Buy When You See Asset Hyperinflation

Summary

• 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.

Aviva PLC

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.

Conclusion

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.

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.

Comments

[Sarel Oberholster]

Hot shares worth a look at the moment are: Alibaba, Amazon, Alteryx, ASML, Atlassian Corp, Biontech Se, Chegg Inc, Crowdstrike Holdings, Inovio Pharmaceuticals, Livongo Health, Lululemon, Medtronic, MercadoLibre Inc, Micron Technology, Microsoft Corporation, Novavax Inc, NVIDIA, OneSpan, Palo Alto Networks Inc, Ping Identity, Salesforce, Sea Ltd, Square, Tencent Holdings, Tesla, Trade Desk, Twilio & Silver.

I have some but am trading all of them with stops so I'm moving in and out given market volatility and risk management but these shares are the ones with the strongest models at the moment.

[Midyanyy]

@Sarel Oberholster what do you think on the current market environment? Many stocks seem to be "overbought?

I've closed all position in the last few weeks. Currently I'm looking for an opportunity to re-enter the market?

Thanks in advance!

On my current what list are:

BAIC Motors

Bayer

Corestate Capital

Zynerba Pharmaceuticals

[Sarel Oberholster]

@Midyanyy we have markets now trading FED money in such volumes that logic is in short supply. I like asml, Tencent and crowdstrike right now but honestly it may be different tomorrow. :-)

[Sarel Oberholster]

@Midyanyy I have just been updating all my algorithm models and everything is in a topping formation indicating a general high risk environment. This would normally take 30 to 60 trading days to complete so it would be a good idea to be extra vigilant over the next month or two.

[Sarel Oberholster]

2nd leg up becoming increasingly unstable and breaking down. Time to become cautious again even though the EU 750bn euro stimulus package has been announced and the USA is debating a new round of stimulus. Gold and silver is still looking good.

[Sarel Oberholster]

One day later and another stimulus of $1 trillion in the pipeline and the up momentum comes right back.

[Sarel Oberholster]

New up leg has started as of last night in the USA markets. It is a 2nd leg up extension move but is very strong at this stage. Will impact all global markets.

[Sarel Oberholster]

My models have gone into top turn as of close of the US markets today. The S&P could not make it back over 3200 and is back at the 11 June levels as of today. INO, NVAX, FSLY & TTD are the only ones still ok but they will also suffer if the markets go back to full panic mode. This is no longer orange lights, it is a red light. I will step aside for now.

[Sarel Oberholster]

I have been keeping an eye on potential covid-19 vaccine makers and my model on Inovio Pharmaceuticals Inc (INO) has gone red hot since 17 June. Perhaps there is good news in the pipeline.

[Sarel Oberholster]

Latest on Inovia is that phase 1 results are due any day and the DoD has provided funding for upscaling their delivery device. I am told by a PHD geneticist that the income from instruments or devices can often exceed the income from the vaccine. Worth looking at.

6/23/2020
- U.S. Government will support the scale-up of INOVIO's proprietary intradermal DNA delivery device CELLECTRA®
3PSP to deliver INOVIO's COVID-19 vaccine
- INOVIO to report on interim U.S. Phase 1 clinical trial results in late June
- INOVIO preparing for U.S. Phase 2/3 ecacy study to begin this summer
PLYMOUTH MEETING, Pa., June 23, 2020 /PRNewswire/ -- INOVIO (NASDAQ:INO) today announced it has received
$71 million funding from the U.S. Department of Defense (DoD) to support the large-scale manufacture of the
company's proprietary CELLECTRA® 3PSP smart device and the procurement of CELLECTRA® 2000 devices, which
are used to deliver INO-4800 directly into the skin.
CELLECTRA® 3PSP is designed to deliver INO-4800 directly into the skin, where the vaccine prompts the body's
immune system to drive a robust immune response. Interim results of U.S. Phase 1 clinical studies of INO-4800 will
be available later this month. A Phase 2/3 ecacy trial is planned to begin this summer (July/August).
The DoD contract, from the JPEO-CRBND-EB through funding provided by the Defense Health Program, builds upon
two separate prior $5 million grants from the Bill & Melinda Gates Foundation and the Coalition for Epidemic
Preparedness Innovations (CEPI), to accelerate the testing of CELLECTRA® 3PSP. Initial development of this next
generation CELLECTRA® 3PSP smart device began in 2019 with $8.1 million in funding from the medical arm of the
U.S. Defense Threat Reduction Agency's Medical CBRN Defense Consortium.
s23.q4cdn.com/...
Also employing new senior staff.

PLYMOUTH MEETING, Pa., June 25, 2020 /PRNewswire/ -- INOVIO (NASDAQ:INO) today announced it has appointed
two experienced senior executives to lead its growth in the Asia market and to advance the clinical development of
its DNA vaccine INO-4800 to combat the COVID-19 pandemic.
s23.q4cdn.com/...

