DRIGGS, IDAHO – Last week, the European Central Bank (ECB) began explicitly controlling the yield curve. (The yield curve tracks interest rates, or yields, across the spectrum of government bond maturities.)

“The ECB is aiming to stop yields rising,” said the ECB’s chief economist. “Our objective is basically to make sure the yield curves do not move ahead of the economy…”

(The Australians also recently implemented this strategy. The Japanese have been doing it for five years. And as I’ve written before in these Postcards, the U.S. will likely start soon.)

More below…

Lost a Bet in Jodhpur

Greetings from Driggs, Idaho…

Not much to report today from the mountains, so here’s a throwback from our two-and-a-half-year trip around the world…

In 2019, we were in a small town in northwestern India called Jaisalmer. A man approached us. He introduced himself as Nando.

“Where are you going next on your travels?” Nando asked us.

“Jodhpur next week,” we answered.

“If you see me again in Jodhpur, will you buy me a beer?”

“Okay,” we said, but with very little hope of seeing Nando again. (Jodhpur is a city of more than 1 million people 200 miles east of Jaisalmer.)

This is Jodhpur a week later. And this is Nando (back, right). And here we are drinking the “beer” we owed him (actually, it’s apple juice)…


Lost a bet in Jodhpur

He saw us in a busy marketplace and came running over shouting.

People tried to scam us everywhere we went in India. It’s sad because we became guarded and untrusting of strangers.

We didn’t mind losing that bet to Nando, though. His wife took up with his brother, and he was sleeping on the streets. (A made up story? Who knows…)

But we still can’t figure out how he found us…

A Tax on Bonds

Back to the markets…

We’re entering a period called “financial repression.”

As we’ve discussed many times before in these Postcards, the big industrial nations are planning to turn their sovereign bonds into certificates of confiscation in order to reduce their debt burdens.

(The term “certificates of confiscation” was coined in the 1970s, when inflation was rising. Here’s how hedge fund manager Leon Cooperman, who may have been the first to use the term, explained it in The New York Times: “If you took the coupon payment, adjusted for inflation and taxes, you had a negative real return.”

In other words, it means the Treasury is selling bonds for a price that may be higher than the total amount of future purchasing power you’ll get from holding the bond to maturity.)

To run this “financial repression strategy,” they’re going to push inflation rates up and then keep yield curves below inflation rates.

Effectively, this will be a tax on holders of government bonds by probably something like 3% to 5% a year.

The last time the feds used this strategy in the U.S. (from 1945 to 1980), they mostly kept inflation a few percent over interest rates like this. It’s not too much that it scares people to dump bonds, but enough to keep the debt pile shrinking consistently over the long term.

(A negative 3% real yield brings down the real value of a government’s debt load by 46% over 20 years… And a negative 5% real yield brings it down by 64% over 20 years.)

Bringing Back a Forgotten Art

It’s been 40 years since investors last needed a strategy for profiting from inflation.

Disinflation (or a slowdown in inflation) has been the norm for so long, inflation investing has almost become a forgotten art…

Everyone knows gold, commodities, land, and other scarce assets hold their value during inflation. But what about the stock market?

As longtime readers know, in general, I don’t expect stocks to perform well – especially given today’s extraordinarily high stock market valuations.

This is one of the reasons I’m so confident we’ll see a decline in the Dow-to-Gold ratio (which measures the Dow Jones stock index against the price of gold).

However, there is one sector I expect to prosper in an inflationary environment: shipping. Here’s why…

  1. Shipping rates and revenues will rise with inflation, but shipping costs are largely fixed. (The biggest costs for a shipping business are depreciation and debt repayment. The higher the inflation rate, the greater the ability the shipping business has to pay these expenses in the future with watered-down dollars.

  2. Shipping is an asset-heavy, capital-intensive business… and shipping companies use lots of debt to buy their ships. Inflation erodes the real value of the debt over time, while increasing ship values and gross profits.

  3. Ships are made of steel. At the end of their working lives, they get sold for scrap. Scrap steel is a scarce hard asset and industrial commodity. It should hold its value with inflation.

  4. Unlike the broad stock market, shipping has been in a bear market for 13 years. Values are extremely depressed (despite the recent bounce in shipping stock prices).

  5. New government environmental regulations and the rising cost of steel are reducing demand for new ships. Many shipyards have closed, and the global order book for new ships is the lowest it’s been in decades. Meanwhile, the rising price of scrap steel will support scrapping. This is a very supportive environment for shipping day rates.

  6. Shipping companies are often domiciled in tax havens like Bermuda, Liberia, and Panama, and are not on the hook to pay taxes to the bankrupt western governments.

If our thesis about financial repression is right and we’re entering a new era of inflation and yield curve control, we will need an entirely new skill set to prosper.

I’m focusing on gold, silver, basic materials, and shipping investments…

– Tom Dyson

P.S. I created an entire model portfolio to help you position yourself for inflation’s comeback. To get the names of the top gold, silver, and shipping stocks I recommend – along with the best ways to buy physical gold and silver – watch this to learn more.

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


A tip for Tom to stay connected to his kids when they get older… the “greatest story” of the Postcards… and an offer to help the Dyson family learn Spanish

Reader comment: I think the best way to keep your children near you is to stay put in one rural place for most of their lives. I am 56 and this is what I have seen observing people where we have lived.

Me, my ex-wife, and our kids all grew up in a small town in British Columbia. Later, we moved to a small city one province away. The kids went to high school here. I have been here 20 years now. My daughter lives nearby with her husband and son. My son did move away, and he went back to where he grew up. What he knew and liked, I think. I would like to live there, too.

The other important thing is to have a close family. Looks like your family is very tight. Good job. That will really influence the kids’ future choices.

Reader comment: It just dawned on me that the greatest story being told in your Postcards is the story of your children. There’s something about them when looking at their pictures that sticks with you. I’ve met some amazing young people over the years and was always left with the thought, “If this is our future, I think we will be ok.”

I get that same feeling with your children. Thank you for sharing their lives with us as you journey on.

Reader comment: Thanks for including photos and stories of your children. They are the lights for the future.

Reader comment: I’ve been enjoying your Postcards for several years. I’m a retired teacher/professor of Spanish and English (including ESL). I taught on the high school and college/university levels for many years. Let me know if you need any help learning Spanish.

Tom’s note: As always, thanks for your messages. Please keep them coming to [email protected], and I’ll do my best to answer your questions in a future Friday mailbag edition.