. Yeah.

Andrew Stotz 14:38
And if we look at that, let's just summarize what you've just said. Basically, when you said that sugar daddy, basically what your what your point is, is it buyers of US Treasuries, ultimately, is what the end result of that is whether that's, you know, OPEC and the Middle East, you know, in Saudi Arabia as an example, buying us Petro dollars using using them money they're generating from selling oil in dollars to then buy US Treasuries and then maybe Europe along the way, and then Asia and then China. But it's like, we're out. And the reason why it's important that you have buyers of US Treasuries, is that gives the US government, the Treasury Department, the flexibility of hey, we can spend, and we can borrow because there's, these guys need these treasuries, because we're shipping them so much money for the goods that they're sending us that they got to do something with it. And so now we're in a situation where we're running out of buyers for US Treasuries and that leaves, okay, can the Americans buy all those treasuries and think back to World War Two, when it was financed by many Americans buying war bonds. And so it can be, and that's when you look at the debt to GDP at the time of World War Two, there was a huge amount of that was finance, domestically, where people took their money out of, you know, commercial type of things and lend it to the government. But you know, nobody's got the capacity to do that. And now, you have only the end result is only the Fed can be the last the buyer of last resort, and you now have this incredible amount of crowding out, it seems it's either happening or is going to happen. So where does it go from here?

Luke Gromen 16:28
It goes to one or two places, and it might go to both places, it probably will go to both places. You know, the place number one is a severe deflationary crisis. Featuring a strong dollar, weak emerging market currencies, emerging markets rapidly selling down Treasury holdings FX reserves, to try to defend their currencies. And then it goes to probably a very, on the other side of it, very inflationary outcome, because ultimately, this success of the system has bred its own demise of this of this dollar recycling this mercantilist system, where the where the rest of the world sends us stuff, and we send them dollars, and they recycle it into our capital markets, and in particular Treasury markets. It's been very successful. And as a result, foreigners have about $7.6 trillion in treasuries. So this is a very different setup than 1997. So in 1997, in Southeast Asia, the US net international investment position was I think negative 3% of GDP, give or take, maybe it was negative six or seven. But that's important. what that number means is that foreigners on six or 7% of US GDP more of us assets than we own up there. So it was relatively balanced. In practical terms, what that means is once the crisis hit in Southeast Asia in 1997, they sell down FX reserves, they don't have that many, they sell dollar assets to get dollars to defend the currencies. And then when they run out. Thai baht, Indonesian rupee all of it gets devalued, overnight, inflation rates up crisis, all the sort of the worst parts of that. The but that's important from a flow perspective. Because from the American perspective, the way the cycle has always worked is the Fed raises rates, rates go up, American rates go up, American dollar goes up, and it starts to squeeze, Southeast Asian, once they run out of dollar assets with which to defend their currencies. They have to devalue, asset prices collapse, economies collapse, and then. So the problem is at the periphery of America, not in America, and then we can come in with dollars that we can buy up assets on the cheap Fed can lower rates, wash, rinse, repeat cycle cycle starts a new, then that was the way it worked through the late 70s, the 80s into the 90s, even under the early 2000s 2008 change everything because this the problem was at the center, we were the America was was the epicenter of the crisis. And now will we fast forward. The success of the system has left the US net international investment position at negative 65% of US GDP. So now, foreigners own roughly $18 trillion more in dollar assets net than we own up theirs, including 7.6 trillion and treasury bonds. What this means in plain English is unlike in the late 90s, when Thailand and Indonesia can sell down only a little bit and then they run out of dollar assets and they have to devalue. Selling doesn't stop. Take another 100 billion. Take another 100 billion take another 100 billion they got 18 trillion that go. And the problem is at the same time, the US deficit has risen enormously. So the Treasury needs to finance 2 trillion of its own. The Fed is selling another trillion for QT. US banks have been regulated in the buying treasuries, they own 4 trillion in mortgage backs and the treasuries and they're having credit problems because of commercial real estate and rates haven't gone up. But guess what they're selling to try to raise capital treasuries. So you quickly get and now foreigners have 7.6 trillion they can sell to raise dollars. So for the first, again, similar to await, but even worse, because the net international investigation position is way worse. The US Treasury market is going to go dysfunctional, the rates in the treasury market are going to hit levels that bankrupt the United States government before the rest of the world runs out of treasuries to sell, and

