Hyperinflation, Here We Come

Includes: AIG, C, GE, HD, LEH
by: Andy So

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.

California SUV Fill Up Chart

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 (NYSE:GE), General Electric Company or (NYSE:HD), The Home Depot, Inc. at a P/E under 10. Insurers like (NYSE: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.