It seems that inflation is temporarily starting to slow down, a fact that has been notably seen in stock investment prices. Although Elliott Management does not interpret the data in a hopeful way... It recently sent a letter to its clients warning them that we are heading towards hyperinflation that could lead to the worst financial crisis since World War II. So, let's better review the factors to follow and how we can safeguard our stock investment portfolio.
What does Elliott think of the current situation?
La Elliott wave theoryApart from being a theory that we explained in another article, it is a hedge fund that has about $56.000 billion in assets under management. They currently consider that global economies are on the brink of the abyss and that current conditions can cause hyperinflation in many states that would lead to a spiraling crisis marked by accelerated inflation of more than 50%. It may just be a subjective opinion, but this hedge fund born in the 1970s has lived long enough to know how to see things coming.
How were the current conditions created?
Current global financial conditions are a direct result of central bank policy mistakes that intensified in 2009 during the global financial crisis, when central banks, including the US Federal Reserve, began flooding the market with purchases of bonuses massively. These “quantitative easing” programs, which were basically “printing money out of thin air,” essentially drive up government bond prices and drive down yields, making money cheap for consumers and businesses, and It tends to be extremely good for investing in stocks and other asset classes.
Annualized inflation at a global level. Source: Inflation Data.
What consequences has it caused?
With such a prolonged era of cheap loans, consumers went on a spending spree, driving up asset prices (investing in stocks, for example). contributing to the inflation we see now. What happens next are the risks to observe. Like many central banks around the world, the Federal Reserve is aggressively raising interest rates to try to slow the economy in hopes of reducing the country's inflation. But rate increases are forceful and the impact is usually noticeable with a delay of several months.
Fed monetary policy of the last 20 years (1999-2019). Source: DailyFX.
What could cause hyperinflation?
Aggressive Fed Rate Hikes
The Federal Reserve is in uncharted territory. It has never been forced to raise rates so aggressively, just as it has never raised rates in an economic downturn. The question is how much interest rates will have to rise to bring inflation back close to the long-term target of 2%, recently being above 8%…
Massive asset purchases by central banks during the 2020 pandemic. Source: Bloomberg.
Central banks are likely to respond to the next crisis as they did before: by buying stimulative bonds (so-called money printing) and reducing interest rates to near zero. It's the strategy that has worked before, and one of the few that has. But that is the path that can lead to hyperinflation and global social collapse, Elliott says.
Financial appeceament.
What is really worrying is the enormous financial leverage (loans equal to debt) that exists in the financial system. Both in central banks (in the form of bonds) and in private companies (loans, mortgages and other debts). It is not just that these policies have caused more inequalities and the formation of a new speculative bubble in certain sectors.
Private debt corresponds to more than half of global debt. Source: IMF.
As interest rates rise and a degrowth cycle begins (central banks selling government bonds) it can have unforeseen consequences. Financial stress could lead to a much sharper sell-off in investments in stocks, government bonds and homes, which could trigger a new global financial crisis that would make the 2008 recession look like nothing.
How do we protect our stock investment portfolio?
Let's see... we have been talking for a whole year now about when the financial crisis we so long expect will emerge. If we stop to think, we are already immersed in it, we are witnessing its development live. The uncertainty of where it is going and what impact it will have on the economies will be seen with the application of the monetary policies of the central banks. But with inflation higher than usual, it remains a concern in the US and other countries that may be heavily exposed.
History of movements of the iMGP DBi Managed Futures Strategy ETF. Source: Imgpfunds.
Therefore, if you want to protect your stock investment portfolio in this situation, we can count on the iMGP DBi Managed Futures Strategy ETF (DBMF US). This ETF replicates the returns of the best 20 commodity trading hedge funds (CTA). This year (YTD) it has a profitability of 32%. And if you don't remember how ETFs work, take a look at the previous article we wrote explaining it in detail.