Andrew Stotz 20:53
how can the US government? I mean, let's just look at what options how can the US government use its its might to, to very unfairly possibly solve this problem? You know, one option is they can go? One option is they can say, China, you're now the enemy. And therefore, we're not going to pay you back. And then

Luke Gromen 21:24
they could do that. And that would, the challenge is almost all of the solutions to this point are akin to burning your furniture and your carpet to try to keep warm? Because in theory, absolutely. They the US theoretically could do that just we're writing off that debt. As a practical matter, China would say that's fine. The price on rare earth metals was now up 3,000% Starting tomorrow. And now DoD Defense Department of Defense United States goes, Oh, we thought we're going to spend 800 billion, you know, obviously, it's a small part, but their entire supply chain gets screwed up. China can go to Apple, biggest company America, one of the biggest companies in America. We're going to, you know, raise, we're going to put a tariff on all Apple products before they leave the country. We'll just take Apple's p&l. Yep. There's a lot of you know, we're gonna slow steam the chips, we're gonna I mean, there's just so

22:33
and there's Okay, so they will they can move out

Luke Gromen 22:35
of China, they but they can't move out of China in any time horizon that matters.

Andrew Stotz 22:39
Yeah, in Asia here, people all excited about Vietnam absorbing a lot of this stuff in China. But you know, there's a limit to what Vietnam can absorb. And Thailand, you know, Thailand, struggling to absorb the high tech stuff very difficult for Thailand. So let's just say that what you've just described is that China has tremendous leverage now because of the supply chain nature of what that's integrated into the system. So okay, so the US is just rough with China, but they can't put demands on but let's just say that, you know, the other thing is US has military power, to force and also they have FATCA power also. And FATCA power is enormous, you know, when you when for those people that aren't familiar with it, you know, basically, if an Australian woman goes to Hong Kong to start a business, and opens a bank account in Hong Kong, she's going to be faced with a US Treasury Department document that she's going to be required to fill out. And I always say to my American friends, imagine if you went to your local bank, and you open up a bank account, and there was a Chinese document from the Chinese government saying, You need to declare X, Y, Z, and maybe it was in Chinese language, but the the intrusiveness of FATCA. And the ability I think with Obama was really a one that really kicked off the use of the US government, the us of what I call the US global financial system, to punish Russia and Russian companies and oligarchs and all that stuff. And then that was like an awakening. And now we see that the US government uses and can use that power. And yes, you know, it's going to force a new currency block and all that. But you know, that's not going to be something that's going to be an alternative, anybody that's going to be pushed out of the US, the global US dollar system, financial system is gonna suffer tremendously. So are there other things that extreme things that the US government could do? Sure,

