Equities Extremely Complacent; De-lever and Prepare to Buy The Dip

Luke Groman describes the Overton window of market possibilities as the widest he has seen in over 30 years, and his overriding near-term advice is to de-lever completely. He argues that unprecedented events are occurring with increasing frequency and that investors who hold gold and carry no leverage will be well positioned over a five to ten year horizon, but surviving near-term volatility is the prerequisite for capturing that outcome.

FFTT projected from the start that the Iran war would last far longer than the Wall Street consensus of three to four weeks and that the Strait of Hormuz would remain effectively closed through at least July 4th, a call that proved accurate as of July 29th. The S&P fell roughly 9 percent in March while oil and rates rose significantly. Groman argues China's ability to cut oil imports by 3 to 4 million barrels per day was more impactful than incremental leakage through the strait, and that it is in China's strategic interest to extend the war as long as oil prices remain manageable for them, since a US quagmire is directly beneficial to China. A strategy of choking off China by closing the strait would hurt US allies, whose bond markets would break first, before affecting China.

Ten-year yields are up 70 basis points since the war began, directly contradicting widespread predictions of a flight-to-safety bond rally. Groman notes that yields have risen rather than fallen in every major stress event since 2020, including COVID, the 2022 Fed tightening cycle, the SIVB and Signature Bank failures, Liberation Day, and the Iran war. The historically problematic yield range for markets has been 4.6 to 4.9 percent, with Trump and Bessent's apparent tolerance having risen to around 4.65 to 4.7 percent. Bessent's three-arrows fiscal program is described as effectively dead as a result of the war, leaving the US more sensitive to rising yields given higher debt levels.

Global central banks stopped buying Treasuries on a net basis in 2014 and their holdings are actually down over the last 12 years. That demand gap was papered over by regulatory changes that effectively acted as delayed quantitative easing. A Fed white paper from October 2025 showed that since 2022, 37 percent of net Treasury note and bond issuance was absorbed by Cayman Islands hedge funds running the basis trade on massive leverage. When equity volatility rises, risk managers force de-grossing across the entire book, turning the largest marginal buyer of Treasuries over four years into a forced seller. This self-reinforcing loop of rising equity volatility, Treasury selling, rising yields, and further de-grossing has triggered dollar liquidity injections from authorities each time it has appeared, including roughly 600 billion dollars per month at the peak of the 2020 crisis.

Equity markets are described as extraordinarily complacent relative to what is occurring in western sovereign bond markets. Highly valued technology companies make up a very large share of US indices, need to keep borrowing, and face rising underlying rates, which Groman characterizes as a very bad combination. Equities priced in gold are still down 40 percent since the January 2000 dot-com highs, and the S&P 500 total return is down 21 percent since January 2022 when the Fed began hiking. The equity rally is characterized as reflecting currency debasement rather than fundamental value creation, analogous to Venezuela's equity index being the top performer as its currency was destroyed.

The dollar has collapsed roughly 70 percent against gold over the last three years, with gold moving from approximately 1800 to 5400. China imported 173 tons of gold last month, the most in roughly 12 years and worth approximately 23 billion dollars, representing about a quarter of its monthly trade surplus of 105 billion dollars. China's strategic goal is not to replace the dollar with the yuan but to replace the US Treasury bond with gold as the world's primary reserve safe asset, internationalizing the yuan by allowing trading partners to settle in yuan and convert surplus yuan into gold through offshore clearing banks it has established in every major gold hub. Groman views gold as a core buy and projects it will continue rising secularly against all western currencies, with a scenario in which gold reaches roughly 16000 dollars implying China's monthly import bill would equal its full trade surplus, though that outcome would imply a significantly weaker dollar and materially higher inflation.

Groman recommends owning US electrical infrastructure through ETFs such as PAVE and GRID as a picks-and-shovels play on AI demand, reshoring, and grid rebuilding, noting that US electricity generation was essentially flat from 2004 to 2024 despite massive paper wealth growth. He also recommends Japanese industrial equities specifically, noting they have underperformed the headline Nikkei, as Japan is positioned to do the heavy lifting in reshoring the US defense base and electrical grid given that the US is avoiding Chinese industrial capacity and German industry is being beaten by Chinese competition.