So what exactly is Hyperinflation? Well… in the simplest of terms, it is extremely high or “out of control” inflation in which prices rise rapidly while a currency loses its value. Other definitions used by the media include “a cumulative inflation rate over three years approaching 100%” to “inflation exceeding 50% a month.”
And while there is a great deal of debate regarding the root causes of hyperinflation, most Economists believe that it is caused by a massive and rapid increase in the supply of money, which is not supported by growth in the output of goods and services. This results is an imbalance between the supply and demand for the money (including currency and bank deposits), accompanied by a complete loss of confidence in the money, similar to a bank run.
With the recent announcement by the Federal Reserve that they plan to pump an additional $1 trillion into the U.S. economy in the near future, it’s no wonder that hyperinflation seems to be on the minds of many traders these days. One such trader, Zachary Oxman of TrendMax Futures believes “We are facing what I think is one of the most aggressive inflationary periods in our country’s history. The minute these commodity markets sniff inflation, things are going to go through the roof and the dollar is going to get whacked.”
So could the recent run-ups in gold, oil, copper and many agricultural names be suggesting that hyperinflation (or at least very high inflation) is just around the corner? well….the financial markets certainly seem to be acting that way.
And as the media continues to focus on sinking home prices and higher unemployment, we think members should look past the commentary heard on the business channels and focus on what the financial markets are forecasting.
In the U.S, the hyperinflationary trigger will not likely come from within the nation. It will most likely come from outside. Eventually, China, Japan, and/or some other nation, will see the endlessly increasing American deficit spending as a threat to the viability of the U.S. dollar. In response, they will reduce their purchases of treasury bills or start selling them. This is likely to bring America to its knees. China has already recently been talking about the creation of a new reserve currency and moving away from the U.S. Dollar as the world’s reserve currency. China holds vast amounts of U.S. debt in the form of U.S. dollar denominated treasury bills and bonds. As the Chinese begin to diversify away from the U.S. dollar the dollar is likely to fall. The Chinese on’t want this to happen overnight as they know it will destabilize world markets which purchase their goods, but it is a good bet they will start reversing their U.S. debt holdings no matter what we do. It is not a matter of “if”, but, rather, of when.
If and when inflation begins to appear on the scene the U.S. Federal Reserve is likely to move aggressively to squash rising inflation by raising interest rates swiftly. This could cause the current recession recovery to come to a screeching halt and even cause a second and possibly worse recession. Time will ultimately tell if the Federal Reserve and World Banks can walk the tightrope of low interest rates and pumping tons of currency into markets to turn this global recession around and the long term effects that increasing debt, currency devaluation will have relative to inflation.
So where to put your money if inflation is coming?
To Gold or Not to Gold?
Gold is deemed to be one of the best places to put money in times of inflation as it is a real tangible asset but right now Gold is up considerably since the stock market’s big drop last fall. In late October gold was below $750 USD/Oz. and has risen to around $955 USD/Oz. today. Seasoned veterans of the gold wars know that the governments and central banks are arrayed against gold are not fair fighters and they will fight to keep gold values in check and currency values high so there may be a short term ceiling for gold in the $1000 USD/Oz. range. But, if hyperinflation happens gold may go much higher.
What about Oil?
Oil prices rose to six-month highs to nearly $63 ppbl Wednesday on optimism that the U.S. is emerging from a severe recession. We expect oil to continue higher as the global economic recovery continues. Also, there seems to be an inverse relationship with oil and the U.S. Dollar. In 2008 we saw a sliding and weak dollar through the first half of the year as oil prices rose precipitously and peaked at $147 ppbl in early July of 2008. As oil prices dropped the U.S. Dollar rose. If we believe that the U.S. Dollar should weaken over time as U.S. debt increases and the Federal Reserve keep printing money and pumping it into the economy, effectively devaluing the dollar, then oil prices should rise as the dollar eventually weakens. So oil should be a pretty good play right now if we believe that scenerio to be true.
Considering the markets generally move 6-9 months in advance of the economy, we think the following sectors and stocks should be considered NOW, BEFORE inflation begins to show up in the Consumer Price Index (CPI), Producer Price Index (PPI) and with the “talking-heads” on TV. If members wait until evidence of inflation begins to shows up in the data, we think the inflation expectations could already be largely reflected in the prices.
Oil & Energy Stocks
Adventure Energy (ADVE) — An independent oil and natural gas company engaged in exploration, development and production activities in the Appalachian Basin, particularly in Morgan County, Kentucky and Wayne County, West Virginia.
Energy West (EWST) — Engaged in the distribution of natural gas to about 36,000 customers in Montana, Wyoming, Maine and North Carolina
Venoco Inc (VQ) — Engaged in exploration and development of oil and natural gas properties offshore and onshore in California and Texas
Transocean (RIG) — Provides offshore contract drilling services for oil and gas wells worldwide.