Luke Gromen 24:37
I mean, you can do what they did to Russia, right, just grab the FX reserves. But here too, it's like burning the furniture to stay warm. What was the fallout? Russia's Russia's economy has actually outperformed the American economy. Since then, number one, number two, that's a weapon that you get to use exactly once and arguably they used it against Iran in 2012, we essentially hyper inflated Iran's economy by kicking them out of Swift. The international banking system and the problem once you use that, you know, and that was a little bit like using that against Iran. I mean, there's, I can see there are possibly national security things that are classified that I don't know that it had to be used them. But using that weapon in 2012, against the Iran was a little bit like, like, like, play, you know, scheduling, being Alabama and scheduling like St. Mary's Sister, you know, Sisterhood of the blind as a football game. I mean, it just, you didn't need to have Alabama's line come up, and like it was just overkill as an elephant gun to kill a fly. Hmm. So you can do what Russia did, or what we did the Russia. But all that's gonna do is notify the rest of the world the second, the next time you disagree with the Americans on something, you're gonna take your money. And so guess what it does, it starts hurting the Treasury market. And so now when you see the US Treasury market has had its worst three year sell off in 220 years. This is the worst peak to try. Now, granted, it was from the lowest level in two 300 years, but the US Treasury market has never sold off for years in a row. Why? Well, part of the problem is who's gonna buy the long and if you're a foreigner, because let's look around the world and go through the countries that have at some point been enemies of the United States, Japan, Britain, Canada, Israel. And these are the guys that are our friends. Now. We've been Germany enemies with them or tense at some point, the Saudi all of them. And, you know, I heard people in OPEC who after we seized Russia's FX reserves, they found it quote unquote, horrifying. We need to start thinking about diversifying our reserves. So what have we seen, we've seen global central banks, buying gold at the fastest pace in seven years. And they're not buying treasuries, they global central banks have not bought a treasury on net in nine years, and that since 2014, so you can do those things. And those things will inflict pain. And those things will increase the dollar and inflict economic pain. There's no question about that. However, unlike because of that net international investment position, again, they own 7.6 trillion and treasuries, they own 11 trillion in dollar assets. And the United States because we've offshored, everything, we are now uniquely sensitive to asset prices, we have to have asset prices rise, or else the US economy comes on hinged. Our tax receipts last year, were down $500 billion 10%. With no change in employment, why it was all asset prices. So

Andrew Stotz 27:53
well. Just to understand that clearly, what you're saying is that we don't really had the manufacturing or productive capacity that could earn way out of that and produce the tax revenue that's needed. And you know, one of the things, one of the things I mean, I went to China and did my PhD there over the last 10 years or so, and I finished it in 2016. And I just went as a student, and was going back and forth between Thailand and China as I was working also. And you just see the intensity of the engineering focus on the infrastructure that they're building out. I mean, it's incredible. And even if you look at the infrastructure that was built out in 2008, you know, and then you look at America, yeah, they spent $10 trillion, and then nothing, it was spent on war. And it was spent on all of these things, there is nothing invested in this, you could say in 2008, when China for instance, really went through a QE type of thing, they had a can say at the end of it, we just installed 500, you know, or 5000 New kilometers of high speed trains, you know, between cities, there's nothing,

Luke Gromen 29:05
there was nothing there was no payback of the productivity. And so that's sort of the elephant in the room that people are waking up to, which is all of these financial weapons that the US wants to use. It's a little bit like the final scene of of platoon, where they're getting overrun, and they call in the air strike, and it's like, you know, get in your holes and hope for the best. And that net international investment position is so great. You think about the order of things. When was the last time in your my lifetimes in our business lifetimes that we saw a cycle where the UK gilt market blew up before any major emerging market where the US Treasury market went dysfunctional. September 22, march 23, October 22. I mean, the United States Treasury market, let's be clear crashed. People say what the Fed was gonna crash, something already crashed. The long bond in the America fell 20% In two months. When was the last time we saw that happen? Before China blew up before? You know, yes, the Russian ruble got hit and absolutely, but you know, you went from 70 to 120 to 60 to 100. And now it's back to 90 Like, like, that's kind of like, normal. It's not that out of the ordinary for Russia. For America, this net international investment position issue they have, so they have greater staying power than our treasury market, which makes it very, very tricky to weaponize the financial system, and it's literally like, are we willing to cut off our own leg? It's not well, you know, we will, you know, we'll cut our hand and they'll bleed out, it's now are we willing to hack up our own leg to try to, you know, use it to beat them? And it's like, well, maybe we should take a different strategy.

