MAMARONECK, NEW YORK – Last week, the bond market’s prediction for inflation over the next five years hit an important new high…
Bond traders foresee inflation just below 3% over the next five years – higher than they’ve ever predicted. And when the bond market talks, I listen…
That’s because bond traders are famously accurate at predicting important macroeconomic trends.
That goes for anything from recessions… to what the Federal Reserve will do next… to wars, government policy, and even inflation.
That’s why one good way to gauge future inflation levels is to look at the bond market… and see what bond traders are betting inflation will be over the next few years.
And right now, bond traders’ inflation fears are higher than they’ve ever been in the last two decades.
So what’s the message for investors from this inflation data? It’s something we’ve predicted many times in these Postcards…
More below. But first…
Our Crazy Lifestyle Experiment
Greetings from Mamaroneck, New York…
My family and I are sort of a “carpe diem” family…
A few years ago, we quit everything… our careers, our friends, our community, and most other conventional family practices… and we put making memories with our children as our highest priority.
We’re currently in New York visiting Grandpa.
Grandpa lives in a one-bed apartment in the suburbs. By living together in this small space for seven weeks, we’re probably going to end up getting more quality “Grandpa time” in this one visit than in the previous 13 years combined.
And I think: no matter how bad this crazy lifestyle experiment turns out, it would all have been worth it. Because this lifestyle has allowed us to spend great quality time with our families… and that is priceless.
DIY Halloween
It was Halloween yesterday…
The kids wanted to go Trick or Treating but they didn’t have costumes (as we’re living out of a suitcase and we didn’t want to buy any.)
So they made their own costumes out of old boxes and bits of scrap paper. Then Grandpa took us to a popular trick or treating spot…
We’d been there a few minutes when some boys stopped nearby. They were pointing and laughing at Dusty, Miles, and Penny’s homemade costumes.
I nudged Kate. “Those mean kids are making fun of their costumes.”
“I know.”
“I hope they don’t notice.”
“They won’t.”
(We imagine our children would get bullied if we sent them to school as they’re so innocent and unaware of themselves.)
Here’s Penny (9) dressed up as a Box Robot…
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Penny’s do-it-yourself Halloween costume
Final Stages of an Epic Credit Binge
Back to inflation…
As regular readers know, the world economy is in the final stages of the most epic credit binge in history. Credit has never been this cheap or this plentiful and the world has never been so leveraged.
(News came out this weekend that junk-rated creditors now owe more than $1.5 trillion by face-value of junk bonds issued. That’s more than they’ve ever owed.)
Our hypothesis is that if central planners let interest rates rise, they’ll blow up the world economy.
But if they don’t let interest rates rise, prices of everyday goods will keep rising. That will eventually cause investors to stampede out of the bond markets… and lead to what we call a “synchronized global currency devaluation.”
We’re predicting stagflation, in other words. That is, inflation combined with a stagnant economy.
And that brings us back to bond traders’ inflation expectations…
Distressed Market Signals
As I mentioned, bond traders’ inflation predictions for the next five years hit new highs on Friday.
We call this the breakeven inflation rate. Put simply, this rate is measured by the spread, or difference, between two bond yields.
And it’s not just five-year inflation predictions hitting new highs. Breakevens for 10-year and 30-year terms hit multi-year highs, too.
And along with this, there was also massive selling in the markets for short-term bonds… especially in Australia, Canada, New Zealand, and across Europe.
The sell-off in Australia’s market was the most severe since 1996. Canada’s was the worst decline since 2009. Bond yields in Greece, Portugal, Italy, and Spain all soared last week, too.
From the Financial Times:
Short-term bond markets have ‘experienced unprecedented volatility’ this week, said George Saravelos, Deutsche Bank’s global head of currency research. […]
Saravelos said the moves have been exacerbated by investors being forced to abandon soured bets as markets move against them. ‘What is happening now runs beyond macro,’ he said… ‘This is the closest we can get to a distressed market.’”
What does this all mean for us?
In short, it looks like the central planners are losing control of short-term interest rates. They’ll either have to increase the money-printing to bring bond yields back down… or things are going to start blowing up.
In the meantime, our best bet is to stay far away from bonds… and wait in the sidelines in hard assets until it’s safe to return to the financial system.
We remain unwaveringly bullish on gold, silver, and deep-value infrastructure plays, like shipping stocks.
– Tom Dyson
Like what you’re reading? Send your thoughts to [email protected].
FROM THE MAILBAG
Readers share their own tales of smartphone dependency… while another reader offers the Dysons hospitality and Tom advice on what to do with his mother’s belongings…
Reader comment: Thank you for sharing your family’s journey and love the new category of “weird things without a smartphone.” I remember my first GPS unit for our automobile, called a Tom-Tom, and while interesting and useful, thinking, too, “Oh no, this is going to make us all GPS stupid.”
We live in upstate New York and my husband is an avid hunter, but got turned around in the woods and twilight came quicker than he wanted. He called me and said he took a wrong turn and would need to figure his way out of the woods. Long story short, he used the compass on his smartphone and eventually found his way out. When he got home, I asked him what he would have done without his phone. He said, “I will be carrying a regular compass again.”
I guess my broader point is we become so dependent so quickly on these things (and I include myself in that category)! I am almost worse because I do notice this, but then dismiss it because I think it will always be available… right?
Reader comment: I have enjoyed your travels since China. Also your snow adventures, if that was at or near Grand Targhee, you found one of the best ski areas in the West.
Regarding your mother’s possessions, check with your children to see if they have any interest in them. They may be too young to currently be interested. Pick out a half dozen or so items for their historic value and keep them safe. These items should be offered some day to your children who may wish to have them as a window into your family history. Take the reader’s suggestion of selling the remaining items through a successful auctioneer. If you ever get close or near The Dalles, you and your family will always be welcome.
Lastly, another reader defends the Dysons after a reader called them “moochers…”
Reader comment: The reader who said you are moochers, I don’t agree with them. It takes a lot to invade a person’s space, versus renting a motel room (which I prefer to do). He apparently hasn’t followed your family around the world for very long.
Also, your way of life is very foreign to him. I feel you have proven repeatedly how free you can be without all the material possessions.
Tom’s note: Thanks for writing in! As always, please keep your questions and comments coming at [email protected]. I’ll answer as many as I can in a future Friday mailbag edition.