How to Capitalize from Inflation?

If I believe that we are facing hyper inflation is upon us, how can an investor benefit from this?
Is there a stock you could buy today that would get you big dividends if your prediction came true?

Thanks Gus

The usual one I heard of was foreign currency. Buy $5 of euros, for example. When hyperinflation hits, use the $5 of euros to buy $10 of dollars.

Really, buying anything other than dollars will work: Land, stocks, commodities futures, whatever. But that’ll just keep you treading water: To actually get ahead (rather than just not fall behind), you’d want to take out as much as you can in loans, and use the loan money to buy more of whatever your investment is.

Of course, if you turn out to be wrong about the inflation, then you’ll get screwed over by the interest on those loans, but that’s the nature of financial speculation.

Pretty much. The idea is to have as few dollars as possible. So spend all your money buying stuff (keep in mind that you should be investing not just spending). And then borrow as much money as you can and buy investments with that.

If you time it right, you’ll do great. All that gold and real estate and fine art you bought will hold its value while dollars devaluate. And don’t worry about those loans - you can sell off one Picasso for millions of hyperinflated dollars and pay them all off.

The downside is if you don’t time it right, you are going to be truly screwed.

You might find this article of interest.

In the case of hyperinflation, isn’t essentially what happens is the slate is wiped clean and everyone gets to keep what they already have in their possession at almost no real cost, regardless of how much they owe on it? If I have a large mortgage, should this be what I hope for?

Buy stock in the makers of banknotes.

Depends very much on the interest rates you pay and the legal system around it. In some countries with a long history of inflations, it’s common to peg interest rates to inflation rates, so the interest you pay will rise along with the price level. In that case, your clean slate effect with debts wiped out won’t work.

Even in the absence of such inflation indexing clauses, German courts developed a doctrine in the 1922/23 hyperinflation of adjusting monies owed from the time before the inflation to the new price level.

With futures contracts (perhaps especially precious metals), leverage would allow you to actually profit (even adjusting for the inflation). Maybe precious metal mining stocks.

All these leveraging ideas are just variations on the central concept, which is, borrow expensive dollars today, and pay back with cheap inflated dollars tomorrow.

The problem comes if the anticipated inflation doesn’t occur, and you have to pay back your expensive loan with expensive dollars. The greater your leverage, the worse off you will be. If you just buy commodities with today’s dollars, and still have the commodities tomorrow, you can sell them and get back your principle. If you’re highly leveraged, you’ll lose everything, and possibly more. With some kinds of bets you can be on the hook for more than your principle.

One must distinguish different kinds of inflation, of which 3 main types are
[ul][li] Producer price inflation[/li][li] Rising wages[/li][li] Depreciation of dollar relative to other currencies[/li][/ul]

Producer price inflation, e.g. of petroleum and metals, is what we’re seeing these days. A normal recourse is to buy stocks like FMCG which owns large amounts of unmined ore. Industries like pharmaceuticals whose costs don’t depend on producer prices may also be a buy. Also worth noting is that small-cap stocks may outperform large-caps during inflationary periods; one reason for this is your question itself! – investors are looking for special ideas. But none of these ideas are big “get rich quick” ideas.

Almost paradoxically, cash is a common idea when anticipating inflation! The idea is to be liquid and benefit from rising interest rates. But this may be inappropriate in today’s environment.

I would ask OP why he specifies “hyper inflation” rather than “inflation”? What’s the intended difference in meaning? I’ve seen the word in other recent posts; is it being bandied about on popular radio?

…from the frying pan, into the fire .

The Euro nations are more in debt than the USA

Continuing from your excellent starting point:

Producer price inflation will happen when demand for raw inputs exceeds near-term supply. A collapse in demand due to a collapsing US economy is unlikely to produce producer price inflation. OTOH, a supply-side shock like Saudi Arabia suddenly stopping production to fight a civil war could cause a lot of price runup of that particular commodity. Whose adverse economic consequences would then slow all other commodity demands.
Rising wages require labor bargaining power. With high unemployment and unions in retreat, you won’t see much of this in any developed economies. You may see some of it in China. Although they still have a shit-load of underutilized rural labor to absorb before their overall economy becomes even remotely labor-constrained. Labor constraints tend to be slow-building and also slow-to-cure. So we’ll be able to see this one coming years before it gets acute.
Depreciating dollars: The key here is the word “relative”. During the Fall 2008 meltdown in the US financial markets, the dollar *gained *strength as the US economy fell off a cliff. How could this be?

Because everything is relative to other world currencies. Investors believed that while the US was objectively screwed, it was *less *screwed than the Europeans or Japanese and was *less *likely to do something really stupid (or more precisely, *less *likely to do something inimical to the investor class’s interests).

And the less-screwed country(ies) will see their currencies appreciate = (more or less) see their inflation go down.

In summary, near term large scale inflation (much less hyper-) in the western world is a figment of right wing radio’s imagination.

Not quite. According to the Wikipedia article, which cites reliable sources, U.S. public debt is expected to hit 100 % of a year’S GDP in 2011. In the Eurozone, it’s currently 84 %, which is why The Economist sees the Eurozone’s prospects better than those of the U.S.

Which does not mean I’m not concerned about the rising debt levels across Europe. OTOH, public debt is just one of many factors that come into play when future inflation rates are to be estimated. In any case, the statement that the Eurozone is indebted higher than the U.S. is inaccurate - not to mention the vast differences in public debt levels among the 17 Euro countries.

A strategy which rather notably drove the Hunt brothers right into bankruptcy.