Hyperinflation, Here We Come

I started writing on the subject of hyperinflation almost 4 years ago. One definition of hyperinflation, offered by Wikipedia, is “a cumulative inflation rate over three years approaching 100%”. Investopedia defines hyperinflation as “Extremely rapid or out of control inflation.” Anyone who was expecting a recession in the U.S. should also be prepared to look at the process of recovery.

A trend has been set since the Al Greenspan era to flood the U.S. economy with newly printed dollars and access to cheap money through low interest rates. It seems that Ben Bernanke is following the same trend of increasing the money supply and keeping interest rates low till we emerge from recent economic problems.

The beginning of hyperinflation is evident from the chart below. Of the 30 cars below, it now costs $114 to fill up a Toyota Sequoia SUV in California. The Toyota stands firmly in the middle of the list, with 21 out of the 30 models costing more than $100 to fill up.

I firmly believe that we are looking at the value of money dropping 10 times in the next decade. I believe $100 will be worth roughly $10. There is simply too much new money being printed by the Fed competing for the same goods. If we look at our emergence from the 2001 recession, we already saw the cost of property, luxury goods, travel and in some cases food increase 300-400%.

Now that we are entering a new recession, when we recover, the price of goods should again dramatically increase. Holding cash at the moment is the worst possible thing a person could do. I suggest buying anything, from stocks to property that you believe is a reasonable quality investment. When we emerge from a recession, stocks, property, and a variety of other investments will adjust themselves to reflect the true value of future dollars.

There will come a time when a $1,000,000 a year salary will be as common as a $100,000 a year salary today. The problem is no one sees it coming. It typically happens in a short time-frame and catches investors off guard. Many of us ignored the opportunity to buy property or stocks in 2001 when prices were low. Many of us will now miss the chance to buy property or stocks in 2008-2009.

Raw Greed’s investing has been focused on identifying trends in advance and setting up strategies to take advantage of oversold conditions. Five years ago, I was buying in and out of technology and airline stocks. For the past three years, I have been buying in and out of precious metals stocks. I believe that we are approaching a mania phase for energy and precious metals. In the next year or two I am guessing that I will exit precious metal stocks and start to invest in financial and home building stocks.

At the moment, there are an incredible amount of deals in the market with some sectors off a staggering 70% or greater. Good and bad stocks, bonds and property have been lumped together and sold off. I don’t believe we have hit a bottom yet, but I do believe we are approaching one. Since no one knows when the exact bottom is, I believe investors should begin to build their positions while the economy is slumping.

The old saying “throwing the baby out with the bath water” is going to be applicable very soon. Investors will have a chance to buy (GE), General Electric Company or (HD), The Home Depot, Inc. at a P/E under 10. Insurers like (AIG), American International Group, Inc. and financials like (LEH), Lehman Brothers Holdings Inc. and (C), Citigroup, Inc. are all down in the 60-70% range compared to highs a year ago. If these stocks were to slide another 20-30%, we would firmly be 80-90% off from highs year ago, indicating a permabear mentality.

It seems that whenever a person decides to buy a stock in a slumping market, the stock will keep falling, causing some degree of fear and angst. Investors should take comfort in knowing they paid .10-.20 on the dollar for a stock that will likely survive and thrive when the economy recovers. There may be another Bear Stearns that will collapse in the meantime, so diversification is key.

Lets say you took a dollar and broke it into 10 varied investments that were down 80-90%. If one were to go out of business you would be left with 9 investments that will likely return multiple times your cost as we emerge from a recession. If you are buying .10-.20 on the dollar, only one out of your ten investments has to recover halfway from year ago prices to bring you to a break even point to prevent loss from one going out of business. The chances are solidly in favor of the investor who can look past the bearish mentality.

I have no idea if companies like AIG or Lehman Brothers will ever drop to the point where I can buy them .10 on the dollar compared to prices a year ago. At the moment, I am going to consider building a position in these stocks as we are down 60-70%. This range is my initial buy-in with aggressive buying at .10 on the dollar.

At the moment there are people forced to pay $168 to fill up a Chevy Suburban 2500 in California. I’m not sure how much longer this can last until all the new money the Fed is printing goes towards increasing salaries. The recent economic relief checks have been completely absorbed by a month's driving for some households. Once we recover and people are able to afford paying $100+ to fill up, it will be too late for investors to capitalize on the missed chances. The lost money caused by just sitting on the sidelines will be very real.