Andrew Stotz 31:15
And the net international position that you're talking about is a combination of bonds, and, you know, equity, but equity, I suspect, is this a small portion now? And really, the reason why it's a negative number is just because of so much money of foreigners being invested in US Treasuries. Would that be correct in saying that? Yeah,

Luke Gromen 31:35
it's the way to think about it is, is just the foreign country's piggy banks, it's the accumulated surpluses, that they have run against the United States over 3040 50, sometimes 60 years. And yeah, as you look at the 18,000,000,000,007 point 6 trillion are in Treasury bonds, there's probably a pretty good slug, I would guess another four or 5 trillion is probably mortgages. Maybe it's maybe it's two, three, drive, whatever, some corporates, and then there's a pretty decent slug of equities as well, and some other foreign assets, etc. So it's such a big number, and the United States, number one that numbers got so big number two, the US has allowed its economy to evolve such that consumer spending marginal consumer spending, marginal tax receipts, are all hypersensitive to asset prices. And then we've allowed our debt to GDP to get so high, that we can't afford a recession that a recession is so you, if you can't have a recession without having a debt crisis, and you can't have an asset price fall without having a recession. And you then who has the power, and if we know the foreigners won't run out of assets until we have an asset price decline. Then if we go like, you can see how this is gonna go, we can sort of beat our chests and say America, and we're going to weaponize the dollar. It's not going to end well, you know, it'll feel really good at the beginning. And then it's going to end the way it's ended over the last year. Why is the Treasury market breaking in? Why is the Treasury market trading like Dogecoin? Why is the Treasury market trading like a biotech with you know, 100 million in revenues? And no drug? Like, it makes no

Andrew Stotz 33:09
sense. Have you been to Bangkok? Have you been to Thailand ever? I've not. I want you to make some friends here in Thailand by answering the next question. And that is, I'd like to put yourself like for you to put yourself in the shoes of you know, a person in Thailand that has a reasonable amount of money. They're sitting on a pretty crappy market that hasn't really been that great. It's still it's got its timeline as let's say 250, large enough and liquid enough companies, which is bigger than Singapore, Philippines or Indonesia, or most other countries around Southeast Asia. So there is an alternative to keep your money in the Thai market, you also have alternatives to invest around the world, and many people have invested in the US and I've ridden the wave on the tech, the tech aspect. But now they're asking lots of questions. And they have no obligation or need to own anything US dollar. So on the one hand, they get freaked out, and they want to sell down because it's on the other hand, they see dollar assets rising, and it's really confusing and difficult for them. So they don't really know what to do. So let's just take, let's just look at a maybe let's look at a one and a five year view. Maybe like on a one year view, should a Thai person or a non US person take their money out of US assets or just ride the dollar or what should they do in relation to US dollar assets on

Luke Gromen 34:38
a one year time horizon, depending on you know, risk tolerance, you know, whatever, but I would own one year treasuries at 5%. Because again, there's two phases of this crisis. The first phase of this crisis is likely to be deflationary with the dollar going up. And then once the Treasury market really has an issue, we're going to print more money than we did in 2020, it's going to be a tidal wave, which is going to be great, it'd be bad for the dollar, but it's going to be great for everything else, it's gonna be great for emerging markets, it's going to be great for US equities. And so that's the two phases. So I wouldn't say I don't want to own dollar assets at all, I think for one year, I want to own you know, I would I would actually own you know, one year treasuries, I would own large blue cap, blue cap, blue chip and large cap blue chip. You US equities that pay a decent dividend that have some pricing power. And good balance sheets, I do not want to own long term US Treasuries, I would not own long term US debt dollar debt, I would stay at the short end, because I don't know the timing on all this.

Andrew Stotz 35:55
So just to be clear on that, it's because you're afraid that interest rates could balloon and you would get crushed on that long term debt holding, one

Luke Gromen 36:05
of two things is going to have interest rates are going to balloon or one of two things are most likely to happen. Either interest rates are going to balloon or interest rates are going to start to balloon and the Fed is going to come in and do more QE to stop them from ballooning any more, because the US government with its debt load cannot afford for them to balloon. The other alternative is we get a productivity miracle or the United States slashing his defense and entitlement spending by roughly 20 to 40%, immediately and permanently. And you and I both know that that's probably not gonna happen,

Andrew Stotz 36:38
that's not gonna happen. And for someone that says, I don't really care about the next year or two, what I care about is I got a huge amount of money. And I care about the next five or 10 years for my future generations and all that. And I'm not into trading that I'm willing to take a position and it could go against me for a while. But I really want to make the big long term trade, what would that be?

