A New Bear Market in Stocks?

DRIGGS, IDAHO – Interest rates… Has a new uptrend begun? If it has, things are going to get very exciting.

Interest rates have been falling since 1981, which has driven a 39-year bull market in stocks.

If the interest rate trend has changed, at best, it’s going to create a headwind for the stock market (especially growth stocks)… and at worst, it will mark the beginning of a new bear market in stocks.

The 10-year Treasury bond’s yield reached 0.5% in July 2020. It’s now at 1.6% and still rising fast. We’re starting to see jitters in the stock market…

(More below.)

Confessions From a Stock Market Junkie

Greetings from our latest Airbnb…

My family and I are a traveling family. We live in Airbnbs and hotels. We homeschool our three children on the road. And we’ve turned all our life savings into gold and “buried” it.

I don’t get much sleep.

I don’t know if it’s our big bet on the Dow-to-Gold ratio that keeps me up at night… or just that after 35 years of watching stock market prices, I’m an obsessive stock market junkie that can’t sleep.

Either way, I feel the weight of the world on my shoulders these days.

No matter. I have total conviction that gold’s purchasing power will increase relative to other investments (particularly stocks). And if it doesn’t, there’s nothing I can do about it anyway because we’ve stashed our gold and we couldn’t sell it, even if we wanted to.

The Dow-to-Gold ratio has risen from 13.6 to 18.2 since last August, a 34% retracement. This is the first major test of our conviction since we placed the trade in 2018.

This chart shows the Dow-to-Gold ratio going back 10 years…

If our thesis is correct, the recent rise in the ratio should fail soon and resume its decline to new lows. If it’s not, I probably won’t get much sleep this year…

Watching From the Sidelines

Going back to interest rates…

I suspect 0.5% will mark the lowest point we’ll ever see in the 10-year Treasury’s interest rate. And we’re in the early stages of a multi-decade rise in interest rates.

But I’m not going to speculate on this with any capital.

First, shorting bonds is awkward, and I can’t be bothered to deal with futures and short exchange-traded funds (ETFs).

And second, I don’t think the Federal Reserve will let interest rise very far, so the opportunity is capped (for now, at least).

I’d rather just watch from the sidelines. And besides, rising interest rates will benefit gold in the end, as the Fed has to implement yield curve control…

As I’ve written before in these Postcards, yield curve control is when the central bank uses its currency printer to make sure interest rates stay low.

The higher interest rates rise, the more stress they put on the economy and the stock market… and the sooner the Fed will have to take action to cap them.

The sooner the Fed intervenes, the sooner gold starts rising again.

(After the recent rises in interest rates, the Australian central bank became the first central bank to take action. The Europeans are poised to start intervening, too.)

Why I’m Confident About Gold’s Value

I found these interesting statistics in The Weber Global Opportunities Report this week. (Global Opportunities is an excellent newsletter written by friend and investment strategist extraordinaire Chris Weber.)

There are 197,576 tons of gold in the world. That’s the amount that’s been mined throughout human history. At current prices, that gold is worth $11 trillion.

Meanwhile, the total value of all the debt in the world is $281 trillion. There’s also about $96 trillion in currency in circulation, $90 trillion in total global stock market value, and $281 trillion in real estate.

In other words, gold is insignificant in the big financial picture. That means the gold market still has plenty of room to grow. (Oh… and the total value of all the silver in the world is just $68 billion. A mere blip.)

These figures are why I’m so confident gold’s relative value will increase if inflation returns… or if investors start losing confidence in the dollar and the asset valuations that support debt, real estate, and stock markets.

– Tom Dyson

P.S. Our unusual lifestyle means our kids haven’t spent as much time with other kids as most children do at their ages. Instead, they’ve become very close as siblings. Here they are this weekend, playing soldiers together…

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

Readers congratulate the Dyson family on Tom and Kate’s nuptials… give their thoughts on the idea of the U.S.’ soft default… and praise Tom’s China analysis…

Reader comment: Tom and Kate, congratulations on your remarriage. I know three pairs of eyes and three bright smiles were there for the ceremony. Keep up the good work on your research, but especially on your family. That is the investment where the returns will dwarf all those monetary ones.

Reader comment: The “soft default” makes sense and is likely to be tried. However, it might have one flaw. If the government keeps spending at the rate it has, the “soft default” will not keep up with the deficits. I also believe not all currencies will take this route, as there are currencies with little debt, and solid, hard assets.

Russia is a country deep in commodities, from minerals to oil and gas. Singapore uses debt only for infrastructure and not operating budgets. It seems to me there are currencies which can be used in conjunction with gold and silver to weather this storm. Nevertheless, for the U.S., there will be either a hard default or an attempt at a soft default, as you describe.

In either case, holding dollars or stocks seems to be a losing proposition. As I see a hard default, it would accompany a move for the U.S. to switch to a digital currency, which could happen swiftly, with all bank accounts converted to new dollars and people given a time limit to turn in paper money and coins.

Reader comment: I am older and have been aware of America’s declining situation since the early 1960s, when we began our current “Welfare State” mentality (New Frontier and Great Society programs, etc.).

Millions of people found out that they could receive “free” things without having to work for them. This basically destroyed them as prideful, achieving human beings, and turned them into “wards of the State.” The “Swamp rats” in Washington’s “Deep State” knew that the route to their continued power and wealth was to provide these poor people with their basic needs, and in turn, they would receive enough votes to remain in control.

In essence, they bought their “elite status” by using the labor and earnings of America’s large, hard-working middle class, and running up our huge and impossible national debt. Thus, your continued advice to acquire gold, silver, and other “hard” assets as the dollar continues to lose value. This evil “system” would work until it didn’t, and then the country would be broke because of the corruption, waste, debt, and undermining of our collective national pride in being Americans.

Tom’s note: As always, thanks for your messages! Please keep writing us at [email protected]. I’ll do my best to address your questions and comments in our Friday mailbag editions.