CHISWICK, WEST LONDON – The real interest rate on the 10-year Treasury bond has moved to new lows…
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A real interest rate is a nominal interest rate adjusted for inflation. It shows the return a lender will achieve from his or her loan in terms of future purchasing power.
Purchasing power is what really matters. And it’s especially important now, as prices of everyday goods are rising over 5% per year.
An investor who buys a 10-year Treasury bond today is accepting a loss in purchasing power of 1.17% a year, or 11.7% over 10 years.
Not a very good deal.
More below…
Teaching Our Kids Soft Skills
Greetings from London, our temporary base while we deal with my late mother’s estate…
This week, we finished Heartland.
Heartland is a TV show on Netflix. It’s about a girl named Amy, who can communicate with horses. She uses her powers to rehabilitate troubled horses.
It’s a contemporary western (set in Alberta, Canada). A Postcards reader recommended it to us when we were living in Idaho last year.
Since then, we’ve watched one episode every day, and we just finished the whole show. There are 14 seasons and 224 episodes.
The great thing about Heartland – and the reason I’m telling you about it – is that it’s the only TV show we’ve ever found that we could all enjoy together… from eight-year-old Penny to 45-year-old me.
Not only that, but it throws up lots of conflicts and their resolutions, all in the setting of a family living in a small western town.
We discuss these issues after each episode as a family, so it’s been a great educational tool to teach the soft interpersonal skills our kids will need later in life.
We would recommend it highly for families with preteen kids who like to watch TV together.
Why Protecting Our Purchasing Power
Is So Important Today
Back to Treasury bonds with negative interest rates…
It’s a wonder anyone buys them at all.
As we’ve said many times in these Postcards, foreign buying of Treasurys has largely dried up, and the Federal Reserve has become the main buyer.
This chart shows the main sources of demand for Treasury bonds…
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You can see foreign purchases of Treasury bonds have been gradually dwindling since 2014, while the Fed now buys most of them.
What happens next? I think real interest rates are going even lower. Think of it as more stimulus… And the final leg of a trend of falling real interest rates that started in the early 1980s.
For these reasons, Kate and I have put the bulk of our wealth in gold, silver, and shipping stocks. I see shipping stocks as another form of hard currency, except with a high yield.
As real interest rates fall further, assets that protect purchasing power… or that pay positive returns in terms of future purchasing power… should appreciate, all else being equal.
A Hard-Currency Strategy That Works
Talking of shipping, I like all sectors… From oil tankers to product tankers, liquified natural gas (LNG) tankers, propane tankers, dry bulk carriers, and container ships.
Container ships are particularly fascinating right now because there’s been an acute demand shock because of COVID-19.
Demand for imported goods is so high, there is a shortage of container ships to bring the goods across the seas.
Container ship owners are able to charge whatever they want. And the import/export firms (like Maersk, Cosco, etc.) will pay it – or their clients risk empty shelves.
I received this note today from a friend in the importing business…
“I can reaffirm how much the container shipping costs have risen. What is driving this is surreal demand. COVID-19 lockdown caused huge demand spikes in anything related to stay-at-home activities.
“Contracted container rates averaged about $4,000 last year. Contract prices were written at over $9,000 but the number is meaningless. $20,000, $30,000, and now $35,000 are the rates you must bid to get a container, regardless of any contract.
“The major retailers are facing empty shelves if they don’t pay up, so the bidding has indeed gone parabolic. I know the Halloween decoration buyer for one chain that will miss the whole season due to no containers available.
“This pricing is really in uncharted waters. How business plans built on sub-$10,000 container pricing survive is anyone’s guess. The major retailers are throwing money at this problem. Small importers are being passed by.”
The numbers have gotten so large, ships are making tens of millions of dollars per contract in profit for their owners.
I got this note below from a friend in the business… (Keep in mind, the ship he is referring to is probably only worth around $60 million.)
“It is reported that a Chinese freight forwarder has chartered the 15-year-old Orca I for 60-90 days Pacific trading at $300,000 per day.
“The ship is owned by Poseidon Containers but has been chartered to Maersk for the next three years at $21,000 per day.
“Maersk stands to make a profit of $25 million if the relet charter goes the full 90 days. These numbers are, to use a well-worn phrase, unprecedented.”
Anyway, the point is, our little strategy of protecting our purchasing power with gold, silver, and a little shipping has been working well as real interest rates have fallen.
And if I’m right about real interest rates continuing to go lower, our little hard-currency strategy should continue to work…
We’ll see…
– Tom Dyson
P.S. The gold and silver model portfolio I put together for my Tom’s Portfolio subscribers is up nearly 14% since I recommended it last May. And our shipping stocks are up 36% on average since I first recommended them. And the best part is, we can protect our purchasing power without risking it all in the stock market – which, as regular readers know, I expect will see dismal returns over the next 10 years…
FROM THE MAILBAG
The debate on homeschooling, kids’ socialization, and beliefs continues… and another reader wonders if gold-backed currency will return…
Reader comment: I’m a longtime reader and thoroughly enjoy every piece you write. And I really enjoy your exploits with Kate and the kids. I find it very interesting, and the kids will have fantastic lifetime memories. Keep doing what you’re doing. 🙂
Reader comment: I remember the names of several friends from high school, but very few such relationships are lasting ones. Most people never even go to their high school reunions, other than the set of extremely popular former kids who are trying to relive return past.
I don’t think that needs to be a significant factor in your consideration for your children’s future. Being able to make friends and using a high level of social intelligence will help them a lot – and it seems that your kids are developing that skill way better than the average pre-teen.
I taught in government schools for 35 years. I was always mystified that people thought children needed the “socialization” proffered by public schools. To the contrary, what I observed on a daily basis teaching kids was that they learned to be anti-social, to bully their inferiors, and to suffer the bullying of the abusive kids (or teachers).
Keep doing what you two are doing for your kids!
Reader comment: Regarding whether homeschool kids believe only what their parents teach them, our experience has been that teaching our kids HOW to think critically is very important.
Our daughter once had a conversation with a friend who told her, “Faith is what you believe even though you know it’s not true.” That is laughable. Faith is what you believe based on the best evidence you can find. Everybody has faith.
The content of that faith can be affected by learning to ask questions and finding the best evidence. Many things affect our belief systems and our weighing of the evidence.
Reader comment: The feds are no dummies. They may be forced, along with other central banks, to keep printing. But I wonder if they are not secretly buying gold, all the while keeping the price of gold somewhat capped, before all hell breaks loose (and we return to some form of gold-backed currency)…
Reader comment: Love reading the Postcards. We are in another snap lockdown by decree of Dictator Dan in Victoria, Australia, again. Be thankful that you keep testing negative to COVID-19. You have chosen a low-stress lifestyle, which promotes a healthy and strong immune system. Great! Your body can defend itself against any pathogen.
Tom’s note: As always, thanks for writing in! Please keep your messages coming to [email protected], and I’ll try to answer your questions in a future Friday mailbag edition.