The Fed’s Balance Sheet Is About to Explode

CORPORATE APARTMENT, BALTIMORE – All my work and research can be boiled down to one prediction: The Federal Reserve’s balance sheet is about to EXPLODE higher…

Last week I saw the latest numbers. (More below…)

Leaving America

Greetings from Baltimore!

My family and I just traveled around the world. We visited 29 countries on four continents over two years. We lived out of a suitcase, traveled by bus and train, slept in Airbnbs, and homeschooled the kids on the road. It was an epic trip. 

After the trip, we’d always planned to return to America, settle down, rent a house, and get back to work. We didn’t know where we’d live or what exactly we’d do, but we figured it’d all become clear once we got here.

The thing is, now that we’re here, we’ve been talking, and we are not ready to settle down yet. It’s so much cheaper and more interesting to live in foreign countries. We love not having any possessions. Above all, we love how tightly knit we feel as a family when we’re on the road.

So we’re leaving America again…

For now, though, we’re crashing in Baltimore. It’s an elegant city, rich in history, art, culture, and fine architecture. For a homeschooling family, it’s paradise.

Today we visited the American Visionary Art Museum. Here’s Miles (10) taking in some of the artwork…

Miles at the museum

Next week we’re going to Nicaragua. After that we’re heading to South America.

We bought one-way tickets. No idea when we’ll be back… but you’ll be with us every step of the way through these Postcards.

Stretched Finances

Back to the prediction I mentioned earlier, the U.S. government is in its most precarious financial position ever.

It has $23 trillion in debt, runs a budget deficit of more than $1 trillion a year, and mostly finances itself with short-term debt, which is a lot less secure than long-term debt.

Even after borrowing so much money, the U.S. government still has three monstrous financial obligations to pay: to baby boomers, to the military machine, and to foreign creditors. So there’ll never be any relief from its obligations. 

And this is its position after 10 years of economic expansion and soaring stock markets… 

When the next recession and bear market arrives, it’s going to blow a hole in its already-stretched finances.

Heavy Weight

The government’s gargantuan demand for cash has been weighing heavily on the public markets.

I used to work for the “repo” desk at Citigroup. So when I started studying the markets again in 2018 after my battle with depression, the first thing I noticed was the blockage in the plumbing beneath the banking system.

The blockage was being caused by the enormous amounts of cash the government was soaking up. 

As I warned many times last summer, if they didn’t unblock the money markets, things would “start blowing up.”

Things blew up on September 17, 2019. That’s when the interest rate on short-term loans spiked from 2% to 10% in a matter of minutes. (I wrote about it the next day in these Postcards.)

The Fed turned on its printing press and began bailing out the government. It couldn’t let the government collapse financially. 

When you consider the government’s obscene consumption of cash… its inability to fund itself in the public markets… the Fed’s willingness to bail it out… and the likelihood of a coming recession, it’s clear to me the Fed’s balance sheet is going to grow by trillions and trillions of dollars over the next few years. 

Unless they change the way they inject liquidity into the economy – and they might – this “money-printing” will support bond and stock prices and increase the consumer price index.

On the flip side, it’ll untether gold prices. I expect gold will be approaching $10,000 an ounce by the time this cycle peaks.

Last week, the Fed’s balance sheet reached a new high for the bailout. It’s at $4.175 trillion now.

Gold is at $1,600… near seven-year highs…

–Tom Dyson

P.S. My father came to visit us this weekend and we went exploring the city with him. Here we are on the wharf beneath Federal Hill, with the Baltimore cityscape behind us…

Left to right: Me, Miles, Dusty, Kate, Penny (front), and my father

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

Readers chime in about Tom’s plans to write a book… how diversification plays into his “all in” bet on gold… and the Dyson family’s travels…

Reader comment: Enjoyed reading about your travels. You have so much to write on your adventures. I am sure your book will sell!

I have moved 22 times and counting in my life. Each move brings new adventures, but it’s tiring. Children need stability and to foster friendships. I still keep in touch with my ex-classmates. Although we lead different lives, it’s nice to talk about the past. There’s a special bond knowing we will always be supportive of each other as adults.

Hope you find a country to settle down for longer periods.

As for turning everything to gold, aren’t you putting all your eggs in one basket? Physical gold, gold stocks, gold futures… they are all still gold. What about diversifying?

Tom’s response: Thanks for your note. We think about this, too… the value of community and relationships and friends. Our oldest son is 12 years old. So it’s not urgent our kids start making lifelong friends… but it is something we’re beginning to think about.

