RANCHO SANTANA, NICARAGUA – OPEC (the Organization of the Petroleum Exporting Countries) fell apart and the price of oil collapsed this weekend. This is going to wreak havoc on the U.S. financial system…
Why is a collapsing oil price so devastating to the financial system? More below…
Last Days in Nicaragua
Greetings from Rancho Santana…
I’m writing this note to you from the veranda of our little house. Beneath me, the waves crash on the rocks. And in front of me, I have the crescent beach and the forested mountains.
My family is at the kitchen table doing their schoolwork. In a few days, we will leave here and return to the United States to visit Kate’s parents.
What will we find when we get there, I wonder? I’m worried.
Cow to the Slaughter
(If you’re squeamish about blood, DON’T read this section.)
This morning I watched the ranch hands slaughter a cow.
They tied it up and slit its throat with a long, narrow knife. The blood drained from its throat into a bucket. It died four minutes later.
When it was over, the cow was slumped on the floor, hanging from the ropes that had bound it.
I come from suburbia. I’ve never seen an animal get slaughtered before. It made me feel sick.
My first time seeing an animal get slaughtered
(Can’t say I didn’t warn you.)
Oil is the world’s most important commodity by market share. In dollar terms, the oil market is bigger than ALL other commodity markets, including gold, combined.
A lower oil price hurts the world economy for two reasons…
First, it hurts the global oil industry, which generates its profits by selling oil. When the oil price falls, the oil industry makes fewer profits. The weakest, most indebted oil companies in the world are in America and Canada. Eleven percent of junk bond issuers are oil and gas companies.
Second, it hurts the U.S. government because when the oil price falls, Saudi Arabia and other Middle Eastern oil producers generate fewer dollars from their oil production. They won’t be able to recycle as many dollars back to the U.S. government in the form of cheap loans.
The bottom line is, the fall in oil prices represents a SEVERE tightening of financial conditions.
This is why stock markets, commodities, and currencies are all crashing around the world. And it’s why the U.S. dollar and gold are soaring.
A Major Domino Just Fell…
What Comes Next
As we’ve said many times in these Postcards, the global financial system cannot tolerate a strong dollar. In order for liquidity to flow and for the banking system to function, the dollar must be weak.
They’re going to have to “fix” this by devaluing the dollar and all other paper currencies relative to gold.
We’ve been calling this fix a “global synchronized currency devaluation.”
This weekend’s oil news was a major domino to fall in this story. Next, the Federal Reserve and other central banks will accelerate their money printing and balance sheet expansions…
We’re also about to see debt bailouts, loan guarantees, helicopter money, and a big infrastructure upgrade plan.
I think we may even get free healthcare for coronavirus victims, paid, of course, with freshly printed money.
More Government Defaults Ahead
This weekend a government – Lebanon – announced it was going to default on a $1.2 billion bond issue. Over the next few years we’re going to see many more sovereign borrowers (aka governments) default on their debt, including the USA.
But unlike Lebanon, I don’t expect the USA to “hard default.”
The USA has a printing press. I expect it to default by watering down the value of the dollar relative to gold, food, clothing, energy, basic materials, etc.
Our strategy remains the same.
The global financial system is completely and irredeemably broken. We’re staying on the sidelines in physical gold until the Dow-to-Gold ratio has fallen below 5 and it’s safe to begin buying stocks again…
– Tom Dyson
P.S. The timing of this oil crash is fascinating. The Chinese and Russians have been the world’s largest purchasers of gold for years… They’ve bought hundreds of tons. They have also both reduced their use of U.S. Treasury securities as reserve assets. What if they’re trying to promote a new world monetary order that uses gold as the central reserve asset instead of U.S. government bonds?
The U.S. had a tottering, unstable, highly indebted economy that had begun to slow. Then there was an outbreak of coronavirus. The Americans were on the “back foot.” Putin saw America’s weakness and seized his opportunity. It wasn’t just an attack on the U.S. oil industry. It was an attack on the entire dollar-based financial system. The financial equivalent of Pearl Harbor…
(The Russians have their own oil. The Chinese can trade manufactured goods for Saudi Arabian oil using Chinese Yuan. When the Fed waters down the dollar, it won’t hurt Russia’s or China’s access to oil.)
On readers’ minds today, Tom’s “narcissism” and vulnerability in sharing his Postcards… market movements… and life insurance policies…
Reader comment: I’ve been reading your Postcards each day, and I continue to enjoy them. For what it’s worth, writing and sharing these postcards is not narcissistic. I chuckled at the one reader comment who chided you for them being narcissistic – but, oh, by the way, they’d keep reading them! I mean, by that person’s argument, ANY journal/diary ever published could be considered narcissistic.
People are funny. And people are critical. I think it’s brave and honorable what you’re doing with these postcards. It takes guts to share much of what you’ve divulged… and it takes guts to do what you and Kate are doing for your family. I think what you’re revealing in the postcards is personal and honest and meant to inspire those who read them, in small or big ways.
Sure, most people don’t have the “luxury” of being able to go off the grid as you’ve done. But I don’t think the “message” in your postcards is “all or nothing.” There are small ways to recenter one’s priorities and spend time more meaningfully with family, even from one’s own home. Anyhow, keep on keeping on!
Reader comment: I have read every word of your Postcards since you began writing them, but was never really inspired to respond until just now. I am just overwhelmed by the wisdom released by you and your readers, wisdom that might never have been shared if not for your generosity in revealing your own foibles, and your wonderful ability to express them. This open-hearted sharing you have inspired is a greater contribution to humanity than you might ever realize. Thank you and God bless you for that.
Reader comment: I enjoyed reading your “come to Jesus” moment about why Kate divorced you and the role depression played in your divorce. I’m glad you finally opened up about your divorce. You can’t go wrong with telling the truth. (I have a friend going through some tough times). God bless you and your family! Keep the postcards coming. Love reading about your adventures!
Reader comment: I was reading your post about curve control and noticed that the market has priced in a half-point rate cut, on the short end. If this happens in the next week or two it will bring down the near interest rate and maybe restore the curve. Would you expect the resulting “normalization” with longer rates higher than short rates again to stave off the yield curve inversion and prevent recession? I know you’re not interested in shorting bonds or going long the market, but wouldn’t this likely cause a short-term rise in the stock market as well as the long bonds?
Tom’s response: The long end of the curve has collapsed even faster than the short end and the curve. Anyway, I can’t predict short-term movements in the markets and every time I try, I get a headache. I’m sticking with my seat on the sidelines. I’ll let everyone else figure this stuff out.
Reader comment: It seems to me, and I’m sure many others, that you and Kate are providing an exciting and memorable time with your children and providing them lots of love and quality time. I have enjoyed your Postcards and journey. Kudos for your courage and decision to keep traveling. What a wonderful education for your children! Living in and experiencing so many different cultures is the best learning experience of all. I pray that you all stay healthy and are safe as you travel. You are filling your bucket list as you go, don’t look back.
Reader comment: Love your Postcards and I’ve been a fan of your investment ideas since the beginning of Palm Beach Letter. That said, you’ve declared your Dow-to-Gold strategy as binary, with no cash or other investments. But we also know you have put a great deal into Whole Life, which you also hold as a long-term, never-to-sell strategy towards your family’s legacy wealth.
Tom’s response: Kate and I have five whole life insurance policies. It’s been a great comfort to me that if I die, Kate and the kids will be well provided for and, in the meantime, it’s a great place – and a very safe place – to save money.
And, as always, please keep writing us at [email protected]! Kate and I read every note you send us.