*Disclaimer: The author does not own a position in any of the stocks above.

Comments

[Hugh]

Inflation is sometimes caused by the printing of fiat money, however, the inflation that we have experienced is an inflation of "checkbook money," the money that gets multiplied by the fractional reserve system.

You put $100 in your bank, your bank loans out $90 of your money, that $90 winds up in another bank, that bank loans $81, that money gets into another bank, and then $70 of that money is loaned, etc.

This is the modern cause of inflation. Because of this, some argue that we are in a deflation, in that banks are more reluctant to loan and the public reluctant to borrow. This winding down of credit extinguishes the fractional reserve's money creation abilities. There may be more paper money but less total money.

[hendi_alex]

I don't think that looking at one component of prices/expenses could allow one to proclaim or reasonalbly predict inflation of any kind. Especially when the "inflation" is mostly tied to very volatile commodities.

Another argument that rising energy is deflationary goes like this. Energy rises while the cost of labor stays relatively constant. The consumer gets squeezed, slows spending on everything except essential food, and the economy contracts, bringing on a round of deflation.

Finally, currencies often move through fairly long duration cycles. The excess military spending will end, adjustments will be made in the consumption of crude, excesses will be squeezed from throughout the system, exports will continue to increase, the imbalance of the dollar vs other currencies will shift, and the pendullum will swing in the other direction.

[CTProgrammer]

OMG! They just let anyone ramble on and on on Seeking Alpha now, don't they? This baby analysis needs to be thrown out with the bathwater. What the fill-up cost (which doesn't take into account MPG or the size of the fuel tank) has to do with inflation is beyond me. The author thinks he's making a point, with a nice colorful chart, but this is all just the rantings of a lunatic. Inflation always exists. Yes, in the future the average wage will eventually hit $100,000. Whether that's 5 years down the road or 15 makes a big difference, and this article does nothing to inform anyone of anything. No real figures other than "10 cents on the dollar" hypotheticals. Utterly useless article!

[DroolingElmo]

Sorry Andy So, I don't know where to begin. So I won't even try.

I will say though that my newly bought 1999 Suburban has a 44 gallon gas tank and costs me about $200 to fill up now and if I had owned it a year ago it would have cost me about $125 to fill up.

I looked at this vehicle with my neighbor in July 2007 and the asking price was $12,995 and it had 68,000 miles. My neighbor ended up getting it for $12,000. Last week I saw it in his yard for sale and I bought it, now with 74,500 miles for $6700. Almost 50% depreciation on one year on a nine year old vehicle. I'll bet that has never happened before on a vehicle that old.

The amount I saved offsets the extra price in gas for over 3 years.

$11,000 Truck value if gas prices were still $3.15
$6700 Truck value with $4.15 gas

$4300 Savings

$75 Extra cost to fill up tank

$4300/$75

[DroolingElmo]

I get 680 miles on a tankful and I'll only put 5000 miles a year on it. But let's say I drove it 230 miles a week. I would need to fill it every three weeks or 18 times per year.

The amount I saved on the truck offsets the gas price for 57 fillups. At 18 fill ups per year that's a little over three years.

So Andy So, there are always lots of ways to look at things in a positive way. I see bargains everywhere and am buying everything I can find at rockbottom prices!

[Georealist]

Bui...Lien..the pathetic Mark Anthony...and now So...what marks all three clearly is a lack of any hard analysis or insight. In the case of Mr. So its as simple as taking a trend and projecting it straight line into the future...to say the least, a highly amateurish way of analyzing economies..or potential investments.
I would guess that we are far more likely entering a period of a rolling economy..different than anything we have precisely experienced. Periods of inflationary bursts..followed by credit contractions that turn investment assumptions upside down. VERY schizophrenic markets. There are very few safe havens one can cling to..but..I'd be looking to gold...a clean personal balance sheet..safe haven oil/gas producers like PWE/Linn Energy....and learning how to grow some of one's own food. This could get very nasty...but will certainly not be as simple minded as detailed by So..or some others.

[Bear StocksReport]

Inflation is here to stay in one form or another (oil, food, metals, etc.) and to hedge against it, indeed to profit from it, we must have commodity related ETFs in our portfolios. DBC, GSP, XME, RJN, KOL and MOO fit the bill.

[rawgreed]

A simple glance at the recovery of the 2001 recession can tell you where we may be headed as we recover from the current economic crises.

