TLDR;
This episode of The Jay Martin Show features Luke Gromen and Grant Williams discussing the geopolitical conflict in the Middle East, focusing on the Strait of Hormuz and its implications for the global economy. They discuss the potential miscalculations by the US administration, the involvement of Russia and China, and the fragility of global food and energy systems. They also explore alternative financial systems and the potential shift away from the US dollar.
- The Strait of Hormuz is critical; its closure spells economic crisis.
- US may have miscalculated the conflict's scope and duration.
- Russia and China are playing significant roles, challenging US dominance.
- Global food and energy systems are fragile and at risk.
- A shift towards a multi-currency, gold-settlement system is possible.
Intro [0:00]
Jay Martin introduces Luke Gromen and Grant Williams, highlighting their expertise in macro analysis and investment strategy. He acknowledges their valuable research, which helped him maintain conviction in the metals and mining industry during challenging times. The conversation will focus on geopolitical conflicts, particularly in the Middle East, their root causes, and the potential impacts on investors.
The Core Thesis: Everything Hinges on Hormuz [3:37]
Luke Gromen asserts that the most critical factor right now is whether the Strait of Hormuz is open. If it remains closed, the global economy faces a severe crisis, potentially within two to three weeks, due to supply chain breakdowns. He notes a collective delusion, similar to the COVID-19 situation, where the obvious danger is ignored amid political pronouncements and fog of war.
Military Power vs Reality: Why It Hasn’t Been Reopened [5:43]
Gromen questions why the U.S., despite its powerful military, hasn't reopened the Strait of Hormuz. He suggests looking for "the dogs that don't bark," inverting the situation to examine why, if the U.S. has the capability to act, it hasn't done so. The reasons could range from relatively benign to existential threats to the global economy and the U.S. dollar's hegemony.
Propaganda, Fog of War & Information Breakdown [8:01]
Grant Williams emphasizes the importance of recognizing propaganda from all governments and keeping an open mind. He notes the difficulty in discerning truth from misinformation, as claims from various sides are often debunked in real-time. He advises against blindly trusting any single source and stresses the need to consider contradictory information.
Investor Strategy: Trade It or Stay Out [10:40]
Williams advises that only experienced traders should engage with the current market volatility. Others should either hold secure long-term investments or remain in cash. He notes that the conflict's resolution is crucial for everyone, as it affects the global economy, and even countries with oil reserves are likely to become anxious if the Strait remains closed for an extended period.
Who Wins & Who Loses in This Conflict [12:15]
Williams suggests that the U.S. might ironically be the least affected stakeholder due to its energy independence. He contrasts this with the traditional goal of regime change and establishing a pro-Western democracy, noting that the U.S. could potentially leave chaos behind without significant repercussions. Europe, however, faces major problems due to missile range and other factors.
Russia, China & the Expanding Conflict [18:55]
Groman states that the U.S. miscalculated the situation, as evidenced by communications from the U.S. military indicating they are trying to "build the plane while flying." He points to widespread evacuations of U.S. personnel and reports of significant damage to the Fifth Fleet base in Bahrain, which have not been widely reported. He also highlights Russia's involvement, suggesting they are supporting Iran in response to U.S. actions in Ukraine.
Why This Could Escalate [23:30]
Williams believes Trump is a gambler who has pushed his luck too far, miscalculating the situation in Iran after a quick win in Venezuela. He notes the topographical challenges of invading Iran and the potential dangers of Trump seeking an off-ramp that Iran might reject, which could force Trump into a corner and escalate the conflict.
Global Fragility: Food, Energy & Population Risk [27:02]
The discussion shifts to the fragility of global economies, with Japan, Europe, and the Gulf countries being the most vulnerable. The closure of the Strait affects not only oil exports but also food imports, particularly for the Gulf countries, which also face water insecurity and a high percentage of foreign nationals, potentially leading to population instability.
How a Global Economic Collapse Could Cascade [33:14]
Groman outlines a scenario where Australia, Southeast Asia, and the GCC face immediate shortages, leading to a cascade of economic collapse. He points out that Iran's strategy, according to the former head of the IRGC, is to collapse the global economy by driving oil prices to $120 a barrel. He warns that markets are complacent and that a resolution is unlikely given the conflicting interests and the perception of Iran as an irrational death cult.
Bond Market Signals & Policy Limitations [39:24]
Grant Williams explains that countries will prioritize domestic issues over international politics when faced with shortages. He notes that gold's performance is a clue to what will happen to financial markets, as it is being liquidated to raise cash. He adds that the complacency is reinforced by policymakers, but previous rescue measures won't work in this crisis due to higher debt levels.
Correlation Breakdown: Why 60/40 Fails Here [41:34]
Grant Williams emphasizes that the traditional 60/40 portfolio strategy will fail in the current environment due to correlation breakdown. He advises investors to consider hedges and long volatility, as commodities, bonds, and equities are all being sold.
The Suez Crisis Parallel Explained [43:08]
Grant Williams explains the parallels between the current situation and the 1956 Suez Crisis. He notes that Great Britain, then the global reserve currency, was weakened and tried to regain control of the Suez Canal but was undermined by the U.S., which saw an opportunity to elevate the dollar. This led to the dollar becoming the dominant currency.
A Potential “Suez Moment” for the U.S. [47:40]
Luke Gromen suggests that the best-case scenario now is a "Suez moment" for the U.S. He notes that if the U.S. attempts to send ground troops into Hormuz, it could go poorly unless they have a special weapon. He argues that the U.S. has gone from wanting to overthrow Iran to now asking them to manage the Strait responsibly, indicating a significant shift in negotiation.
Shift in Warfare: Missiles, Drones vs Naval Power [51:26]
Groman argues that the world will see a shift from naval powers to land powers due to missiles and drones. He points out that U.S. aircraft carriers retreated during the conflict, highlighting the obsolescence of carriers in modern warfare. He suggests that satellites, missiles, and drones are the new tools for controlling choke points.
What Replaces the Dollar? [57:39]
The discussion turns to potential replacements for the U.S. dollar. Luke Gromen notes that ships pricing in Yuan are coming and going, and he suggests that the dollar is like a Chuck-E-Cheese token, while the real prize is the goods. He envisions a multi-currency energy pricing system where transactions are settled in gold.
Petro-Yuan, Gold Settlement & New Trade Systems [1:00:30]
Luke Gromen explains that the system will be dictated by the factory power, which is China. He suggests transacting in any currency but settling net surpluses in gold. He points out that gold has already overtaken dollars in global FX reserves. He also references innovative products like Abacks in Singapore, which use gold collateral for immediate settlement.
Is This Gold Bull Run Durable? [1:09:12]
Grant Williams emphasizes that the conversation about alternative trade systems began years ago and involves gold becoming a bigger portion of reserves. He notes that every trade becomes a negotiation once people lose comfort with the dollar. He also points out that we are moving from an age of abundance to an age of scarcity, making commodities more important.