[Sarel Oberholster]

The major problem today is at Oil with WTI down over 6%. The market is still finding its feet from the 6% fall in the Dow. So far this is turbulence but it must not hang around for too long. Dow & S&P down around 2.5% and Nasdaq down 2%. FTSE went down over 3%. We'll need to see how it plays out towards Friday.

[Sarel Oberholster]

Some really good PMI numbers coming out this today with France and Australia back to positive territory and all beating expectations.
www.theguardian.com/...

The German flash PMI index, just released, has risen to its highest level since the lockdown began.

However, it’s still below the crucial 50-point mark which separates growth from contraction. This suggests activity is still falling across German factories and service sector firms, though at a slower rate.

Flash Germany PMI Composite Output Index at 45.8 (May: 32.3). 4-month high.
Flash Germany Services PMI Activity Index at 45.8 (May: 32.6). 4-month high.
Flash Germany Manufacturing PMI at 44.6 (May: 36.6). 3-month high
Flash Germany Manufacturing Output Index at 45.8 (May: 31.7). 4-month high.
Data firm Markit says there are “increasing signs of life” in Germany’s economy, with new orders falling at a slower rate and business confidence picking up.

Just in: France’s economy has returned to growth this month, as some of the Covid-19 lockdown measures are eased.

Data firm Markit reports that private sector activity in France rose for the first time in four months during June. Encouragingly, output growth was recorded in both the manufacturing and service sectors.

Here’s the details:

Flash France Composite Output Index at 51.3 in June (32.1 in May), four-month high
Flash France Services Activity Index at 50.3 in June (31.1 in May), four-month high
Flash France Manufacturing Output Index at 55.5 in June (36.3 in May), 28-month high
Flash France Manufacturing PMI at 52.1 in June (40.6 in May), 21-month high
Any reading over 50 shows growth, so this shows a pick-up in French output this month compared to May (which was a grim month).

And encouragingly, we’ve got evidence that Australia’s economy appears to be growing again. The Australian PMI index has rocketed back to 52.6, from 28.1 in May, driven by a rise in activity in the services sector.

That’s the highest level in nine months, with many firms reporting a rise in new business.

[Sarel Oberholster]

The results from my models are uneasy. The data indicates that the up move is not over but the topping formation remains for now though the medium to longer term is improving and can negate the topping formation which comes from a weaker short term move. It follows that the results from each model are now more important than the general picture.
3I Group PLC: Model is improving on short, medium and long term. Still some weakness on the short side but the medium and long term is positive and advancing. May be time to look for a good entry point close to or better than 800.
Associated British Foods PLC: This one is the safer option with a much less volatile model but not as strong upwards. A bit weaker on the short term but advancing on the medium term and long term. The others are more interesting.
Aviva PLC: Still some weakness on the short side but the medium and long term is positive and advancing well. Looks to be setting up for a good advance.
Barratt Developments PLC: Weakness on the short side and slight weakness on the longer side but advancing on the medium side. Good potential but more risky.
Taylor Wimpey PLC: Weakness on the short side is uncomfortable and slight weakness on the longer side but advancing well on the medium side. Good potential but more risky. Perhaps look for an entry point closer to 140-141 or pass for now (still a good call on a longer term view).

[Sarel Oberholster]

I have uncovered another FTSE share which looks very promising on its model. Informa PLC www.informa.com/...
Full on buy signal re-confirmed today 18 June 2020 at 490. A company which may be well placed in a post Covid-19 world at a very cheap price.

Disclosure: I have bough Informa at 489 today. I have also re-entered 3I and bought some Aviva.

[Sarel Oberholster]

For the record, lets set up benchmarks from 18 June 2020 re-entry:

3I: Good entry points around 800.
ABF: Entry point at average 1940
AV: Entry point at average 277
BDEV: Non aggressive entry points around 500
TW: Entry points at suggested level 140.50
INF: Average entry point 480

The target exit point is the last week of July based on the current data. I will post updates on significant developments and say weekly.

[Sarel Oberholster]

Pent-up demand from retail sales may be a once off due to the lock-downs. A respectable recovery so far but not yet enough to suspend the developing down trend. The move must hold or further improve to market close 17 June to establish a sideways trend rather than a down trend (the 6% down day had set up the trend change). The likely outcome is that this is a short term effect and the down trend will hold or just be deferred for a day or two. The S&P will need to get back and pass the 3231 recent top to stop the trend change. We'll see.

[Midyanyy]

@Sarel Oberholster Thanks for your update. I think we will see a push back in july / august. Most Q2 / H1 results from industrial / transportation companies will be horrible. I think that before or close after the publication will be a good entry point.

Looking on technical indicators (RSI/MACD/Bollinger Band) are on "wait" / "over bought".

On top of that, I see rising sentiment in media regarding a "second wave". As we know it is not important if there will be one or not - a negative sentiment is enough for falling stock prices in a volatile environment.

