CORPORATE APARTMENT, BALTIMORE – Today I noticed a couple of inflation “dots.”
I’m writing this note to you by hand at the kitchen table of our apartment. Kate and the kids are nearby, watching movies. They’re sick. We haven’t left our apartment in four days.
Dusty (11) and Miles (9) snuggled up in our loaned apartment
This morning – as I do every morning – I scanned the latest rumors, news headlines, institutional research notes, and economic data. I’m trying to join the dots and predict the future… at least as it pertains to the world of money.
Here’s what we know…
The stock market oscillates between “cheap” and “expensive” in great mean-reverting waves. It always has. It always will.
While it moves from expensive to cheap – what we’ve been calling a “valuations bear market” – we need to own gold. While it moves from cheap to expensive – a valuations bull market – we need to own stocks.
The last great valuation wave peaked in 2000. We’ve been in a valuations bear market ever since. Stocks are down 56% since then in terms of gold. By the end of this valuations bear market, stocks should have fallen about 90% in terms of gold.
I sometimes call this process “the long walk down the mountain.” A quick look at the charts suggests this “long walk” resumed in October 2018 after a seven-year backtrack and is gathering momentum.
Or stating my hypothesis in its simplest terms: Gold is going to outperform stocks for the next five to 10 years.
Contrarian View: Inflation Is Coming
Kate and I have moved all our savings to gold and there it will stay until we get the signal that stocks are ready to beat gold again. The signal we are using is a Dow-to-Gold ratio of 5.
In the meantime, I’m having fun figuring out the path we’ll take to get “down the mountain.” Here are the main clues I’ve picked up over the last year…
1) The market is overwhelmingly positioned for deflation. Bonds are the hottest investments on Wall Street and more than $10 trillion of bonds trade with negative interest rates.
Commodities, meanwhile, are hated. Many are trading at 10-year lows. My contrarian instinct interprets this as “the crowd is wrong, and inflation is coming.”
2) The most pro-active group of central bankers in history is in control of the financial system. They exemplify hubris… certainty in their mission… and “do whatever it takes.” This is another clue inflation is coming.
3) The stock market is at one of its richest valuations in history, the economic expansion we’re in is the longest in history, the financial system is the most leveraged it’s ever been, and fund managers are the most undisciplined they’ve ever been.
The world economy seemed to be slowing down last year… and now, as I wrote yesterday, China has gone into cardiac arrest because of this disease outbreak.
A big “tantrum” in the markets is the ticket central bankers need to roll up their sleeves and begin their “whatever it takes” money-printing program. This is another clue inflation is coming.
4) Gold is beginning to sniff inflation out, as it always does. It hasn’t hit all-time highs in terms of the dollar or the Chinese yuan yet. But as I showed you yesterday, in terms of almost every other currency around the world, gold is soaring…
…Which brings me to this morning, sitting at our kitchen table, sifting through the news.
First, I saw a report from Reuters, published yesterday, announcing that Norway’s inflation rate jumped. Consumer prices were 2.9% higher in January than they were a year earlier, it said.
Then I saw a report from CNBC, also published yesterday, announcing China’s inflation rate has also soared. Consumer prices were 5.4% higher in January than they were a year ago, it said.
Finally, I saw this chart in my Twitter feed. It shows CPI inflation between 1955 and 1981. Then it shows today’s CPI, overlaid, following a similar path…
The dots join. A picture emerges. Invest accordingly.
– Tom Dyson
P.S. I love trying to figure all this out, but the reality is, it’s just mental gymnastics. The only thing you really need to know is that gold is going to do better than stocks over the next five to 10 years. That’s the big insight.
Like what you’re reading? Send your thoughts to [email protected].
FROM THE MAILBAG
Thoughts on the Dysons’ nomadic lifestyle… Tom’s financial and family legacies… and one reader shares their “gold dilemma”…
Reader comment: Many thanks for all the inside information in your postcards, which are completely fascinating. I regard you and your family as friends because of the way you share your life! I look forward to everything you write.
Reader comment: Happy birthday. I am glad to hear you are doing well. You have the most important things in life now: family, relationships, and freedom.
Reader question: Life cannot be a perpetual “vacation.” (It doesn’t work.) I suggest you look into the “back to the land” movement. If you haven’t read Walden (by Thoreau) you might start there. I find working land very rewarding (though challenging also).
Reader comment: People have asked about how to sell gold when the time comes. Perhaps this will help educate someone. I spent a long time collecting numismatic gold and had a grand time doing so. Now I come to a dilemma: Do I assume my survivors will know where and how to liquidate a collection without getting snookered by the marketplace? Or, as I’m the one with the knowledge, do I handle the estate side of things now? Keep the postcards coming. Your "cultish" followers like me watch for them daily.
Reader comment: You might leave them without money, but never in poverty. You have gotten to know your family like most men never do. You have given them the whole world from an insider’s perspective. I think you are safe this time with Kate, but if she wants a divorce again, ask her if she will travel the world with you first. That rich lifestyle isn’t for everyone. I wish for you to be blessed with everything that money can’t buy.
Reader comment: I’m no genius, I’m barely average. But I HIGHLY doubt that this bubble will be “the one” that defies history. Sooner or later fools pay for their idiocy. It goes back almost to the beginning of recorded history. Even the Bible is riddled with examples of fools being taken down.
I can’t speak as to whether or not Kate will always love (or at least tolerate) you, nor can I say if your investment will pay off in time for your children to enjoy the fruits of your wisdom. As they say, the markets can stay irrational much longer than you can stay solvent. But the point is, sooner or later, the tide comes back in. So whatever you do, do not give into that fear. Fear is normal; it’s the checks-and-balances system that makes us stop and check our logic, but it is NOT logic in itself.
With your family, follow your heart. With your money, follow your brain. Thanks for the postcards. You have been slowly changing my way of thinking, not on investing (I’ve known that you are right from the start), but on living. It’s food for thought, and I’m digesting.
Reader comment: I love your postcards. I live in rural Canada. As a young adult I knew the rat race wasn’t for me. Quality of my life, day to day, was what I was after. I realized that if I left the city, I could live well on a part-time job, rurally, in paradise! I’m still here now, many years later, having raised two daughters.
At some point along the way, I realized that I had figured out how to live a beautiful lifestyle without much money! In fact, it was the lifestyle that enabled me to not need much money! I grow my own food. I make my own wine and beer. I make beautiful bread. I make my food from scratch, and can barely eat at a restaurant for the disappointment! I surround myself with beauty, nature, art, and second-hand treasures. My life is simple and sometimes disturbingly full! Everything I have is paid for and now that I’m “retired,” my monthly expenses are minimal, around $600.
Yes, I invested my life to achieve this. But it has also been my life. One that I’ve chosen. I always remember a co-worker’s reply when I said to him on his retirement that I envied him for his pension after 40 years of 40-hour weeks. He said, “Yes, but you’ve lived semi-retired your entire life!” Indeed. If you don’t think you need all of the trappings, and make your life with less a wonderful game, the richness of it creeps up on you. Love to you, Kate, and the children.
Tom’s response: Thanks for all the kind notes! Kate and I read every one – even if we don’t publish an answer right away. Please keep sending your questions and comments to us at [email protected].