A CABIN IN THE WOODS, MINNESOTA – I’ve spent the last two years – as we traveled around the world – studying economics and filling up notebooks with my observations.
I even dug into the plumbing beneath the world’s financial system when I saw the subtle stresses in the Fed Funds and repo markets.
I was able to predict the blow-up in the repo market in September 2019.
(I used to work for the repo desk at Citigroup. The knowledge of the repo market came in handy.)
The direction we’re going next has become very clear to me. Below, I’ll show you what I think is going to happen…
But first, greetings from the Minnesota backcountry…
The Endless Vacation
My family and I are a traveling family.
We have no home to live in, no possessions to play with, no school to attend, no office to commute to, no bills to pay each month (except Netflix).
We just drift from country to country, town to town, getting around by public transport, sleeping in hotels and Airbnbs, and homeschooling our kids on the road.
We call it our “Endless Vacation.”
We’ve been living like this for over two years now.
We’re currently in America, our “home” country. (Kate and the kids are U.S. citizens. I’m a U.S. resident.)
There isn’t a reliable public transport system in America. So for this trip, we’re using a car, a tent, and sleeping bags. We’re driving around the country, sleeping wherever we can pop our tent.
Over the last eight weeks, we’ve driven 4,000 miles across 12 states and set up camp over 25 times.
This week we’re in western Minnesota, staying at a cabin by a lake.
With Kate and the kids on our Minnesota dock
We’ve got Wi-Fi, hot water, a refrigerator, and two beds to sleep in. We’re going to spend a week here and recharge our batteries and catch up on our work.
Here are the boys doing their schoolwork this morning…
Dusty and Miles busy at work
Towering Overhang of Debt
Going back to the financial system…
There’s an enormous, towering overhang of debt right now. The most unstable parts of it stem from the giant, unregulated offshore market for dollar finance. We call this the eurodollar market.
The eurodollar market has inflated into a $57 trillion monster over the last 65 years. That’s nearly 3x the size of the American economy.
This happened on the back of the dollar’s status as the global reserve currency… globalization… the Fed’s manipulation of interest rates and stimulation of debt growth… and the United States’ willingness to run enormous trade deficits and supply the world with dollars.
The recession that arrived earlier this year forced the Federal Reserve to become the central bank for the world. The Fed has been supplying the dollars the rest of the world needs to roll over its enormous eurodollar debts.
The Fed does this through swap lines and repo facilities with other central banks. They use these facilities to send dollars to other countries. (I saw someone joke recently that the Fed now has branches in Ottawa, Brasilia, Copenhagen, Seoul, Mexico City, etc.)
But that won’t be enough.
Ultimately – if the Fed is going to continue down this path of being the world’s central bank – it’s going to have to start supplying dollars to banks, corporations, and shadow-financial companies.
This is going to raise all sorts of political and administrative headaches.
If the Fed doesn’t continue down this path, there’ll be an emerging market currency crisis and a worldwide economic depression. So I don’t think it has a choice.
The recession will also force the government to spend trillions of dollars on what it calls stimulus and support.
It’s similar to fighting a war. Government revenues decline because of the recession, while its obligations and liabilities soar. We get large deficits as a result.
Unfortunately, the government entered this crisis in bad financial shape already. That means the hole is going to be far bigger.
We’re about to see debt-to-GDP and deficit-to-GDP levels not seen since World War II.
If you look back in history, there have been many other times when governments borrowed too much money (including WWII).
And 100% of the time, those governments had to work off those debts afterwards, through a combination of debt restructuring and inflation.
There is no other way. To think this time will be different is very naive.
What It Means for Investors
As the world uses dollars for its store of savings, trillions of dollars will go looking for new, risk-free assets outside the dollar to shelter in.
Gold and silver will be the obvious choices.
There’s one other outcome I’m anticipating… although this is, frankly, an extreme outcome…
And that’s for the world to restructure the global monetary system WITHOUT the dollar as the main reserve asset.
The probability of this is a lot higher than most people think, so I take it seriously.
There are several alternatives global bankers and policymakers could use.
For example, they could use Special Drawing Rights (SDRs) – a currency basket issued by the IMF. They could use gold or cryptocurrency. Or they could even use a combination of all of them.
Gold is the natural choice, though.
The only issue is… They’ll have to hyperinflate the gold price from $1,700 an ounce, where it is as I write, to $10,000 or more.
Why? Gold’s market capitalization needs to be big enough to meet the world’s demand for a risk-free asset.
Dow-to-Gold Ratio Below 5
I think it’s this – the restructuring/inflation of the U.S. government’s debt… and the end of the current global monetary organization – that’ll drive the Dow-to-Gold ratio down below 5 in the next 10 years. (Remember, right now, it’s at 14.)
As I write, we’re in a lull.
Stock markets have rebounded.
And the Fed and the government have managed to spread enough freshly printed dollars around the world to keep the machine running and the debt overhang from collapsing.
The Fed has even managed to curtail its balance sheet expansion.
But it’s only a matter of time before that debt starts rumbling and crackling again… and then we’ll need another huge dose of stimulus from the Fed…
– Tom Dyson
P.S. One of these days, they’re going to let the inflation genie out of the lamp. The conditions have never been better for inflation. And remember, inflation is a psychological phenomenon. Once it starts, it’s very hard to reverse…
A reader weighs in on Tom’s tanker stocks update… while Minnesota residents welcome the Dysons to their state and suggest sites to see while there…
Reader comment: Glad you explained about the tanker stocks recently – I invested in one, based on your recommendation. I was about to sell it, for it is down 20%, but I’ll hold on.
Reader comment: Hi Tom and everyone, the new videos are great. They make this epic journey even more fun and exciting. Look forward to each new video.
Reader comment: Tom & family, welcome to our state. Hope you enjoy your time while in the “Land of 10,000 lakes.” A couple of suggestions if you have time. As a teaching moment for your kids, the Mississippi River begins in Lake Itasca and you are able to walk across it, which is pretty cool. From a financial standpoint, the Mall of America is also in Minnesota and is worth a look. Enjoy your Postcards and the videos. You have a lovely family.
Reader comment: I love to see your adventures traveling, especially up where I lived for 40 years. I lived in a cabin on a river for a little over a year. And I grew up in Minnesota. Minneapolis is probably not one of your preferred destinations right now, with what is happening there, but traveling north is much more wooded and beautiful, especially north of Lake Superior, if you have time to go that far. Just make sure you are in your tent before dark if you don’t want to get carried away by pesky flies.
Reader comment: Tom, nice place in Minnesota. Even with an Albert Bierstadt painting… We have a friend who built a cabin on one of the lakes up near Duluth. We were finally able to visit them a few years ago. Beautiful scenery, not many people. Cold when the sun goes down, even in mid-June. This is his saying about short summers in Duluth: “If summer falls on a Sunday, we’ll have a picnic.”
Tom’s note: Thanks for writing in! As always, please keep your questions and comments coming at [email protected]. I read them to Kate and the kids every day.