WEST PALM BEACH, FLORIDA – The Treasury bond market is an $11 trillion market.

It’s the deepest, most liquid market in the world… the definition of AAA… the standard of risk-free… the guaranteed credit of the world’s richest country…

And it’s become horribly dislocated. More below…

Homeschooling Tools, Part Four

Kate and I have been homeschooling our children for years. And all this week I’ve been sharing some of our homeschooling tools with you. (Catch up here: Monday, Tuesday, and Wednesday.)

Here’s another one…

Google has a website called Google Arts and Culture.

Among many other cool educational programs, it offers virtual tours of over 500 of the world’s most famous art galleries and museums, including the British Museum, the Guggenheim, Musée d’Orsay and many others.

We’ll be “touring” many of these galleries with our kids over the next few weeks.

If you – or anyone you know – is having to homeschool children this week because their schools have closed, perhaps you’ll find this useful. (I’ll post more of our favorite homeschool resources every day.)

Treasury Dislocation

The chart below shows the premium – or what we call the discount to net asset value (NAV) – of the Vanguard Total Bond Fund (BND)…


BND is the world’s largest bond fund. It holds $269 billion worth of the world’s most creditworthy bonds. 63% of those are Treasury bonds.

Right now, BND is trading at a 6% discount to its NAV. As you can see from the chart, the only other time in its history that there’s been a discount similar in size to this was in 2008.

Jammed Up

The Treasury market is completely frozen. There are so few buyers, it’s impossible to trade Treasury bonds.

Money is so scarce that a 6% arbitrage has opened in what’s normally one of the most liquid ETFs on the planet. The chart above is a microcosm of this dislocation.

As you can imagine, if the Treasury market is jammed up, all other markets for bonds and credit instruments – from mortgages to corporate loans to junk bonds – are jammed up too.

In other words, the plumbing beneath the world’s financial system has totally seized up.

It’s like the patient’s heart has stopped beating, the ECG has flatlined, and the doctors have come rushing into the room and are desperately trying to resuscitate. But so far, there’s no response…

Why It’s Happening

Why is this happening? Two reasons, both of which I’ve been writing about for months…

1) The huge offshore market for dollars – called the Eurodollar market – is deflating.

2) The U.S. government’s gargantuan appetite for cash is overwhelming the market’s inventories… and causing a credit crunch.

Now superimpose the current state of panic and unwinding onto these already tight markets. Everyone’s trying to sell at the same time. And we’ve become stuck in a sort of self-reinforcing spiral of doom, where everything is being liquidated and everyone’s scrambling for cash… which is causing even bigger losses…

This is a dangerous situation for a bunch of reasons. But the biggest one is this: The U.S. government won’t be able to finance itself for much longer (because as things stand, it cannot sell bonds)… and the lights will soon go out.

In other words, it’s no exaggeration to say this is a matter of NATIONAL SECURITY.

Watch the Dollar

The U.S. dollar is the key to all this. The more it rises, the more “stuck” the whole system becomes, and the more things implode.

Currencies of countries like Mexico, Brazil, Turkey, and South Africa are starting to crumble. Trade is drying up. Businesses are running out of cash. The Treasury Secretary, Steve Mnuchin, is talking about 20% unemployment rates soon in the United States. And crucially for the people in charge, the government can’t roll over its debts.

They’re even talking about closing the stock market.

I assure you, the policymakers are – as I write – scratching away feverishly to reinflate the system. (I wrote about this yesterday.)

They haven’t managed to resuscitate it yet, but in my humble opinion, they will. And the main thing they’ll be working on is getting the U.S. dollar to go back down… not just against other currencies, but against everything.

So we need to watch the dollar. It’s the key battleground of this war.

The chart I’m watching is of the Bloomberg Dollar Index. It tracks a basket of 10 leading global currencies against the U.S. dollar. And it’s up 7.5% over the past 10 days.


– Tom Dyson

P.S. Please send me a message at [email protected] and let me know how the doctors, nurses, caretakers, technicians, and other health care workers in your life are coping with the coronavirus pandemic. I want to help them… somehow.

Like what you’re reading? Send your thoughts to [email protected].


