BALTIMORE, MARYLAND – The U.S. government is burning through so much cash, there’s a shortage of dollars in the banking system.
That’s why the Federal Reserve had to start printing again late last year…
And the “Afghanistan” of Fed Interventions
We were following the “repo” story for months in these postcards before it became headline news.
At the time, I called it the plumbing underlying the world’s financial system. I knew it was going to blow up. And I knew the Federal Reserve would print money to fix it.
People still don’t get it, though. They treat this repo story as if it were some technical issue in an obscure corner of the market.
“The Fed just needs to flick the right switch, and everything will go back to normal…” they think.
Actually, the Treasury is dependent on this liquidity and will get more so. The Fed will now print money and expand its balance sheet for many years into the future. (It’s already funneled about $500 billion into the repo market since September 2019.)
This is the “War in Afghanistan” of Fed interventions… the beginning of a long and costly campaign that the Fed will find it impossible to extricate itself from. Mark these words.
Two More Recessions Ahead
There are powerful deflationary forces at work. This is normal given that we’ve been in a “valuations bear market” for 20 years.
I wrote about that here. To recap, stock market valuations have oscillated between “expensive” and “cheap” every generation or so – for the last 120 years – in a great wave.
Valuations reached a peak of “expensive” in 1999. They’re now on their way back to “cheap.”
Valuations bear markets in the past have typically included four to six recessions. We’ve had two so far. If I’m right about this, there are at least two more recessions to come. Maybe more.
But pitted against deflation and recession are the central bankers, who will move mountains to try to prevent these…
Why We’re Holding Our Savings in Gold
Central bankers are convinced they can fix deflation and uphold valuations by printing money, injecting liquidity, suppressing yield curves, and devaluing exchange rates.
Considering the collision of these forces, it’s clear to me that gold will be the world’s best-performing currency for the next few years.
There’s no other currency – including the U.S. dollar – that we’d like to hold our savings in. Especially now that interest rates are again going to zero across the world, and you don’t get penalized for holding gold.
So when Kate and I saw gold break out of its seven-year downtrend in 2018, we took the chance and converted all our assets to gold.
The Dow-to-Gold ratio is my barometer, showing me where we stand in the cycle.
It peaked at 41 in 1999 at the beginning of the valuations bear market. When the valuations bear market is over, the ratio will be under 5. It closed last week at 18.7.
– Tom Dyson