FORT LAUDERDALE AIRPORT, FLORIDA – I don’t know if this viral outbreak will cause a recession in the U.S., but I won’t be surprised if it does. In these Postcards, we’ve been expecting a recession for months…
More below. First…
Back on the Road
Here we are at the Fort Lauderdale airport for the night flight to Managua…
It’s almost midnight. It’ll be our second night in a row without sleeping in a bed. The kids are so tired they’re acting weird. Next time you hear from us, we’ll be in Rancho Santana, Nicaragua…
If you’ve been with us for a while, you know some of our favorite places are places the State Department warns Americans NOT to go. They’re cheaper, there are fewer tourists, they’re more interesting, and in most cases, the threat is illusory.
For example, we went to Lebanon, Hong Kong, and Serbia on our trip around the world. And I went to Venezuela and the Democratic Republic of Congo by myself. These all have “travel advisories” from the State Department on them. We had a lot of fun in all of them.
Nicaragua is on the State Department’s list too. The president is a dictator and he’s unpopular. There’s been some violence recently. I’m told tourism is way down. The Nicaraguan currency is as cheap as it’s ever been.
My hunch is, it’s completely safe and we’ll have a great time. We’ll see…
Dark Side of the Wave
As you know if you’ve been reading these Postcards, we’re in a “valuations bear market.”
The stock market oscillates between “cheap” and “expensive” in great valuation waves that last a decade or more. These waves are predictable and consistent. You can trade them if you’re patient and you don’t mind running against the herd.
Right now, we’re in the “down” wave that takes valuations from “expensive” to “cheap.” This wave began in 2000, the highest peak in stock market valuations ever recorded.
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We’re about halfway down the wave now. I expect the trough will be pretty extreme this time too, because of how extreme the peak was. (We should get there in the next five to 10 years.)
Anyway, valuations bear markets are the dark side of the wave… the winter… the reset… the detox… and they mean lean pickings for investors, generally.
Typically, you get four to six recessions in a completed valuations bear market. We’ve had two already in this one, so I’m expecting a few more.
The last one was over 10 years ago, and I see some big imbalances building up again, so I’m expecting the next one to come along soon. (Recessions are like buses. One doesn’t come for ages and then three come along at the same time.)
China First, Where Next?
It’s through this framework that I’ve been watching the coronavirus outbreak hinder economic activity. First in China… now in Japan and Korea… and maybe some other important economic areas soon, like Europe, or North America.
For example, in the first 16 days of February last year, 59,930 new cars were purchased in China. During the same 16 days this February, only 4,909 new cars were purchased… a huge decline.
Chinese demand for steel has also collapsed (down 70% in January).
And the Chinese real estate market has cratered, too. As I wrote about last week, China Evergrande – the third-largest property developer in China – just announced a 25% price cut on every apartment it’s currently building in the country.
And Evergrande is not alone. Bloomberg:
New apartment sales plummeted 97% in the first week after the Lunar New Year holiday from a year earlier, according to China Real Estate Information Corp.
Fewer than four units a day were sold in Beijing [China’s flagship property market], whereas daily transactions would usually number about 400.
This is a big deal. When you include all the upstream and downstream activity associated with housing (appliances, furnishings, etc.), the housing industry accounts for around 30% of China’s domestic economy.
And the country’s troubles don’t end there. “Millions of Chinese firms face collapse,” starts a different Bloomberg article. It goes on:
A survey of small- and medium-sized Chinese companies conducted this month showed that a third of respondents only had enough cash to cover fixed expenses for a month, with another third running out within two months…
Without more financial support or a sudden rebound in China’s economy, some may have to shut for good.
According to the China Real Estate Chamber of Commerce, most housing developers have a cash buffer of just three months.
Cusp of a Recession
Again, I don’t know if the coronavirus will lead to a recession in the United States.
But given global economic connectivity and what I know about valuations bear markets… and our position in the current one… I think it’s quite likely we’re on the cusp of a recession.
Stocks beat gold in the “bull” stage of the great valuation waves. Gold beats stocks in the “bear” stage. So if you want to preserve your capital, it’s critical – now more than at almost any other point in the wave – to get onto the sidelines in gold.
The chart below shows the Dow-to-Gold ratio, which is how we keep track of the battle between gold and stocks. When the chart is falling, gold is beating stocks…
Notice the recent chart pattern… and how the blue line is about to “break out” from the pattern and head to much lower levels.
I’m tracking this closely. When it’s time to get back into stocks, I’ll let you know.
– Tom Dyson
P.S. China Evergrande has the biggest debt interest bill of any listed non-financial company in the world. It pays over $8 billion a year in interest. It’s the poster child for China’s economic extremes. Let’s keep an eye on it.
Like what you’re reading? Send your thoughts to [email protected].
FROM THE MAILBAG
In today’s mailbag: Why you shouldn’t get caught up in gold’s daily fluctuations – and what to do instead… How to get into physical gold on a budget… And the best way to time the stock market…
Reader comment: Like everyone else, I’m hooked on your Postcards. I’ve been buying gold and other precious metal stocks, ETFs, royalty companies, and junior miners for over 15 months now, as well as the physical stuff more recently.
A recent postcard talked about the price of the dollar and gold moving up simultaneously. My question is a bit different. The price of gold went up significantly again, to about $1,620 per ounce. Yet almost all my gold stocks either were unchanged or lost money. Why is that?
