When Bond Yields Go Negative

DRIGGS, IDAHO – Kate and I have put all our savings – every spare penny we have, including our 401(k) – into gold, silver, and steel. We are ALL IN.

If my hypothesis about the world economy is correct, this bet will give my family and me financial freedom for the rest of our lives. We’ll never have to “work” again.

More below…

The Snowiest Place in North America

Greetings from our mountain hideout in Idaho…

My family and I are a traveling family. We’ve been on the road for three years traveling around the world, Airbnb hopping, living out of a suitcase…

For our latest adventure, we’ve come to one of the snowiest places in North America to experience what a cold, snowy winter feels like in a tiny mountain town.

(For this adventure, we had to sell the camper we lived in all summer and rent an Airbnb…)

The town we chose is called Driggs… population 1,660, one traffic light. It’s in a little valley called Teton Valley, which is sort of squashed between Yellowstone National Park and the western slope of the Teton Mountain range.

The Jet Stream brings vast rivers of moisture off the Pacific Ocean. The air collides with the mountains and it dumps…

(I only learned about this area by searching Google for “the snowiest places in North America.”)

Snowfall and Friendly Community

Another 15 inches of snow fell last night. We’ve now had heavy snowfalls seven days in a row, and 154 inches so far this month.

This is the field behind our Airbnb cabin. I came out to take photos this morning after the overnight dump. These are our neighbors, taking their three dogs for a morning walk.

And here’s Miles, 11, posing in front of the fresh powder:

Yesterday, I drove the car off the road. Everything was so white – the road, the fields, the sky – I couldn’t see the edges of road and I became disoriented. I was so confused, I veered across the road and into the powder on the other side – without realizing it. I never even hit the brakes.

Luckily, a man came past in a truck and towed us out.

Perhaps the most exciting thing about living here is that we are starting to make friends. We’ve been on the road for the last three years and we haven’t experienced much in the way of “community” during that time. It’s just been the five of us… a little wolfpack.

But now that we’re living in a small, friendly community, we are meeting people and integrating with our neighbors. There are lots of other homeschool families in our neighborhood and our kids have made friends with some of them.

As I sit here writing this letter to you, with the snow falling outside my window, my family around me, and new friends living in the other houses nearby, I think, “I want to live here forever.”

Another Soft Default

Now back to my family’s financial strategy…

Our hypothesis is simple. The global financial system has reached the limits of indebtedness. And the U.S. government is going to begin quietly defaulting on its debt.

I’ve been calling this default a “soft” default because there won’t be any official announcement or public policy about it. They’ll simply make real interest rates negative (even more than they already are) and let the debt load shrink by 3% a year or so. Over 20 years, they’ll have paid half of it back without any big drama. That’s the plan, at least. It worked after World War II. But we’ll see if it works this time.

Either way, for now, the key financial metric to watch is the real interest rate on the U.S. government’s debt load.

We know it’s about to go deeply negative as the U.S. government basically forces its creditors to take small, annual haircuts (-5% or more) on their Treasury bonds.

(A real interest rate is the nominal interest rate minus the inflation rate. Therefore, if the inflation rate is higher than the interest rate, the real interest rate is negative.)

As you can see, real bond yields went negative in 2003 and have stayed modestly negative for most of the last 18 years.

But if I’m right about all this, inflation is going to rise, the feds are going to cap interest rates, and real interest rates (as well as bond yields) will go far more negative than anything we’ve seen so far in this cycle. (Real interest rates got to -3% briefly in 2011. I’m expecting them to get to at least -5%, as they did in the ’70s..)

It’ll lead to a bear market in the real value of stocks and bonds, a loss in the purchasing power of the U.S. dollar (and of all paper currencies) – what I’ve been calling a “global synchronized currency devaluation.” And we’ll start calling Treasury bonds “certificates of confiscation” again.

Kate and I are protecting our savings the only way we know how… by ditching our dollars, pounds, euros, and any bonds, and sheltering in hard assets: gold, silver, and steel.

There we’ll stay until the Dow-to-Gold ratio has gone below 5, and it’s safe to buy high-quality dividend-paying stocks again (because they’ll be much cheaper than they are today)…

This one “big” trade should set us up financially for life.

A Look at the Dow-to-Gold Ratio

This chart shows the last three years of the Dow-to-Gold ratio. (A rising line shows the Dow beating gold and a falling line shows gold beating the Dow.)

The primary trend of this chart is down, despite the 12-month countertrend rally we’ve seen recently. If I’m reading the situation correctly, this chart should reverse soon and resume its primary trend down…

– Tom Dyson

P.S. To invest in steel, I’ve bought stock in shipping companies that own large fleets of tankers, container ships, bulk carriers, etc. As the value of the currency falls, these stocks will appear to soar in value. (They already are.)

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

In today’s mailbag, one reader thinks cryptocurrencies will be the best financial hedge…

Reader comment: I wrote you a note before and told you gold is going down. Cryptos are exciting. Gold is boring. Hedge that gold position with cryptos.

Meanwhile, another shares their thoughts on living a long life…

Reader comment: This is the maxim I live by and I am 81: You don’t stop skiing when you get old; you get old when you stop skiing.

And finally, others disagree with the idea that Tom’s Postcards are narcissistic…

Reader comment: Tom, I totally understand your drive. When I am compelled to write, I must write. When you know something others should know, you don’t really have a choice. That’s not narcissism. When it involves you and your family, that’s not narcissism. Besides, no one is forcing anyone to read your missives.

Reader comment: Tom, I have been reading your Postcards since you and your family were on your global trip. I am not a professional, however, not sure how someone would think you are a narcissist. You may have been before your divorce and your battle with depression. However, based on your writings, you seem to be someone who has taken responsibility, been redeemed/forgiven, and is trying to put your family back together.

In the blink of an eye, the kids will be grown up and be out on their own. I, for one, thank you for your honesty about your issues and wish you, Kate, and your family all the best. I also believe that there are a lot of people who wish they had done (or could do) what you and your family are doing. Keep it up.

Tom’s note: Thank you for writing in! Please keep your messages coming to [email protected]. We read every note you send us.