Our father Burry, who art on twitter, hallowed be thy way. Inflation 3.0
Prequal 3. To infinity and beyond!
I warn you, I will use some biggish words and confusing concepts here, but if you have grit you can trudge through and hopefully come to an understanding. I will try my utmost best to explain.
The Prequal. Condensed, Caramelized, and hopefully thoroughly informative.
Stock market speculation, which adds nothing to the wealth of any nation, is the inflationary activity preeminent, and it was the craze of America in the 1960's as it had been of Germany in 1921. A buoyantly rising stock market marks the opening stages of every monetary inflation. A sharply rising stock market proves to be an unfailing indicator of monetary inflation happening now, price inflation coming later, and a cheap boom probably occurring in the meantime. The stock market boom like the prosperity is founded on nothing but the inflation, and it collapses whenever the inflation stops either temporarily or permanently. American investment in the 1960's, with its instant fortunes, its swamping volumes of turnover, and its absurdly high prices for incredibly useless ventures, underwent a species of insanity that was quite typical of inflationary booms. In 1968, the last year of full bloom of the inflationary prosperity, the volume of trading on registered stock exchanges alone was $200 billion, or more than four times what it had been in 1960. The income of the securities industry increased from $1.2 billion to $4 billion. The exchanges were compelled by the overwhelming volume of trading to close for part of the week, as the German Bourse had done in 1921. Capital gains of individuals reached $36 billion, more than three times the levels prior to 1962, and more than the income generated by the entire American gas and electric utility industry and agricultural industry combined.
-Dying of Money: Lessons of the Great German and American Inflations by Jens O. Parsson -Chapter: The great prosperity of 1962-1968.
Can you guess how they achieved this great prosperity? Well, they definitely didn’t work for it, they printed it! Ring any bells? haha just kidding enjoy your stimmy check while it’s worth something.
Swamping volumes of turnover
Absurdly high prices for incredibly useless ventures- RIDE (Lordstone MOTORLESS motors). All the SPACS basically - (SPACS are blank check companies that list without any real income. It’s basically a quick Ponzi scheme and not a real investment).
the insanity that was quite typical of inflationary booms - please, what has NOT been insane about the last few years?
instant fortunes - just look at all the meme stock millionaires (not hating- good DD went into some of them).
SO. Father Burry, was now followed by Daddy Dalio (Ray Dalio) who basically just said (holding cash is a DUMB investment) -BTW this guy also called the crash in ‘08, albeit using a different method - see his book (template for big debt crises).
So Dalio just said that holding cash is dumb, and recommended getting diversified into different currencies, different stocks blah blah blah. I kind of disagree.
Probably one of the best hedges for inflation would be to take out a fixed-rate loan and buy a REALLY stable company’s stock that can cover the loan interest payments with its dividends that is also in inflation hedged (consumer durable-like) business. #notinvestingadvice
Unfortunately, some of us are not lucky enough to have access to fixed-rate loans. What do we do? *CRY*
I did a bit (a lot- probably not enough) of research and when inflation ticks up, yields follow and everything pretty much suffers. Looking at the period from 1968 which is when “The great prosperity” ended and the “Great inflation” started it seems that even great inflation-hedged sectors suffer. These companies fair a bit better but they still hold the cash from their sales, which inflation quickly burns away.
So what? - Gold? During the inflation from 1968 to 1980 gold performed pretty well. But during the ‘08 crisis gold and silver, both first PLUMETTED and only then took off. Why!? Because banks had to do some weird collateral gold lending to get more liquidity, so they sell gold in the market which pushes the price down.
I think that the American financial sector is a lot more secure than it was compared to the 08 crisis, and the Fed is much more eager to step in and stop any sort of liquidity shortage so gold may not plunge as it did in ‘08, BUT if it does you know why. And you can HODL those gold bullions of yours.
Am I saying buy gold? I am saying that it is pretty hard to hedge properly against inflation. I don’t believe in gold fundamentally, -I would rather do the fixed-rate loan thing. But if it’s my only option, I will hold it.
Inflation in February was low? Fasten your seatbelts inflation is going to rocket in April.
Look here. Not here, down at this image.
That little yellow box says 256.389 this is the inflation “Index”. That’s April 2020. When we were in the midst of the shit with Corona. Inflation didn’t really budge because well, everything in the world was pretty fucked.
MARCH and next month's APRIL is when “new” inflation data comes out, and it will be based on this number.
Here’s a quick example:
So this 1.676% is February’s ‘inflation rate’. They take the base - 2020 Feb inflation index (258.678) and then they take 2021 February inflation index (263.014) and they calculate the change in percent: (263.014/258.678 -1)*100 = CPI% = 1.7%
Oh wow, what’s March gonna look like? notice that the base (2020 march is very low ~258.115) if inflation moves at the same rate from 2021 Jan to Feb 2021 (263.014-261.582 =1.432) we can get 263.0.14+1.432 = 264.432.
The inflation on that from last year's March low base? (264.432/258.115 -1)*100 = 2.453% - Basically ALSO where the 10-year inflation expectations are. Do this to April, and shit gets real.
This might be a bit difficult to understand, so to summarise - Inflation is calculated based on previous years ‘base’. Last year (2020) the base was very low due to the Covid crisis. This year, coupled with a bunch of stimmy checks, oil price increasing, and the opening of economies…Inflation may come out a LOT higher than expected.
March won’t be too bad, but April’s data could hurt.
Mostly all stocks get hurt by inflation
How can you protect yourself against this POSSIBLE outcome?
#notinvestingadvice
The fed currently says inflation will be ‘transient’ which means they understand we could see a big uptick in inflation, but they think it will go back down. The problem is that inflation is also very psychological, it can gain momentum just like a stock market rally.
There is also still the huge inflation potential gap (see the last post on Reddit) that needs to be equilibriumalised- not a word.
After all this digging it seems like the best historical investment during these times is literally just gold. not even gold companies, just plain gold. It saddens me because I don’t necessarily believe in gold as an investment in the long term-but hey if it can save my money I don’t care.
I guess we’ll see, won’t we?