Luke Gromen and Dave Collum #1493

Michael Farris (0:00)

What's up, everybody? Just want to let people know, provide a quick update, that all of my conversations go on Substack, both video and audio, ad-free, early. So if you like what I'm doing, want to support my work, please consider becoming a paid subscriber, and you can listen early and ad-free. Also, I've been getting some requests about can you still listen on Apple, Spotify and other platforms. Once you become a paid subscriber on Substack, it'll provide you an RSS feed. You can then take that link, and then listen to it on all those platforms as well, ad-free. So I appreciate all your support, and thank you very much. On this episode of Coffee and a Mike, Luke Gromen is the founder and president of Forest for the Trees, a macroeconomic research firm that serves institutional and private investors. He joins organic chemist Dave Collum to discuss the CPI report, the debt problem, what Kevin Warsh might do next, and much more. Please subscribe, like, and share this podcast. Ladies and gentlemen, the mic is on. I welcome Luke Gromen and Dave Collum.

Luke, Dave, good to see you guys again. Today, let me date stamp this.

Today is November the 10th, and it's 8:15 a.m. mountain time that we're recording.

I saw just before we came on, CPI number had already come out today. And, Luke, I'll turn it over to you.

Luke Gromen (1:39)

Four tenths, supposed to be three tenths, hot. Came in hot.

Dave Collum (1:45)

So the markets took a dip, but so did gold. I didn't know what the CPI did, but things are not predictable anymore, I've decided.

Luke Gromen (1:57)

Not in the short term.

Dave Collum (1:58)

No, they never are, actually. Yeah, so what do you have? Do you think the M2 money supply is a good measure for the CPI?

The substitute, how do you measure inflation?

Luke Gromen (2:16)

How do I measure inflation?

Dave Collum (2:18)

How do you measure inflation?

Luke Gromen (2:20)

I measure it. You know, to me, I still think the rate of government spending is a pretty good measure, because they're not building up a sovereign wealth fund. Right. So if I look at what debt grows, what outlays grow, maybe it's a little below that, but it's interesting, right? If you say outlays grow, you know, six or seven, you know, what's the price of meat done, Cager? I remember I got into a spat last time you and I were on this, speaking and talking offline about people getting worked up on the Internet. I was attacked for saying, you asked me this question last time, Dave, we talked about it. I said, I think, you know, the 8% Cager debt growth is a reasonable starting line of inflation. Let's say we haircut that 100, 200 basis points, it gets you a 6%, 7%.

And in that discussion with this person, you know, the Cager growth of meat inflation, of hamburger inflation over the last like 20 years, it's like 6%, 5.8%.

Dave Collum (3:23)

Well, M2 over 30 years has gone up 7% in your annual life. So here's what I want to bounce off. You have bounced it off almost every guest. I got in a discussion with a guy who we all know, he's very famous, he's very smart, and he thinks about many things.

He said, Dave, you have depended on historical metrics of valuation too much, and that you're underestimating how sustainable the high profit margins are of these big companies. I kept saying, well, if they're sustainable, then you also don't you have to change the stop using historic metrics of return then, uh, prospective return and I couldn't get them to sign off on that. It was driving me a little bananas. It was nuts on this one. And I've heard you're nuts many times, so it won't hurt my feelings.

Luke Gromen (4:17)

Um, I are the profit margins of these companies. I've heard the same thing, higher profit margins, therefore higher multiples, which is backwards according to grant them. That's a very good point.

I would I would I wrestle with and when I've seen this discussion, right, because we've seen this, you can look at corporate profit margins as a percentage of GDP and they've, you know, clearly hockey stick over the last whatever 15, 20 years. And what I come back to is, you know, when they stopped hockey sticking, you know, when they mean reverted, 2008, in fact, they went back to, right? And then 2020 And so I guess my answer to that is, are these profit margins higher, sustainable and therefore justify the higher valuations?

As long as there are no crises, as long as leverage can continue to be added, and as long as the government will keep bailing out these two big to fail companies, then these profit margins are sustainable up until we have a civil war or until we have significant political distress. Civil war is way too strong. We have political disruption to the point where the politicians get involved, and you have an outbreak of hard socialism, and then the profit margins really get hit, right? So that's when people say, oh, the profit margins are higher and secular and sustainable. They weren't in no way, right? So there's some portion of the margins, it's just leverage, right? It's just the leverage on unsustainable things and that's not sustainable.