Readers ask about the Dyson family reunification… the stock market… debt and loan repayment… and currency devaluation…

Reader comment: Love the writings, as always. Your and Bill’s family endeavors are equally important to provide insights as to how we are supposed to live among family and others, even after going through life’s tribulations. By showing love, kindness, compassion, respect, truthfulness, and the willingness to enhance the situation at hand for the benefit of all.

Reader question: I don’t know if I missed it, but I was wondering how you changed from a divorced couple with new partners to a reunited family traveling around the world. How did you approach Kate and how did you or her convince each other? Thank you for your Postcards. They are a fresh breeze in the ocean of economy newsletters.

Tom’s response: I told this story here.

Reader question: I’ve been enjoying your Postcards since you started writing them and I echo the same thoughts as the majority of the others following this journey… Congrats on overcoming your depression and finding true love with Kate and your children. For me, this is the second most important thing you’ll do on this Earth with the most important being the relationship you establish with Jesus Christ and sharing that faith throughout your life.

My question is: Why did they not close the stock market the first week into this coronavirus disaster? The major indexes are down 30% and trillions of dollars have been lost.

Tom’s response: I’m hearing a lot of speculation and chatter that they might close the markets soon. They have the perfect “political cover” for it in the coronavirus story. “We had to,” they’ll say. “To save the system.” I’m also hearing a lot of chatter that the Federal Reserve may begin buying stocks or banning short selling.

These are extreme actions… and they can only do them when things are so desperate, they won’t be criticized for it afterwards.

But please realize that none of these solutions will do any good in the long run. They’re all examples of short-term band aids at the expense of long term systemic health.

Ultimately, these interventions will lead to the bankruptcy of the U.S. government, corruption of our free markets, and big loss of prosperity in America… but they buy some extra time for the policymakers.

Reader question: What happens to all the federal, state, corporate, student, and individual debt? Is there any path to recovery and what will the world hold for our children and grandchildren?

Tom’s response: My guess is – and I’ve written this many times in these Postcards – the Fed will print enough money to make sure that anyone who owns any of these bonds will be repaid in full. So in nominal terms, there won’t be any defaults.

The trouble is, they’re going to be repaid in watered-down dollars that buy a lot fewer groceries and gold than the dollars they loaned in the first place.

Of course, foreigner creditors will see this coming. They won’t want to keep using U.S. treasury bonds for parking their sovereign reserves. So there will have to be a new international payments system that nations can use… both to keep score of their savings and to trade with one another.

As for our children and grandchildren… Well, I don’t know. My hope is, on the other side of all this pain is enlightenment, and our kids and grandkids inherit a financial system that’s much more stable, fair and efficient.

We’ll see… I think a big part of this answer will depend on how we respond to the crisis we find ourselves in right now.

Reader comment: I’m noting how gold prices have dropped sharply in the last few days. I’m guessing that a lot of people, like me, took your advice and switched much of their investments to gold, possibly partially accounting for its slight rise. But now they have stopped most of their buying, so gold settled down a little. I had heard that the gold market was kind of thin, but I didn’t realize you were so popular that your advice would influence so much.

Tom’s response: Please judge my advice on the performance of the Dow-to-Gold ratio. I’m agnostic about the gold price.

All I care about is that by going to the sidelines in gold for a few years, when the dust settles, I will be able to buy a lot more shares in the companies I love than if I’d bought those same companies in 2018 and 2019. So far, going to the sidelines in gold has worked out very well for us.

Reader comment: I have been reading your various columns and I do agree with your view on gold (have agreed for a long time). However on the other hand, it seems that given fiscal profligacy of U.S., the dollar may weaken over time versus various currencies.

So as an investor, whose home currency is not dollar (it’s actually Indian rupees for me, but nonetheless), how does one look at this investment equation?

Given that gold is priced in USD. Most of the investments mean taking a risk of my home currency strengthening against the USD… while hoping for a higher return on gold. Hence my overall return would be impacted and draw a lower return. What is your view, and any advice on how to play this trade?

Tom’s response: There’s going to a synchronized global currency devaluation against gold, and of all the currencies, the dollar will fall least. At least that’s been my prediction since I started writing these Postcards. I suspect the Indian rupee will fall much farther against gold than the dollar. Same goes for the Turkish lira, the Brazilian real, the South African rand, etc. Hard money (gold) is the only money I want to own.

And, as always, thank you for your comments and questions! Kate and I read every note you send us. Please keep writing us at [email protected].