Welcome to the Catastrophe Surge — When Inflation Emerges

Welcome to the Catastrophe Surge — When Inflation Emerges

I’m going to let you in on a closely guarded secret of the Germans. We don’t just fear inflation. We also know how to profit from it.

I’ve translated this paragraph from a December 2020 opinion piece found on the Bavarian stock market’s website, with my emphasis added:

In Germany, inflation has an especially bad reputation, because it is considered a reason for the country’s impoverishment after the First World War. Even today it’s enough, with the mere mumbling of terms like “currency cut”, “money printing” or “government debt”, to seriously unsettle the average saver. Indeed, a considerable part of the population lost its savings in the early 20s. But, to be more accurate, it was about a redistribution of wealth, as a part of the population strongly profited. Nobody more than Hugo Stinnes.

The point is that, when inflation emerges, many people actually benefit. That’s one reason why it comes about in the first place, of course. This isn’t conspiratorial. It’s just a simple truth that inflation wouldn’t occur if it didn’t benefit someone.

So, who benefits? Those with debt to inflate away. Namely, governments. And nobody understood this better than a man named Hugo Stinnes. Today, we dig into how he became the richest man in Germany in the ‘20s. Why?

Well, 100 years later, central banks are back at it — printing vast amounts of money to finance unhinged government deficits. So, let’s take a closer look at Hugo’s story, before I explain what we can learn from it for today’s investment world.

Stay up to date with the latest investment trends and opportunities. Click here to learn more.

The Inflation King

Hugo was born in Mülheim, into a wealthy family which owned a coal mine and other businesses. My ancestors likely worked for him as coal miners and I was born in the neighbouring town.

Understanding what was to come of the Weimar monetary policies, Stinnes borrowed heavily in papiermark — literally the ‘paper money’ of Germany at the time. And he used the proceeds to buy up mines and other capital-intensive real assets like shipping, forests and steelworks.

His business empire rapidly expanded under the load of debt. In fact, he even became a banker just to leverage up his own businesses even more. (The Japanese were a fan of this tactic in the ‘80s, but that’s another story.)

Hugo became Germany’s largest employer in the process of his expansion — about 1% of the entire German population worked for him. And he was a key figure of the political scene too. He was known as the Inflationskönig — inflation king. But it was all a big gamble on what would happen next.

As inflation exploded under Weimar policies, Stinnes’s debts became easy to pay off. That’s because those debts were denominated in money, but money became worth less and eventually worthless. The value and output of his real and productive assets meanwhile soared in price during the inflation, making it easy to repay the fixed debt with vast cash flow.

All this happened 100 years ago. Although, it’s beginning to happen again. Central banks are printing vast amounts of money to try and finance out of control government deficits. So…

Who wants to be a trillionaire?

Am I suggesting you gear up with as much debt as you can? That you buy a coal mine with the proceeds? All in the hope that money becomes worthless and you can repay your debts with ease?

No, debt is risky. It adds the risk of going bust entirely to the investment equation. You can lose more than your initial investment if you leverage it. And there is no certainty that there won’t be another financial shock before inflation sets in. Nor is inflation itself a certainty.

I am however suggesting that becoming a speculator in overindebted companies is a good idea for some of us. By speculator I mean someone who invests a small amount of their ‘risk money’ — what they can afford to lose. And the stock market offers a rather convenient way of doing so. You just need to find the right companies — those Stinnes might’ve bought if he were alive today.

The risk is that much of the developed world would have to experience significant inflation in the next few years for the bet to pay off handsomely. Or the companies you invest in might go bust.

I don’t expect a hyperinflation like Stinnes benefitted from. But a lot of inflation is likely, in my view. It’ll be a debtors’ prison break.

However, as long-time readers will know, I expect something of a currency reset to occur long before inflation gets completely out of control. That’s what happened to Stinnes too. Well, to his vast fortune.

Hugo died in 1924 of a gallbladder operation. Within a year, his business empire collapsed as Germany underwent monetary reform the same year. The reichsmark ended cheap borrowing and exposed huge oversupply of the commodities which Stinnes’s empire produced. Many of the companies, unable to borrow cheaply, went bust. Some still operate today though.

And so my subject line for today, about becoming a trillionaire, is tongue in cheek. The implication is that we will all be trillionaires if inflation does get out of control. But, even if this did happen, it wouldn’t mean we’re rich. The rich would be those who own productive assets — that’s how wealth is measured when money falls apart. And so those who used debt to finance their acquisition of such assets will appear especially rich.

The stock market allows you to achieve this sort of exposure today by providing access to owning such companies. There’s no shortage of overleveraged borrowers.

Welcome to the catastrophe surge

All this might sound a little fantastical. But consider just how true it has been for decades now. Vast sums of wealth have been created in Australia by doing what Stinnes did — by borrowing huge sums of money and buying real assets, mostly in the form of property.

The central bankers in the developed world generally have kept property prices rising by cutting interest rates each time the economy and property prices wobbled. They cut rates by creating new money. When they couldn’t cut rates more, they just kept creating money anyway. This generated inflation and made borrowing to buy houses cheaper, adding demand.

It’s just like Weimar, but in slow motion and focused on property prices. The tailwind has nonetheless been absolutely central to wealth creation, especially in Australia.

For many years, the same tailwind did not take place in Germany, making German households amongst the poorest in Europe simply because their house prices didn’t surge. But euro membership changed that. Because the European Central Bank does not behave like the Bundesbank once did. It doesn’t mind inflation or asset price bubbles.

The Germans, faced with the prospects of another inflation, are now buying up property like mad. And German property prices are booming.

In fact, have you noticed that house prices around the world are skyrocketing now? During a pandemic that has millions on furlough or worse, with businesses collapsing and people evacuating from cities permanently?

This only makes sense to me if the crack-up boom has begun. That’s the term which Austrian economist Ludwig von Mises gave to our current situation. An economic boom funded by vast amounts of printed money. The more accurate translation of Mises’s ‘Katastrophenhausse’ is ‘catastrophe surge’. It’s precisely what Stinnes profited from too. An economic catastrophe which bids up asset prices.

What I’m arguing today is merely that the same phenomenon will accelerate in coming years and that it’ll begin to broaden into other asset classes such as industrial commodities (where Stinnes made his money) and gold.

But the best opportunity of all might lie elsewhere.

What would Stinnes do today?

Consider a twist that Hugo Stinnes was not aware of — bitcoin.

Michael Saylor may be the modern Stinnes. According to Reuters, the software company he leads ‘said it plans to issue $600 million in convertible notes to fund its bitcoin purchase, after issuing $650 million in notes in December as well to buy the currency.’ That’s $1.25 billion in debt to speculate on the antidote to government money and inflation…

So, am I suggesting you borrow money to buy bitcoin?

No!

But I am suggesting you have some bitcoin in your portfolio.

Until next time,

Nick Hubble Signature

Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend

P.S: Australia’s Great COVID Recession — Learn which investments to accumulate and which ones to avoid in order to give you the best chance of preserving your wealth during the recession. Click here to learn more.