The Chart That Will Help You Navigate Inflation

DRIGGS, IDAHO – “It feels as if a lot of people think markets only go up,” writes financial author Andy Kessler in The Wall Street Journal.

“Buy the dip!” he says. “Hold on for dear life! Feed the ducks when they’re quacking! Stocks. Bonds. SPACs. Real estate. Commodities. Crypto. $200,000 nonfungible tokens… even GameStop is flying again…”

We are in the late stages of the greatest financial experiment in history.

Fueled by central bank intervention, money-printing, and unfunded government spending, an enormous bubble has formed in the credit markets.

The major governments are now bankrupt and want to “soft default” on their obligations. In my opinion, it ends in a meltdown of the entire paper currency system.

When will the party end? There’s one chart I’m watching very closely to tell me when the trend changes…

(It’s not the Dow-to-Gold ratio chart you’re familiar with if you’ve been reading these Postcards. More below…)

Winter Is Over

Greetings from Driggs, Idaho…

The winter here has ended abruptly.

The sun has come out… the temperature has risen above freezing… and the snow is melting. We see people skiing in short sleeves and without hats on their heads now.

Our time here is coming to an end. We only have 20 days left until the ski resort closes. Then, we’ll pack up our car, say goodbye to the friends we’ve made here, and drive back to Florida…

It’s been great. The most fun we’ve had since we started traveling almost three years ago.

We’ve skied almost every day… more than 100 days in the season. The lift operators told Dusty (13) they’d scanned his lift pass 520 times so far this year.

Everyone in the family wants to do it again next winter. We’ll see.

Here’s the view of Grand Teton from behind our cabin today…

The Ultimate Contrarian Forecast

Last Wednesday, I mentioned the Ruffer Review, an annual publication from the investment management firm Ruffer.

The biggest insight I took away from this year’s edition of the Review (which you can download here for free) was Ruffer’s prediction that inflation volatility will rise.

I’m familiar with stock volatility and bond volatility. But I’d always assumed inflation would rise in a straight line (whenever it comes)…

Some switch would flip and inflation would accelerate smoothly, like a train leaving a station.

But if Ruffer is right, the coming inflation will be more like a teenager learning to drive with a clutch… lurching and stalling until the system breaks down altogether.

(It occurs to me that this is perhaps the most contrarian forecast one could make. I mean, not only has inflation been low for years, but there’s also been no inflation volatility. To predict a rise in inflation, and a simultaneous rise in inflation volatility… Well, that’s contrarian.)

The Best Inflation Protection for Your Portfolio

This chart will help us navigate the lurches and stalls in inflation…

The black line in this chart shows credit spreads, as represented by the iShares 7-10 Year Treasury Bond ETF (IEF) versus the iShares iBoxx $ High Yield Corporate Bond ETF (HYG).

(A credit spread is the difference in yield between two bonds with similar maturity but different credit ratings.)

The yellow line shows the performance of gold versus industrial metals (copper, lead, zinc, tin, silver, etc.). Industrial metals are represented here by the S&P GSCI Industrial Metals Index (GYX).

When the lines are falling (as they are now), they show us the economy is reflating and everything is booming.

When the lines are rising, gold is beating industrial metals and credit spreads are blowing out. It shows us inflation is crashing and the economy is deflating.

We’re in the reflation stage now. As I wrote last Wednesday, that means we want a portfolio made up of 65% gold, 20% silver, and 15% steel.

In my Tom’s Portfolio advisory, we’re exposed to the “steel” side of this via our shipping stocks, which are soaring right now.

(Cargo ships are made of steel and transport basic materials. I can’t think of an asset that’s more responsive to the global reflation trend.)

With a big infrastructure spending bill coming later this year in the U.S. (possibly up to $4 trillion)…

…and China’s announcement last month that it wants to double its high-speed railway network and build 162 new civilian airports…

…I expect inflation to keep rising and for the current trends to continue for at least a few more months.

But I’m starting to form a hypothesis that Mr. Market is a scoundrel, and just as everyone begins to anticipate inflation, he’ll zig-zag and wrong-foot everyone again.

I’m watching carefully for this trend reversal.

The chart above will show this reversal in real time… And it’ll reveal the right time to exit from our shipping stocks.

For now, though, it’s still game on.

– Tom Dyson

P.S. If you’re not a paid-up Tom’s Portfolio subscriber yet, find out how to get access to my full list of shipping stocks right here.

P.P.S. The chart above also explains why gold has struggled for the last six to seven months…

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

Readers affirm Tom’s Dow-to-Gold trade and offer solutions for his sleeping troubles…

Reader comment: Tom, I think your actions of buying gold is one of the best bets out there. Even if it doesn’t go up, it’s still currency accepted around the world.

Reader comment: The whole point of your thesis is to stop stressing. In the long run, it is inevitable that your thesis will prove true. Don’t listen to those demons. Ignore the daily gyrations in the price of gold or stocks. Be at peace. Love your wife. Enjoy your kids. Say, “Thank you” to God. Trust what He is doing in your life; He is in control, and He knows what is best for you a lot better than you know for yourself.

We don’t want to lose you again (I’ve been reading you since The 12% Letter and Palm Beach Research Group days), and your family even more so. Be at peace. If you are awake at night thinking about investments, turn off the screens earlier in the evening (blue light disruptions of circadian rhythms and all that).

If you can’t get your mind off stocks, gold, and macro issues, spend your time in the dark praying for your family. I often end up wishing I had not fallen asleep the night before, because I was enjoying so much praying for my wife and kids (I have nine of them, so lots to pray about!). I’ll add you to my prayer list tonight – and not only for tonight.

Reader comment: Your sleeping challenge could be due to a congested liver or gallbladder. Sometimes, this is also called a fatty liver. It’s from the bad, indigestible oils from the fast food. Canola oil is the worst offender.

The liver or gallbladder congestion will not allow your mind to settle down at night. It will flit around. Your sleep will come in fits, with waking up about 3 a.m., or just after, typical for this condition.

Untreated, it will get worse. Weight gain will happen, your energy will be sapped, and brain fog will ensue.

Tom’s note: As always, thanks for writing in! Please keep your messages coming to [email protected].