Luke Gromen 37:00
Probably put 10 to 20% by 15% Goal 5% in Bitcoin. And then I would take the other 80%. And here too, I want to avoid long term debt. I think long term debt, it probably is fine nominally. But it mathematically is highly likely to lose on a real basis. And so then I want to think about okay, equities, commodities. And then what does that look like in some real estate? And then what does that look like? As I think about those as more inflation sensitive harder assets than long term bonds that will better preserve purchasing power? Where do I want that, and I probably, I still want to have dollar assets. But I probably, you know, the US equity market cap is what like 60 65% of global, I would probably take the under on that I'd probably put 30 or 40 of it in us. And then the balance in probably Southeast Asia, India, maybe a little bit in Europe, if they can ever figure out how to get out of their own way. And I would probably spend morning sort of industrial type. But that's how I would think about the five year because I, I would be shocked if we were sitting here in five years. And I mean, the look, the debt crisis is it's here, it's accelerating. It's not even something like that is in the future. I would be shocked if it hasn't sort of gotten past the critical point. And sort of if we're not sort of in the data mob, this whole thing. That by that

Andrew Stotz 38:44
it's incredible where US is I mean, I can remember back in 1984 When I went to Kent State University after graduating from Hudson nearby, and I remember standing up and fighting people to say government shouldn't have all this debt. This was back in those days. And then as I went to Long Beach State later, and I moved to California, I was arguing that we shouldn't put tariffs on Japanese competition, you know, the Japanese automakers that we should let General Motors go bankrupt. And bankruptcy is a good thing. In the end, you're going to split that company up, and it's going to become a much stronger company. Of course. You know, how many times has General Motors gone bankrupt since 1985. It's just incredible, where America is gone, and you couldn't even imagine how debt could get out of control. So fascinating. Now it's time to share your worst investment ever. And since no one goes into their worst investment thinking and will be tell us a bit about the circumstances leading up to it then tell us your story. I kind of snuck in a lot of time to talk about strategy. So that's good.

