The Disconnect Between Asset Prices and the Real Economy Is Growing

DRIGGS, IDAHO – I read on CNBC’s website that as many as 10,000 stores could close this year in the USA.

In The Wall Street Journal, it says, “Owners of multifamily buildings are falling behind on loan payments.”

And this, also in The Wall Street Journal:

A promising sign of a bounce back in the pandemic-ravaged economy has stalled: Fewer borrowers are resuming mortgage payments.

Meanwhile, national property prices are soaring… up about 10% over the last 12 months… one of the largest annual gains in the 30-year history of the index.

Junk bond sales are setting records. Emerging market bond sales are setting records. Lumber prices just hit all-time highs. And trading volumes on Wall Street are also setting all-time highs…

How is all this possible during the worst recession since 1946?

It’s all because of Tina…

(More below.)

Feeling Rootless

Greetings from our homeschool in rural Idaho…

It’s been a month since my mother died.

I’ve been a traveler all my life… and I’ve lived in many different places around the world.

The more I moved, the more one thing always stayed the same: my mother’s townhouse in West London.

For the last 35 years, she’s waited for me with open arms, a familiar bed, a roast lunch, and a chance to do some laundry or store some junk in her attic.

It’s the only place I’ve ever really been able to call “home.”

Now, Mum’s gone.

Our lease in Driggs is up in April. We’ll travel from here to London, where we’ll have to begin the work of emptying her house and putting it on the market.

As we’ve traveled around the world these past few years, I have been proudly calling our family “rootless.” But now, I get to feel what it really feels like to be “rootless.” It’s a very unpleasant feeling.

In the meantime, we’re trying to enjoy our time in the mountains… skiing, learning, and making new friends…

Yesterday was a beautiful winter’s day. Kate skied with two other homeschool moms and the kids skied with their friends. I didn’t really fit in on Kate’s “ski date” with the other moms, so I went off by myself.

Here’s Miles (11) snowboarding down the mountain on one of our favorite trails yesterday…

“Whatever It Takes” Economics

Back to the disconnect between asset prices and the real economy…

The boom we’re seeing in property markets, bond markets, and stock markets has nothing to do with real economic fundamentals.

It’s all based on “whatever it takes” economics being pushed by the Federal Reserve and the government.

“Whatever it takes” economics means interest rates will stay at zero percent indefinitely… while the Fed stands by, ready to counter any market instability with freshly printed money.

This brings us to TINA…

TINA stands for There Is No Alternative.

With interest rates at zero, there is no risk-free rate of return, so investors buy stocks, or property, or junk bonds. With no risk-free rate, cash flows from these investments have become relatively more valuable.

This is especially true for large-cap tech stocks that make no profits now, but expect to make enormous profits in the future.

Discounted at zero percent interest rates, their massive future profit streams become extraordinarily valuable in present terms. Tesla, Amazon, Facebook, Alphabet (Google’s parent company), and Netflix are examples of this.

The other way low interest rates warp the economy is in the effect they have on the politicians’ attitude toward debt.

When interest rates are at zero, theoretically, you can borrow to infinity because there’s no burden of additional interest.

You and I both know this is nonsense and that a) debt must be paid back, and b) borrowing more will push interest rates up. But the politicians don’t see it this way. They just see a blank check.

Of course, it’s all theoretical interest-rate mathematics. Here’s what’s actually going to happen…

The Treasury will be seduced into borrowing astronomical amounts of dollars (even by today’s standards)… asset markets will continue to bubble… the Fed will be forced to keep interest rates at zero permanently (or even take them negative)… and eventually, the currency will become the relief valve.

The dollar, and the entire paper currency system, will collapse. (This is what we’ve been calling a global synchronized currency devaluation in these Postcards.)

When it does, it will destroy the real value of these investments… even as they appear to have nominal value (face value, in other words, meaning the upfront price).

So even though I think rising asset prices make sense, I’m not getting drawn into these markets in search of return.

Instead, I’m sticking with gold and silver. It’s the TOA… or The Only Alternative.

– Tom Dyson

P.S. This is not a typical stock market boom being driven by a “new economy” or another great innovation. The activity we’re seeing in the stock market is a reaction to the dollar and other world currencies losing their values. It’s why real estate prices are going crazy. And the price of steel exploded last year. And agricultural commodities like wheat and corn soared to levels we haven’t seen since 2013.

While the atmosphere is quite rowdy, I don’t think it’s irrational, for the most part… Still, that doesn’t necessarily mean it’s sustainable. That’s why Kate and I moved to the sidelines in gold, so we can protect and grow our nest egg over the next decade. For anyone who wants to do the same, I put together a model portfolio – including specific percentage allocations and the 11 gold stocks I recommend today. Learn more here.

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

One reader is thankful for Tom’s recent essay, “Why Stocks Are Soaring Despite the Pandemic”… and another asks Tom to keep the Postcards coming…

Reader comment: Hi Tom, thank you for your explanation on why the stock market appears to be going up so dramatically. Using gold as a yardstick instead of paper currencies makes good sense. As you observe, the upward trend is the market pricing in the potential benefits of the accelerating digital age. Thank you for your reports. I read them all with interest.

Reader comment: We enjoy the adventures y’all have, and hearing the latest on each family member. We wish you safe travels around this country, and any other places you decide to visit. If you would like any history and travel information on the American South, please let me know. I write on the true history of our country and where to travel to see the scenes of our founding. Keep up your investment insights, too. We learn from your perspective.

Meanwhile, others offer Tom kind words over his mother’s death…

Reader comment: Hello, Tom. I would like to join all those who have expressed condolences to you and your family after losing your mother. My mom had Parkinson’s, along with Alzheimer’s, so my family has some experience with what yours has experienced in recent years.

This is one of those times when your family is called upon to be, as you described in an earlier postcard, “the oak under which others can shelter.” The closeness and the love you all have built during your travels should serve you well during this most difficult time. Thank you again for sharing your experiences with us.

Reader comment: Dear Tom, all of your “extended family” that reads your Postcards is saddened by the news of your mum’s passing. Thank you for sharing that beautiful eulogy with us. My prayers of comfort go out to you, your family, and all of her friends… and to Tessa.

Tom’s note: Thank you for your thoughtful messages. Your notes keep us going. Please keep writing us at [email protected].