CORPORATE APARTMENT, BALTIMORE – Uh oh. Is a recession coming now?
European economists just reported that, last quarter, the euro area logged its slowest quarter in seven years.
And from China, news comes that factories are struggling. The PMI (Purchasing Managers’ Index) – an important indicator of industrial output – fell to the brink of contraction. This report doesn’t factor in the coronavirus pandemic. China’s economy fell off a cliff this morning…
And then there’s this. It shows global trade in a long term decline…
We’re in a “valuations bear market.” As I’ve written many times in these postcards, I anticipate a series of recessions over the next 10 years. Could this be one of them coming now?
More below…
What’s Next?
Greetings from Baltimore…
My family and I are homeless. Two years ago we sold all our things and ripped our kids out of their daily routines. I left my job, we packed a small suitcase, and we left America.
We went on an epic trip around the world. We visited 29 countries and completed a full circumference of the planet.
We came home a week ago… with no plan or idea about what we would do with ourselves.
We still don’t have a plan.
We’re squatting in an apartment in Mount Vernon for the time being, living in the same way we’ve been living for the past two years… exploring, homeschooling, and living like a little wolf pack…
We must figure out what we’re going to do next. One thing we know for sure is we’re not staying in Baltimore. It’s too expensive for us. But we do love it here…
“Hobo-Schooler” Paradise
Baltimore is rich in culture, history, art, heavy industry, and freight trains. It’s paradise for “hobo-schoolers” like us.
Today we explored some of the neighborhoods to the east of Mount Vernon. We found block after block of abandoned row homes. You can spot them by the plywood boards. They cover the doors and windows with them.
To the east of Mount Vernon, we found block after block of abandoned row homes
Because of our lifestyle, our kids don’t have any friends. Whatever we do this year, we’d like to change this.
Today, we took the children to a gym where they could run around with other kids. It was a class for Baltimore’s homeschooled kids. Our kids had such a good time and made friends with the other kids easily.
Most Important Chart of All
Turning back to the markets… This is the most important chart of all charts…
It shows the valuation of the U.S. stock market. Or said another way, this chart answers the question: “Is the stock market currently cheap or expensive?”
Notice how it ALWAYS reverts back to its average. (Statisticians would call this a “mean reverting” time series.)
Second, notice how it moves in big, discernable waves between “cheap” and “expensive,” always over-shooting and rarely pausing at its average. This wave pattern isn’t random or accidental…
The pattern exists because attitudes of investors and business leaders oscillate between “optimistic” and “pessimistic” every half-generation or so.
They’re bi-polar. Not in an erratic, unpredictable way… but in the consistent and dependable way of ocean tides or the changing seasons. Confidence builds. And then it ebbs. It’s always been this way… and it probably always will.
The implication of all this is: You can beat the market if you’re a) patient and b) contrarian.
Finally, notice that the wave reached its most recent apex in 2000 and has been in a “valuations bear market” ever since.
There was a strong rebound between 2009 and 2017, but that seems to have exhausted itself. Values now appear to be walking back down the mountain to levels last seen in 1980, 1945, 1933 and 1921.
At least, I’m betting they are…
How I’m Playing My Bet
As you know if you’ve been reading these postcards, the Dow-to-Gold ratio tracks stock market valuations very closely. So I’m expressing my bet by holding gold.
When the chart I just showed you reaches “cheap,” I’ll trade gold for stocks and hopefully ride the wave back up again.
Anyway, the reason I’m telling you all this is because in the past, there have typically been four to six recessions in each valuations bear market.
We’ve already had two recessions – in 2002 and 2008. So I’m expecting at least two more before stock market values complete their downwave.
As I consider this theory, I look around me in the real world… I see trade breaking down, production stalling, and desperate central bankers running their printing presses…
And I think, “Theory and reality are perfectly in sync.”
– Tom Dyson
P.S. The Dow-to-Gold ratio closed Friday at 17.78.
FROM THE MAILBAG
Readers offer kind words for the Dyson family, ask for clarification on Tom’s definition of “toxic income,” and suggest the kids might need more stability on the homefront…
Reader comment: Thank you for sharing your physical and personal/family journeys with us. It takes courage and discipline to share with the world every day. I enjoy your daily postcards, and getting to know you and your family.
Judging from the feedback, your postcards resonate with many, many people. Best regards to you and your family.
Reader question: I am intrigued by your comment of income investments as toxic. I get what you mean as it refers to stocks and bonds, but what about real estate? About a third of my net worth is in rental real estate and the income is great.
The risk I see is a decline in rental income caused by widespread unemployment… but I can’t see how that could drop by more than maybe 20%. What do you think?
Tom’s response: Rental real estate is clearly a better asset to own going into the inflation period I’m anticipating than say, a corporate bond. It’s an example of what I’m starting to call “hard money.” And it’s a “workhorse” in the sense it generates income for its owner.
When I made that comment on Friday, I should have made a distinction between income investments of capital (stocks and bonds)…
…and income investments that are hard, productive assets such as timberland, farmland, small businesses, or rental properties. Your property and expertise as a landlord generate the income, not your capital.
The former are, without exception, toxic income investments that have been pumped up by decades of easy money and manipulated interest rates. The latter are safe-havens and exactly where you want to be over the next decade.
(The more humble, the better, in my opinion. So cheap starter homes rented to young families in Kansas will weather the storm much better than luxury condos in London, for example.)
Reader comment: The readers who question what to do for retirement funding, other than rents, interest, and dividends from investments, ideally without touching their principal, have a point.
When you have figured out how to slide into the grave with just a $20 in your pocket, you won’t have to work anymore. But if your last $20 is gone while you are waiting for a 5-1 ratio, it could get rough and set you up for a bad ending.
As I get older I’m not getting smarter, but I am getting wiser.
Reader comment: Your comment on income in the current interest rate environment is brilliant. I sincerely appreciate your advice, and am learning to appreciate the risk inherent in all asset classes as the Federal Reserve continues to debase the dollar. I admire what you and your family are doing and will continue to look forward to your postcards. My best to you, Kate Dusty, Miles, and Penny! (What great kids!)
Reader comment: Regarding your comments on why retirees don’t just spend down some accumulations, I have been questioning myself on that same point. I recently retired and am deciding how to manage what we’ve been able to save. I feel reluctant to spend any principal, or even the income from within tax-advantaged retirement accounts.
It may be related to passing something to the next generation, but I wonder if the hesitation may also be related to addressing our own mortality. Not so much running out of money, although that’s a significant consideration, but actively reducing our pile because we won’t need it forever.
That seems to be cooperating with or hastening that reality, when most everyone fights to remain alive as long as possible. Just some speculation. It’s a most interesting topic and I don’t have a solution for myself yet, let alone anyone else. It’s good to examine.
Reader comment: Love the concept, but you must realize kids need stability, their stuff, and a place they call home. They have no core after a year of wandering. Give them some stability. At least for a few months now.
I met many Army brats in school in Ohio. They seemed so worldly, but every one of them told me, “I hate moving around every couple of years. It’s so hard to have friends. So hard to adapt to a new place.” Think about it. Or ignore it. Do your thing. Good luck. Wishing best for your family.
Tom’s response: We think about this a lot. This is just a phase of their childhood, while they’re still young. In the next phase we’ll settle down somewhere… for the remainder of their childhoods. The Army brat model is something completely different to what we’ve been doing, but I still get the point.
As always… Please keep writing us at [email protected]! We love getting your messages, and Kate and I read every one you send in.