- The first recipients to deploy newly created money gains the most and the last recipients probably lose.
- Don’t be shackled by economic fundamentals or company fundamentals – the newly created money fills in all the cracks.
- A selection of quality FTSE 100 assets which are still in the early stages of asset inflation.
- The immediate capital allocation model is again “cash is trash” and hunting for quality laggards is the name of the game right now.
Photograph by SJ Oberholster.
The one absolute truth about inflation crafted through new money creation is that the fundamental principle of inflation applies. The first recipients to deploy the newly created money gains the most and the last recipients probably lose. This applies equally whether the inflation is in the real economy or whether the inflation is targeting asset prices. Thus, this principle applies fully when Central Banks create new money with the explicit purpose to encourage asset price inflation.
Going back to the real estate bubble of the period 2004-2007 as a preamble to the 2007/2008 financial crises, it is easy to see how the newly created money was channeled into real estate and how the prices of real estate were relentlessly inflated. The best asset inflation example was the response to the 2007 financial crises. Central Banks reinvented the real estate inflation model into a general asset inflation model. Many new methods were designed to achieve targeted asset inflations. These designs included objectives to use channels to achieve the targeted inflations without spilling the inflations into the real economy. Gold benefited, silver benefited, oil benefited, real estate benefited (again), shares benefited, in fact, no asset class was left behind.
Fast forward to March 2020 and the COVID-19 crises. Central Banks did not hold back this time. The response of Central Banks in 2007 was to sell the idea of money creation with the specific purpose of inflating asset prices. It was implemented incrementally in QE1, QE2, QE3…. The asset prices ratcheted up with each tranche of money creation and the "markets" loved it. The approach in March 2020 was to simply move to QE infinity in a single step. No need to sell the idea to the markets or politicians. No need to invent ways to do it or to find channels of distribution. All was in place. Gold benefited, silver benefited, oil benefited, real estate benefited (again), shares benefited, in fact no asset class will be left behind. This time was indeed different, it all happened much faster. The asset reflation from the crash of 2007 took until early 2012 to generally wipe out the decline, roughly 4.5 years. The asset reflation under a QE infinity regime in 2020 is heading for full reflation in 4.5 months. The DOW is back to its late 2019 levels, it just needs to still recover the advance of early 2020. Same with the S&P 500, same with the DAX, yes, generally the same result across all major global share indexes.
I'm sorry that this article is so late. I have been trading gold, silver, oil and lately shares. It is an irrational affront to my economist senses and market senses alike. I traded on two basic principles:
1. Follow the money - the first recipients to deploy the newly created money gains the most and the last recipients probably lose.
2. Don't be shackled by economic fundamentals or company fundamentals - the newly created money fills in all the cracks.
It logically follows that the asset inflation from newly created money must be fed constantly into the markets to keep the prices moving upwards. The reflation process from 2009 to 2012 and beyond was not a smooth or no risk upwards drive. Flash crashes happened and the May 6, 2010 flash crash became famous for a 9% drop in in the DOW in 36 minutes. It was a warning that the asset inflation model is inherently unstable. Now flash crashes are old hat. You can find many 9% and greater crashes in about any assets or indexes (and often) since 2010, it has become part of the asset inflation model and is here to stay.
The burning questions have become: Do I participate or not? Am I an investor or a trader? What is my time horizon? Can I afford to sit it out and wait for calmer markets with high visibility? How do I manage risk in in an asset inflation environment?
Those were the questions I had to answer in 2009. I realized that time horizons have become short if you are looking for visibility or long if you are simply going to trade the asset inflation in a buy and hold. Not participating is as fatal as panicking in a flash crash. Finally that no matter how much I hate the vulnerability posed by a stop loss, one has to use stop losses to remove you from the market when necessary. Do not be afraid to step aside and re-enter in need.
Risk has become very real for both "investor" and "trader" and in most cases the concepts of investor and trader converged to make the distinction moot. Stop losses are targeted by trading strategies to cause a flash crash with a specific aim to harvest stop losses. Investors may find that the asset inflation disguised very real fundamental weaknesses in an investment which, when exposed, will cause a rapid collapse in the price of that asset. The end result is that anyone who ventures into the markets has to be on high alert all the time and may not cling to any asset or narrative. The instability of asset inflation drives the risk-on, risk-off swings in the markets which can ravish any investment portfolio without warning.
I have developed and refined, since 2010, proprietary trading models which specifically track asset inflation and its oscillating pulses. Each asset gets its own customized and specifically calibrated model and not all models fit the mold (weak fits are eliminated). Using my models as the method of selection and the principle of "the first recipients to deploy the newly created money gains the most and the last recipients probably lose", I have identified some assets on the FTSE 100 which are still in a relatively early stage of asset reflation, of sufficiently high quality to restore value even without asset inflation and with fair to good scope to reflate further in the short term (1-3 months time horizon from today 9 June 2020). The selection focus is on asset inflation and not fundamentals. Stop losses in accordance with your risk profile should be used if you chose to engage in any of these trades. This is not investment advice and everyone must make their own choices according to your own risk profiles. The consequences of these choices (profit or loss) will also be your own. All prices are in GBP.
3I Group PLC
Investment services, financial sector. Investment manager in Private Equity and Infrastructure in Europe and North America.
Entry point price: Preferably under 900.
Target Prices: First target range 1000-1020 should be very achievable in the short term. Second target range is a return to a normalized target range of between 1050 and 1150.
Associated British Foods PLC
International food retailer and sugar producer.
Entry point price: Preferably under 2050.
Target Prices: First target range 2270 - 2300 should be very achievable in the short term. Second target range is a return to a normalized target range of between 2436 and 2680.
UK based life insurance, general insurance and asset management services.
Entry point price: Preferably under 290.
Target Prices: First target range 349 - 356 should be very achievable in the short term. Second target range is a return to a normalized target range of between 393 and 442.
Barratt Developments PLC
Construction services, developer, builder and seller of retail property in the UK.
Entry point price: Preferably under 560.
Target Prices: First target range 746 - 764 should be achievable in the short term. Second target range is a return to a normalized target range of between 800 and 870.
Taylor Wimpey PLC
Construction services, developer, builder and seller of retail property in the UK and Spain targeting affordable housing.
Entry point price: Preferably under 160.
Target Prices: First target range 198 - 204 should be achievable in the short term. Second target range is a return to a normalized target range of between 220 and 235.
We have seen asset prices crash in March, oil famously even went negative, just to recover equally fast in steps of 20%, 50% or 100 % and oil going from negative to back over $40 within a month or two. When does asset inflation qualify for the label "Asset Hyperinflation", 20%, 50% or 100%? Some assets have lagged and the stream of asset inflation money is now seeking out those assets. The immediate capital allocation model is again "cash is trash" and hunting for quality laggards is the name of the game right now.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
This article was written by
Analyst’s Disclosure: I am/we are long TWODF, TGOPF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I may initiate long positions in any of the stocks mentioned in the article in the short term and equally may close out any positions that I have disclosed. Currently all positions are traded with stop losses and will close out automatically should the stop loss levels be reached. Stop losses are adjusted upwards manually in response to market moves to create manual tailing stop losses.
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