The most BASIC premise of inflation is not an increase in prices. It simply means more dollars competing for the same goods. Looking at MZM money supply as I posted in previous articles shows that our money supply has increased over 16% in just the first half of this year. We recovered in roughly 3 years following the .com lead recession after the Fed increased money supply 21% in 2001.

Can anyone point to a single recession in U.S. history that hasn't lead to an higher adjustment in the cost of living following our recovery?

CT recovery if you want hard statistics I offer you to read my historical calls on buys and sells 100% have been posted in the past and in SA articles. My personal belief is the quality of analysis is tied to accountability. I post my buys and sells to produce a track record, of which I have roughly 3 years posted for all to see.

[rawgreed]

My only recovered page of Raw Greed's portfolio is at

www.rawgreed.com/?page...

Since inception of the blog in 2005, I have written over 400 articles. I get nothing from it other than producing a track record. My analysis may be simple, but in trading, quality simply means consistent picking. I'm a value investor. When I buy I detail, cash, debt, ROE, ROI etc. I look at the trend, I look at RSI, among my personal observations. Keeping things simple gives you clear direction and conviction.

It doesn't matter if you employ throwing darts or elliot wave analysis as long as your results in B&W prove profitable to you.

[flow5]

There are various degrees of hyperinflation. The U.S. will experience a loss in the faith and credit of the Federal Government (unsupportable Federal Debt interest payments), followed by debt repudiation and the issuance of a new currency). There is no time table but at some point the increase in tax collections necessary to cover the Federal, State, & Local debt payments will be exhausted and all debt (public & private) will go into default.

And at the same time, a surfiet of Euro-dollars (dollar denominated assets) will cause a flight from the dollar and a economic catastrophe of unprecedented proportions. It is in no way inevitable but it seems the most probable outcome considering nothing, no nothing, is being done to avert this senario.

[carey_jim]

Unfortunately, when I hear statements like "I firmly believe," I have to point out that the future is called the future because it can't be predicted with much accuracy.

Your argument for inflation is strong but there is also an argument for deflation:

Falling consumption because if rising prices causes reduced production which causes reduced employment which causes a contracting economy which is a deflationary force.

Falling real estate prices, falling stock prices and a rising dollar vs the Euro for example, are deflationary forces.

A strong recession, read depression, usually causes a contraction in economic activity which usually produces a downward price spiral.

This is not an argument for the necessity of a coming deflation just a heads up that it is possible.

Obviously, if a major deflation occurs, cash will be king and commodities of most kinds will be bad investments.

But I can't predict the future either, so don't count on either scenario.

[jcrash]

You can't have inflation like that without wage pressure. Currently, wage pressure is nil.

[ajhough]

Inflation is HERE! The cost of living of most items we use is flying out of control. Profits for companies will continue to disappear and stocks will drop to "fair value."

[Eagle-Chief]

Andy - good article and some good points made. It is scary to think that our retirement funds could be worthless some day, compliments of reckless central banking policies.
I just saw 2 good websites last night that deal with hyperinflation -

www.sjsu.edu/faculty/w...


www.econlib.org/librar...

[User 127919]

you are saying the right things . continue

[punk_ash]

good article, and what is wrong with you people just insulting the author. What he is saying is correct and he is advising us to buy hard assets. He is right about that. All countries are printing money and the long term trend for all currencies is down versus the real assets.

[Stanley]

Andy, you are missing several points.
1. houses are still overvalued by historic standards and will likely keep losing value for many years.
2. oil is in a price bubble, and it will eventually pop, just like housing did.
3. inflation has nothing to do with commodity prices. the fed is not printing money. yes, the fed is giving the banks cheap money to lend. but they can't lend it because they are having issues paying off all their bad loans. also nobody is borrowing the cheap money because of economic uncertainty, job losses, falling property values.
4. wages are not going up. in an inflationary environment, there is so much money floating around, wages are shooting up. are people that do the job that you were doing 3 years ago now making 100% more? i know in most parts of the US wages are basically flat.

[copperpenny]

debt is payed back with cheaper dollars in an inflationary environment when you look at the true value of money.

[edvestor]

Interesting guys . But tell me wthat happened to prices for real asssets , and stock market soon after the fall of Ugoslavia , or German

[edvestor]

Interesting guys . But tell me wthat happened to prices for real asssets , and stock market soon after the fall of Ugoslavia , or German Reply Report abuse