This is hardly the first time I’ve observed this anomaly, but I doubt it could be profit-taking across the board. I was reading something from your colleague Jeff Clark where he was talking about major traders shorting gold. Could this have something to do with it?
Many thanks for your insights and for sharing your life with us. Continued safe travels.
Tom’s response: Don’t read too much into daily fluctuations. It’s mostly wind chop. Look at correlations of gold to your gold stocks month by month, or even quarter by quarter, to get the real picture.
Reader comment: I have enjoyed your exploits and had to comment on homeschooling. My career had us living and homeschooling in 15 different places, including four years in Germany (loved it there!).
Three of my children have their master’s degrees, while my youngest is finishing her second year, with honors, as a nursing student. We played sports with other families, and my kids had friends from public and private schools. There are great teachers in public schools, but it’s difficult to tailor to each kid’s learning speed.
On a side note, gold seems out of reach for me, so I’ve been investing in silver coins. How can someone on a silver budget get into physical gold?
Tom’s response: You can buy gold coins that weigh a tenth of an ounce. Or stick with silver. I like silver, too, although I suspect gold will rise faster.
Reader comment: Hope all is well. I know I have made scathing remarks to those analysts that have been, for years, warning about the absurd rise of the equity market and its dire consequences. I basically have been calling them cry wolf.
Well, they deserve to be scorned because all the while they have been crying wolf, the equity market has surged. Doug Casey, Porter Stansberry, Dan Denning, Bill Bonner, Harry Dent, on and on. I can name them.
However, I am finally starting to see the end of it… I feel that all those analysts have been yelling at us to at least get prepared.
Tom’s response: I admire those analysts greatly. They haven’t been telling us what to do but how to think. Big difference.
I have studied all their work for years (except Harry Dent, I’m not familiar with his work) and I feel like I’m standing on the shoulders of giants by writing these Postcards to you. I’d add Steve Sjuggerud and Chris Weber to this list, too.
Timing is hard. In my opinion, the best way to time the stock market is to be a trend follower on the Dow-to-Gold ratio. It seems to form the clearest and most durable patterns over time…
Meanwhile, other readers turn to the Dyson family’s past and future travels… including the consequences of a nomadic lifestyle…
Reader comment: As always, I enjoy your Postcards. I have been to China several times over the last few years and my observation was the same as yours. Condo buildings everywhere, but where were the workers to fill them? I am sure the rent is not cheap. Even moving 100 million people from the countryside to the cities will not fill the apartments if they do not have good-paying jobs.
It always amazed me the number that were half finished, as you described. I have worked in Singapore and visited several countries in Southeast Asia over the last 20 years. It always amazes me that they seem to build and develop with the mindset that if we build, the people will come. Will be interesting to see how this works out in China. Good luck in South America.
Reader comment: I am a widower living alone on the West Coast these past eight years since my wife passed on to heaven. I do enjoy reading the stories you and family have experienced. So I am glad to hear that homeschooling is working well and the kids are enjoying it.
I would like to suggest that you get a Holy Bible to further their education, as it has 66 books in it (39 in the Old Testament and 27 in the New Testament). The books were written over a period of 1,500 years by about 40 different authors.
This Bible is the most-purchased book every year. It would be nice to consider it your family book, and each evening read a couple of chapters (family members taking turns and reading out loud). Start with the book of “Daniel” and you will see the enthusiasm from the kids to find out what happens next and who gets to read the next day.
Enjoy Argentina. My wife and I drove over the snow-capped mountain from La Serena, Chile (a very beautiful coastal city and area) and had a wonderful trip and time in Argentina. In the winter the road is closed.
Reader comment: Bring your family to Medellin, Colombia where the people are young, vibrant, and very friendly. The U.S. dollar is very strong, too, and the weather is good… It has to be experienced. If you get here, my wife and I would love to meet you and say hello. LOVE your Postcards and the experiences you’re giving your children. Take care.
Reader comment: I believe that since food comes from the land, all the knowledge connected to that is vital, not only for education, but for “grounding” and creating a lifestyle that has basic meaning.
Clearly you grasp the most important concepts of parenting and “schooling,” but without farming and gardening you are lacking an important “plank” in the “platform.”
Reader comment: My parents died when I was young, of cancer. It influenced me to spend money when my family was young and take vacations we could savor. Now 60, I mostly regret it. The kids have vague recollections of the trips, and the money we spent made a big difference in our financial situation. We can’t afford to travel now and have no money to help our kids when they could really use a leg up.
Our one saving grace is that I worked 30 years and earned a defined benefit: inflation-protected pension with health and dental care. I wonder why you couldn’t pursue your Dow-to-Gold strategy while working a job and giving the family some stability in a place they could call home. You’re clearly a smart guy with a lot to offer. I fear the nomad lifestyle will wear thin soon. Kids, especially teenagers, need structure, familiarity, and security. So do most wives.
As I age, I find that travel has less allure to me. The best of life is where your friends and loved ones are. But you have to make some friends, and being part of a community helps. Best of luck in the next year. Whatever happens, don’t despair. You know now that you have the skills and courage to re-engineer and revitalize your life.
Tom’s response: Thanks for sharing your viewpoint. I will never regret the trip we just did but going forward, we’re going to remain vigilant for the issues you bring up. We talk about this stuff a lot and we’ll stay open minded and flexible.
And as always… Please keep writing us at [email protected]. Kate and I read every note you send us.