Luke Gromen 39:47
So my worst investment ever was a private equity investment I made. I think I started investing in it in late 2000 I was in early 2001 was relatively early in my career the US was actually already in recession. It was a tech facing company that was a they basically were creating like I guess it was almost like an amazon before Amazon and Amazon was just like little book bookseller right. But they were selling like for building supplies basically like an Amazon of books supplies building up a database and it was really going to be for the more the industrial slash the b2b space really, I guess is how they used to call it right the business to business space and great founder had created and sold some tech companies before was was known was known by some friends of mine I had one of my dearest friends in the world went work there so I had somebody who was on the inside was telling me it was going really well. And so I invested and I was really happy with his getting there making progress. And then I made my first mistake, which was I got too big. And I got in terms of I mean, gosh, it was probably because I was getting it was my very dear friend, I have an inside read this guy's done this before. I have mutual friends who knew the other businesses that the guy sold excitement. So I betcha at one point, it was probably and now this is a private equity tech investment, not cashflow positive, I probably had it 25 30% of my liquid net worth or my total net worth, I was a pretty young guy then. But it was a lot of money. I was like, Oh, I have the time to make it up. Now. The good news is I knew I was young and I knew I would have time to make it up. But I really didn't think anything bad was gonna come up. And then I met the head guy, and I realized he was not a very good salesperson. And you never realized how important sales is they weren't always poopoo sales. I was a sales guy like I was, but being able to sell your idea. And as a founder in that area, what is critical and he wasn't a great salesperson. So that was kind of like okay, well, it's okay. The next issue, what was it? Oh, I had a friend of mine that I then we had a new analyst join us at the firm was working at and he was a tech I know I was in Cleveland Midwest, we've historically done sort of the rust belt, you know, industrials and retail consumer and healthcare. But nothing, you know, things that we were we knew never really had much exposure in tech didn't know tech. So we bring a couple of tech guys in, and I'm talking about it with this analyst. And he said, Well, what's the initial valuation that they raise the money at my told him what the value goes, Oh, you're gonna lose all your money? Like he knew, right? Yeah. Oh, no. I said, How can you possibly know that? And this is a guy who'd been in the Silicon Valley, if great, dude, he's great. And he goes, the value is too high, you started the value too high, you have to start it way lower for it to work out. I'm like, oh, so anyway, I'm still hearing from my buddy, that, hey, it's going well, it's going well, it's going well. And actually, as it turns out, they had a deal done with a major international conglomerate to buy it. For like, I'm gonna say it was like a five or eight times what I would have made five or eight times when we bought it. Right. Yeah. And if it was, me, again, I think this goes back to the sales like when you know, you have a good deal, like, you're the perfect is the enemy of the good. Right. And, and he had a good deal. And I think he was trying to get too cute, and maintain certain ownership traits and whatever. And then 911 happened. And after 911 happened, funding recession, and it just never so I ended up losing all my money. So I had a tax write off that I took the IRS, religiously 3000 bucks a year carry forward, carry forward, carry forward for a lot of years, you know, offsetting gains for a lot of years, other gains for a lot of years. And I learned a lot I learned yet number one position sizing is so important, like had a map and so big. Yeah, these things I mean, you know, private equity, it comes and goes it's a little bit of a lottery ticket, especially in sort of venture capital, not cash flowing, tech related stuff. getting too excited, and that being sort of removed because I knew you know, I had a buddy there and he was super excited and things were going well and that was probably mistake number two is getting too emotionally invested. And then I think, you know, the other side of it was just, you know, learning. No, you know, I didn't know any better to know, hey, the valuation was too rich from the start had I know that I never would have put all that money in, I might have done a little bit smaller, but I would have done it still, but it would have been a lot smaller. And then just the importance of sales is when you have a founder, and you meet the founder. And one of these types of things are the managing partner they've got to be they've got to blow your socks off on sort of every aspect or on, you know, numerous aspects, not just the product, but the marketing and the sales and feet, you know, they they're, you know, they got to kind of be like navy seals in terms of just really good at a lot of different things. And it was a great, it was a great learning experience. My friend and I are still very dear friends to this day didn't hurt our relationship at all, which is in the end all that really matters. But that was my worst investment.

Andrew Stotz 46:02
Yeah, I think my take away is, you know, also just the illiquidity aspect of, you know, private equity and private investment. Everybody wants to get in on at the bottom at the ground. When this thing started in the Italian restaurant around the corner, or the Thai restaurant around the corner, it's gonna be amazing, you know, everybody wants to get in. But the problem about all of that is it's just the liquidity is so you know, so severe, you know, the liquidity when I moved to Thailand in 1992, by 1985, of my good friend Dale came from Hudson also, where we grew up together. And he said, Let's start a coffee factory. And we started a coffee businesses now almost 30 years old, let's say, getting close to them. But it was a very illiquid investment. And I basically had to think, right from the beginning of really, when I started to have money, I was totally torn in my investment style, because I had this very illiquid investment. And we were just going into the 1997 crisis. So we needed funding, and nobody's gonna let you know, here's to American guys in Thailand, yeah, who's going to lend them money for startup at that time, in particular. So, you know, I had to fund and think about the funding of it, and think about the illiquidity of it, and think about the going to zero aspect. And then on the other hand, so here I have a huge, the huge risk. And it made me also realize that I had to kind of have a barbell strategy where I had very low risk levels. So some people were kind of surprised that I'm not a big risk taker on the stock side, part of it is because I was, you know, I was kind of stuck in a situation of a private investment that we couldn't really get out of, and, you know, eventually it worked out. But the point is, is that that those types of private investments and those types of non let's say, stock market listed things that have liquidity, you got to think very carefully, because it can be a trap, you know, when you do get trapped in and we, we were trapped for probably the first 10 years until it started. So based on what you learn from that this story, and what you continue to learn, let's think about a young person like yourself at that time, and opportunity of a lifetime comes, you know, you don't have a chance to perfectly understand the valuation, you don't have a chance to necessarily meet the founder, and you may or you may not, but what is the advice that you'd recommend for our listeners that would help them avoid this type of loss

