CHISWICK, WEST LONDON – What do a field, a tree, property, and the stock market have in common?

They all yield something.

A field yields crops, a tree yields fruit, a property yields rent, and the stock market yields profits.

But what if I told you now is one of those rare occasions when the market will not yield profits… and instead, it will yield massive losses over the next few years?

Take a look at the chart below. It shows the price-to-earnings (P/E) ratio of the S&P 500, going back 120 years…


When the line on the chart is high, it means the stock market is very expensive relative to the earnings it generates. When the line is low, it means the stock market is cheap relative to its earnings. 

As you can see, the stock market has never been more expensive – except once, at the peak of the dot-come bubble. That tells me today is a terrible time to buy stocks.

As investors, all else being equal, we will make much greater returns on our capital buying stocks when earnings are cheap than when they’re expensive.

Or, we will do even better if we can capture the next bottom, and buy stocks before the ratio trends higher again.

Both strategies require patience and discipline. But I believe they will pay off in the long run.

More below…

Hobo Family

Greetings from London…

My family and I are a hobo family… We drift from place to place, living out of a suitcase and staying in short-term rentals.

Recently, we got waylaid. My mother died in London and we’ve come here to tidy up the loose ends she left behind and say goodbye to a place that’s very dear to our hearts.

We think it’ll take us another six months to wrap up here. Then, we’ll return to the USA and resume our drifting. That’s the plan, at least.

For now, the kids’ homeschooling continues… I study economics and write my little journals… I do the administration of my mother’s estate… I grieve for my mother… and we try to suck as much marrow as we can from this place before we have to say goodbye for the last time.

Here I am writing my Postcard today. I always write in pencil first and then type it up later on the computer…


Writing today’s Postcard with Penny

Back to the stock market’s valuation…

The Best Market Gauge

There are many ways to measure the stock market’s P/E ratio. The chart at the top of today’s Postcard shows Robert Shiller’s method.

Shiller is a Nobel Laureate and Economics professor at Yale. His method is called the Shiller P/E or CAPE (cyclically adjusted price-to-earnings) ratio.

And it’s the best long-term gauge of stock market valuation, in my opinion.

The Shiller P/E comes out once a month. This month’s reading set a new record high.

As I mentioned earlier, the ratio has only been higher once in history…

That is, the 25 extraordinary months between July 1998 and November 2000 – otherwise known as the dot-com boom.

That was a terrible time to buy the S&P 500. When the bubble burst and the CAPE ratio started falling, stocks lost 78%.

Back then, investors were willing to pay such extraordinary prices for earnings because they got carried away by their excitement for the internet revolution.

Some of that is happening again today, but I don’t think it’s the main reason the stock market is so expensive.

The main reason is because today the feds are meddling with interest rates and the U.S. money supply. That has made the stock market (and the property market and all sorts of other asset markets) look extremely attractive – but only temporarily.

The stock market’s P/E ratio could stay at these levels for a while, I suppose, or go even higher, but sooner or later it’s going to fall back down.

These valuations are simply not sustainable long term. Investors sooner or later will demand a greater return on their capital more in line with historical norms and the P/E will adjust down.

We can’t predict when that will be. And we don’t have to. We just need to weigh the probabilities.

At these levels of P/E, we must ask ourselves, is the trend more likely to rise or fall? That’s easy. It’s more likely to fall.

All we can do is do the right thing – stay out of the way in gold – and hope it doesn’t take too long for the P/E ratio to return to more normal levels.

In the past, we’ve seen a cycle reversal – from peak to bottom – every 20 years or so. But this cycle has been stretched by central-bank intervention… And the end of the down stage of the cycle is now long overdue.

When will the decline back to normal valuations begin? Only time will tell. But I don’t want to risk my hard-earned savings by buying into a stock market at extraordinarily high valuations where future returns are likely to be dismal as the P/E ratio returns to its average.

I’d rather wait on the sidelines in gold and other hard assets, preserving my purchasing power… And wait to buy the highest-quality stocks when they’re cheap again relative to earnings. Even if I have to wait another decade…

– Tom Dyson


Gratitude for the Postcards… and finding what’s most important in life…

Reader comment: Thanks so much for sharing your story. I am sure it has changed many a life for the better! Just keep on living it your way. Forget the negative comments.

Reader comment: With the world in economic chaos and COVID-19, you have given your children the inner strength to find their peace in the world. You and Kate will figure out how best to deal with your mom’s possessions as life unfolds. You, Kate, and family have shown the world what is most important to human beings: love and a sincere connection to each other.

Reader comment: COVID-19 has helped you, me, and many other people to re-evaluate what we should do with the rest of our lives. For years, I had been living a compromise between England and Thailand, which probably won’t be possible in the future.

Recently, I read The Top Five Regrets of the Dying by Bronnie Ware, and it got me thinking. As I wait to make a one-way trip to Thailand to be with my girlfriend permanently, I have been going through all the junk I have been carrying around for decades. I made a huge pile of stuff I don’t need – which turns out to be most of everything. I keep adding to the pile, and gradually finding new homes for it all. It’s time-consuming but satisfying work.

My goal is one suitcase to take, and a couple of boxes to store for possible future visits to England.

Meanwhile, others discuss buying gold… precious metals prices… and their belief in government confiscation of gold…

Reader comment: I have been reading your letters for some time and noticed that some readers have experienced some difficulty/delay in buying physical gold.

I have always dealt with BullionVault in the U.K. and their charges are low and include storage and insurance. They store the gold in Zurich, London, or New York, according to client choice, and the exact amount held by each client is audited daily.

Buying and selling is extremely easy, and deals are frequently on a client-to-client basis, with very good prices and low spreads. They also deal in silver and platinum.

Reader comment: I do believe when the fiat folly “hits the fan” and the “fat lady begins to sing,” a contagion of massive selling will occur which will impact ALL ASSETS, including precious metals. Just as a rising tide raises all ships, so are they all lowered when it rolls out. 

A real test of faith and fortitude will be to hold on (even buy) when the price of gold/silver “momentarily” collapses as collateral damage caused by the panic selling. It may take some time (how long?) for precious metals prices to rebound as the hysteria subsides. But when it does, the price will explode to the upside as all the fundamentals that have existed from the get-go will now burst forth in spades. 

These certainly are not times for the timid. 

Reader comment: I enjoy your Postcards daily. It is a very welcome email, unlike the majority that I receive. My comment’s regarding gold confiscation. I think that it is inevitable. The U.S. government is broke and exceedingly in debt. I think they will do another Roosevelt. They will demand surrender of all gold holdings at an artificial low rate and then re-value it at an exorbitant rate to back a new USD, tied to gold, once again.

This is the only way the USA can keep any hope of global supremacy. They will also confiscate bullion holdings in all the ETFs that are precious metals depositories. They will claim a national emergency. The populace won’t care as they are the recipients of the plunder, and will want to punish the prudent investors.

Tom’s note: As always, thanks for writing in! Please keep your messages coming at [email protected], and I’ll try to answer as many questions as I can in a future Friday mailbag edition.