[Sarel Oberholster]

Thanks @Midyanyy . We now have a seemingly viable medical treatment for Covid-19 and yet the markets are not responding positively. I need to wait until after the close of the USA markets to do a comprehensive review on my models and will then post a further update as promised.

[Sarel Oberholster]

The markets move on the FED and that was once again demonstrated yesterday. The swing from negative to positive in the US markets was significant but the follow through is not, so I'm staying out until the data for tomorrow 17 June is in to judge the developing trend which is still warning down for now.
www.ft.com/...

[Sarel Oberholster]

Nice rebound today 12 June 2020 but the damage done yesterday with a 5.9% drop in the S&P and a 6.9% drop in the DOW will not be undone by a 2% bounce today. I would need data from today to Wednesday June 17th before I will have conformation of a top turn (or not), for now the orange lights remain on for a high risk warning for a market top.

[Sarel Oberholster]

I am stepped aside as of this morning 11 June 2020 as my models have indicated a high risk of a short term top developing (across most shares models). It is not yet calling a short and the top is not confirmed so see it as a high risk warning. I have tested the construction companies BDEV and TW against also the model for Persimmon (PSN) and all are displaying weakness. The weakness developed in the USA after the FED interview; targeting Air Travel, Tourism, Banks and the Oil majors but have now spread to almost everything (perhaps the markets have hoped for some more new liquidity and distrust a holding pattern). Oil and emerging market currencies have also taken a hit and even gold & silver are showing top side weakness in spite of small gains. Together there are just to many warning signals.

[Nicklaas]

Thanks. Finally someone not on the deflation scare gravy train.

I agree on the inflation trend - the deflation / ice age crowd does not want to see it, although Mr. Edwards of SG seems to develop doubts as to his ice age thesis.

But are we getting inflation or rather stagflation as in the 70ies? The value chains are in tatters and the .gov interventionism seems hellbent on making that worse esp. on the trade front. If they manage to kill globalisation the weak productivity growth goes negative in all those new island economies. Add ample nominal $$ and voilà you are set for stagflation. And everybody will be surprised again as in the 70ies.

------------------

But how does a financial like AV do in that scenario? I have been burnt by them twice, so I am wary, maybe overly so.
They have a huge (£ 400B or so if I recall right ) bond portfolio and quite a bit of duration (maybe matching obligations). Both would take a hit from inflation. Net result? So the life book (mostly in £ but also some € (F,I, Poland, Ireland) and some in Asia (Singapore) is a '?'
- or am I wrong here.
And their mid-market savings products should suffer in a stagflation scenario (folks cash strapped, and where is the point in saving with rampant inflation anyway)

They also have a significant property & casualty line, mostly in UK, Canada, Ireland. That is maybe 1/3 of AV and should benefit.

Macro headwinds: The world economy is said to shrink by ± 4% this yr if all goes very well from now on. UK more like - 11%. The plague fallout might well spawn a good old financial crisis somewhere not to far down the line. A good time to buy a financial co?

low p / book (about 2/3) but good ROE (± 14% acc. to FT.com) -- but the latter may suffer.

Overall: Not really convinced they are a good asset play, regardless of looking cheap.
But open to consider things I missed.

regards

Nicklaas

[Sarel Oberholster]

Thanks Nicklaas for a great comment. I have avoided economic and company fundamentals in my article. We have economic devastation in the real economy and we do not yet know how it is going to play out. We have no easy references in economic history so I'm still working on my longer term economic view. This article is about the short term 1-3 months and the abundance of central bank liquidity. I do not know if it will be enough to make up for the economic devastation long term but I lived through 2008 and traded short against the liquidity and lost. My approach this time around is to run with the liquidity but with stop losses against the short term crashes, one which we may have entered right now. I'll step aside when it falls and re-enter when it gains traction again all within a 1-3 month time horizon. I can give you a speculative bullish narrative on AV, for instance that the insured risk on the general portfolio will be a lot less given lock-downs and restricted activities of the insured for a lower claims outcome but we just do not have enough facts right now to make that kind of assessment with a good degree of accuracy. The bottom line of the article is not the identified shares but that the popular names have been traded back to its full value as if there are no economic issues and the liquidity will seek out the next tier of assets to buy, an opportunity to explore.

[Sarel Oberholster]

Some additional material on the FTSE 100 assets mentioned:

seekingalpha.com/...

seekingalpha.com/...

Taylor Wimpey sees jump in bookings as lockdown eases
www.reuters.com/...

www.stockopedia.com/...

www.stockopedia.com/...

[Midyanyy]

@Sarel Oberholster thank you for your thoughts - I've done similar. A possible trade could also be Airbus. My price target is 100-105 €

[Sarel Oberholster]

Thanks @Midyanyy. I do not have a model yet on Airbus. Its a brave choice and similar to one that I have a model on, International Consolidated Airlines Group S.A. IAG is a longer term target on my model, not presently in the 1 month - 3 months range but it fits the profile for an asset inflation laggard. Airbus is worth looking at with entry around 71-74 and agree with your target price, so I'll put it on my list of models to do.