Luke Gromen 48:31
of its position sizing, and, you know, because it's interesting I, I, at the same time, or shortly thereafter, I invested in a also an additional private equity deal much smaller. And it was a boring packaging company, literally, they made cardboard boxes. And then there was some issues, and they transitioned to making exhausted the machines. And this led to making housings, doors for the 737 by Boeing. And so there was a delay in the payout, but they had very good operators. And it took longer than I thought. But ultimately, if you looked at I made almost all my money if you would have taken the total loss of the first and then what the second one did, which was supposed to take five years, and I finally got paid out in 10 years. But when you look at the 10 years later, I almost made it all back with the second one. And again, it's the position sizing. If you had I just had I done the same size position for both. I would have zeroed out on this one and I would have tripled my money on this one. And I would have made you know, a nice respectable probably not risk adjusted but making monies making money I probably would have made 15 or 20% CAGR over that 10 year period. It's fine. That's perfect. Have an equity snap, and maybe it was 10 or 15. I've never done the math, but you get the point is, position sizing is so, so critical. So, so critical because you can be wrong and there's a margin for error and things happen like 911. Like you could no one could have predicted that true black swan and investment shut down after for a period of time and your cash flow burning business and you need funding and a 911 happens, you know, they're willing to do my to your fair Spanish ladies it's over. So that's what I would say the number one thing is just, if you in position sizing, start small, you can always get bigger, and you're better off chasing a higher valuation down the road of a more successful operation than starting too big, and then having to sort of kick in more money or be stuck. That's the key takeaway. For me.

Andrew Stotz 50:54
It's a little bit like, you know, a morning run solves a lot of problems. You know, like it solves generally it solves problems, position sizing, solves a lot of problems. And so that's a great lesson. Why don't you just tell us a little bit more about the best way for people to engage I, I follow you obviously, on Twitter, one of the things I am interested about what I see from you is that you're pretty, you're you've got a narrow focus, you're not trying to be on every platform and everywhere. You know, I appreciate what you're doing there. First, where's the best place for people to follow you? And second, if people want to engage in your product, buy your product or learn more about it? Where's the best place for them to do that? Sure.

Luke Gromen 51:40
So the best place to engage with me on the socials or the interwebs is Twitter X, I guess at now, as at Luke Grohmann, Liu KEGROMEN, all one word, they'll find I have a fairly active fee there. And if they're interested in learning more about our various research product offerings at f f t t dash llc.com. And they can learn more there about that.

Andrew Stotz 52:06
Right. We'll have links to that in the show notes. Ladies and gentlemen, last question. What's your number one goal for the next 12 months?

Luke Gromen 52:15
That's my number one goal for the next 12 months. I I think it's too maintain a healthy balance of helping clients being engaged in markets. And then you know, spending time with the things that really matter. My wife, I have three boys, you know, my, my fitness, and trying to do all those things. Those are the things I really, you know, you look at the sort of a pie chart of how I spend my life. It's, that's, that's, that's, that's probably at least 80% of it. So, but having a balance there and doing all of them? Well, I would say is my goal for the next 12 months. Yeah,

Andrew Stotz 53:05
and for those people that follow your Twitter, occasionally we'll see a baseball diamond there and a sunset and you know, you talking about your son's you know, successes. So you know, the balance of life is a critical thing. Well, listeners, there you have it another story of loss to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. As we conclude, Luke, I want to thank you again for joining our mission. And on behalf of a Stotz Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Luke Gromen 53:45
Now, I just would like to thank everybody for listening, and I appreciate it. And I really enjoyed the talk with you about this. It's a great format. I hadn't thought about this and this is 2020 some years ago. So it was cathartic. It was therapeutic.

Andrew Stotz 54:01
Amen. And that's a wrap on another great story to help us create, grow and protect our well fellow risk takers. Let's celebrate that today. We added one more person to our mission to help 1 million people reduce risk in their lives. This is your worst podcast hose Andrew Stotz saying. I'll see you on the upside.