Enbridge Energy Partners (EEP) — Engages in the ownership and operation of crude oil and liquid petroleum transportation and storage assets, and natural gas gathering, treating, processing, transmission, and marketing assets in the United States.
Valero Energy (VLO) — operates as a crude oil refining and marketing company. The company operates through two segments, Refining and Retail
Marathon Oil Corp. (MRO) — through its subsidiaries engages in the exploration, refining, marketing, and transportation of liquid hydrocarbons, natural gas, and other petroleum products worldwide. It operates in four segments: Exploration and Production; Oil Sands Mining; Refining, Marketing, and Transportation; and Integrated Gas
Endeavour Intl Corp. (END) — is an independent oil and gas company, engages in the acquisition, exploration, and development of energy reserves in the United Kingdom and Norway sectors of the North Sea and the United States
RPC INC (RES) — is an oil and gas services company that provides various oilfield services and equipment to the oil and gas companies. It operates in two segments, Technical Services and Support Services. The Technical Services segment offers pressure pumping, coiled tubing, snubbing, nitrogen pumping, well control consulting and firefighting, wire line, and fluid pumping services.
Chevron (CVX) — This is one of the best consolidated oil companies out there that has solid refinery exposure. The company also has a strong balance sheet with a good dividend yield.
Whiting Petroleum Corporation (WLL) — is an independent oil and gas company that acquires, exploits, develops and explores for crude oil, natural gas and natural gas liquids primarily in the Permian Basin, Rocky Mountains, Mid-Continent, Gulf Coast and Michigan regions of the United States.
BP Plc (BP) — oil company is one of the highest dividend yield stocks around. When the market is down you can pick up the bp stock with dividend yeilds around 8%. That is one of the best dividend stocks around.
Exxon Mobil Corp (XOM) — is the world’s largest integrated oil company with perhaps the biggest divident yield.
Gold & Mining Stocks
Gold Resource Corporation (GORO) — A a mining company pursuing development of gold and silver projects including a 100% interest in four potential high-grade gold and silver properties in Mexico’s southern state of Oaxaca.
Gammon Gold (GRS) — Canadian company engaged in the exploration and development of gold and silver mining properties in Mexico
Yamana Gold (AUY) — Canadian company engaged in the exploration and development of gold properties in the U.S. and Latin America
Richmont Mines (RIC) — Canadian company engaged in exploration and development of gold in Quebec and Ontario, Canada.
Iamgold Corp (IAG) — Canadian co engaged in the acquisition, exploration and development of gold mines in Africa, South America and Canada
Northgate Minerals Corp (NXG) — Canadian company engaged in mining and exploration of gold and copper properties in Canada and Australia
Rubicon Minerals Corp (RBY) — Canadian company engaged in exploration of gold and base metal deposits in Canada, U.S. and Republic of Congo.
Vista Gold Corp (VGZ) — Vista Gold Corp. is an international gold mining company based in Littleton, Colorado, with a plus 20-year history of gold exploration, development and operations.
Central Fund of Canada Limited (CEF) – Central Fund of Canada Limited is a self-governing, exchange-tradeable, refined gold and silver bullion holding company.
OceanaGold Corporation (TSX: OGC) — OceanaGold produced 264,000 ounces of gold during 2008 and is targeting production of 300,000 ounces during 2009.
Fronteer Development Group (FRG) — has announced that they have intersected high-grade gold mineralization at their Long Canyon property in Nevada.
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But while the price of oil has risen from the $30s to $50, oil stocks have not really rallied much. Below we highlight the ratio of oil stocks (S&P 500 Oil & Gas index) to oil (the commodity). When the line is rising, oil stocks are outperforming oil, and vice versa for a declining line. As shown below, when oil spiked in early 2008, the ratio dropped to its lowest level in years. Then when oil tanked in late 2008, the ratio spiked to its highest level in years as oil stocks held up much better. Recently, however, oil has rallied and oil stocks have been stagnant, causing the ratio to come back down. At the moment, the ratio is resting just above the average since 1990..
Meanwhile, it should come as no surprise that all the major homebuilding stocks have also taken big hits in the last couple of years. But in the stock market, crisis creates opportunity. And we think the worst could be behind these beleaguered stocks? In light of the surprise merger on April 8th by homebuilders Pulte (PHM) and Centex (CTX), we think members should consider positioning themselves for further consolidation in the sector, and subsequent gains in stock prices.
Back in 2001, President Bush moved to restrict federal funding for human embryonic stem cell research, making it the subject of his first prime-time televised speech from the White House. Now, Obama has flipped the tables with one swipe of the pen, a prospect that pleases many Democrats in the Congress. “Signing this executive order sends a clear signal around the world that our nation supports research based on science, not politics,” said Rep. Jim Langevin of Rhode Island, a strong backer of stem cell research.