As for your question, I consider gold to be a form of money… the oldest, most stable form. We feel like we’ve made the most conservative “investment” it’s possible to make – to quit investing altogether, and sit on the sidelines in pure, real money. 

Reader comment: My concern is that the U.S. government will again confiscate, in one manner or another, say, through “windfall” taxes or the like, the gold we’ve so diligently hung on to (rather than invest in the FAANG – Facebook, Amazon, Apple, Netflix, Google – and Tesla stocks where we could have made a stinking fortune).

Tom’s response: I’m a little worried about that, too… but all we can do is do the right thing and let the chips fall as they will.

The reason they confiscated gold was because they needed to devalue the dollar and gold was the world’s reserve currency at the time. But I don’t think enough people own gold these days to matter.

They can just go ahead and devalue the dollar anyway. If anything, they’ll have to do something to discourage speculation in the stock market this time around. 

Reader comment: I love reading about your family and am looking forward to your next adventures in South America.

You’ve done a good job of convincing me that today’s market is overpriced and gold is where I should be investing.

I can achieve that with my personal and IRA funds, but how do I protect my employer-sponsored 401(k) if no gold investment options exist?

Tom’s response: Do they offer you the “brokerage link” option? If not, there’s not much you can do except choose the safest option your employer offers. 

Reader comment: Several months ago you said that when you got back to the U.S. you were going to get married again. You are now back in the U.S. and planning shortly to head for Argentina. Are you going to tie the knot before you head south? If not, when? I know there are a lot of us who want to vicariously share the event!

Tom’s response: We’ll be honored to share our wedding with you! You are our friends, and through your support and encouragement of these Postcards, you’ve helped our family rebuild.

Not sure when we’re going to get married, though. Sometime this year, I hope.

Reader comment: Love your postcards. I’m a bit old now to get back on the road. My grandkids will have to learn, I guess, that it’s all about the journey and if you have your family with you – what a blessing that is.

I have a question on the Dow-to-Gold ratio. I get this ratio, and that, in real terms, stock valuations are falling. If equities crash big time, and gold also sells off, then there may well be a drop in the Dow-to-Gold ratio, but currencies (that is the USD I would think, but also the AUD here) would hold relative value if there is a big deflationary drama in all markets.

I know you don’t like cash in the bank, but is it wise to go all in with such a comparatively stable banking system here in Australia? Give everyone a big hug.

Tom’s response: There could definitely be a deflationary bust. Cash would be king and both gold and the Dow could fall.

The thing is, if this happened, the Fed and the other central banks would begin printing money at levels none of us have ever seen before, and it wouldn’t last long. In fact, I suspect they’d begin printing money as a precautionary measure, so the deflationary bust would never materialize in the first place.

This is why the crises never repeat. Because the government and central bank are always standing by to fight the last battle, not the one that’s coming. The last battle was the 2008 financial crisis. I guarantee you the next “battle” won’t look anything like it. 

Reader comment: I find it ironic that you and your family come back to the U.S. and everyone (except you) gets sick. You even traveled in China when the coronavirus was just getting started. Glad the family is well and ready to move on again.

Tom’s response: Everyone (except me) got sick in India, too. But that was Delhi Belly… and I think everyone who goes to India gets that. We’re in Baltimore in wintertime, going to homeschool classes. Not surprised we got sick. Anyway, it passed and we’re all better now.

Reader comment: You often talk about buying physical gold, but I prefer to buy blue-chip precious metal royalty stocks such as Franco Nevada, Wheaton, etc. for three reasons:

(a) It’s much easier for me to buy these stocks than to buy and store physical gold and silver.

(b) I’ve heard that gold royalty stocks tend to outperform physical gold. (In the last five years, Franco Nevada stocks have grown 140%, while physical gold has grown only 32%). Also,

(c) It might be a hassle taking physical gold from Japan, where I live, back to my home country.

I’m sorry if this seems like a dumb question, but please could you tell me what are the advantages of buying physical gold rather than blue-chip precious metal royalty stocks? Thanks a lot. Hope Kate, Dusty, Miles, and Penny are well again, or getting better.

Tom’s response: An excellent question! The big benefit for me is how easy it is to be a long-term investor with physical gold.

I’ve told you my stories about bitcoin and gold in 2003. In both cases I was thrown out of the bull market because I was too easily scared out of my positions. I could just open the broker, “click,” and sell. With physical gold, I won’t be able to make an impulsive decision to sell.

Anyway, I also like royalty companies. They’re my preferred way of owning gold through the stock market. 

And as always, thanks to everyone who wrote in! Please keep your questions and comments coming at [email protected]. Kate and I read every note you send us.