The Hugo Stinnes Playbook

Hugo Stinnes was a German industrialist who came out richer after the German economy collapsed in World War I. While the wealth of the entire German middle class was wiped out, he was dubbed as the “Inflation King” because he positioned himself to profit from the hyperinflation that took place in Germany during that time.

Seeing all the turmoil not just in the financial markets, but also in the geopolitical arena these days, one can do well to study what Hugo Stinnes did.

In this article we take a close look at the steps in his playbook and consider it as a possible guide for positioning our investments in preparation for a similar scenario of hyperinflation.

Leveraging Before Hyperinflation. Before hyperinflation broke in Germany, Hugo Stinnes borrowed aggressively- using Reichsmark-denominated debt to fund his investments in mining, shipping and cargo lines.

Investing in Hard Assets. The Reichsmarks borrowed by Stinnes did not stay in his bank account. They were converted into hard assets utilized by his operating businesses which mainly involved the transport of commodities such as coal, lumber and grains.

Investing Offshore. Stinnes had international businesses and holdings of physical gold. These were, in effect, denominated in hard currency and allowed him to be hedged against the devaluation of the Reichsmark.

Deleveraging After Hyperinflation. The Reichsmark became worthless when hyperinflation hit in 1921. The exchange rate of the German currency to the United States Dollar went from 208:1 to 4.2trillion:1 three years later. Stinnes’ Reichsmark-denominated debt similarly became virtually worthless. With the value of his hard assets unaffected by inflation, he was able to easily erase his debt without making a dent to his net worth.

Buying Companies in Distress. Distressful economic conditions in Germany resulted in fire sale prices of languishing and bankrupt businesses. Hugo Stinnes’, with his war chest of hard currency, was quick to pick up more hard assets and buy out his competitors at bargain prices.

After the war, Hugo Stinnes emerged as one of the richest men in the world.

Armed with this information, the typical individual investor can also form a strategy patterned after Hugo Stinnes’ playbook.

Just like in 1921, the threat of hyperinflation once again exists – not with the Reichsmark but, this time, with the global reserve currency – the United States Dollar.

The United States is currently the world’s number one debtor nation. Owing $1.3 USD to China, the United States should find cause for concern in China’s recent actions, which appear to be aimed at chipping away at the US Dollar’s supremacy. Moves like the setting up of the Asian Infrastructure Investment Bank (AIIB).

The AIIB is being promoted by China as a rival of the International Monetary Fund and the World Bank, threatening the system set up by the Bretton Woods Conference in 1944. The United States has declined membership to and has campaigned against the AIIB – but to no avail. 57 countries have joined the AIIB, including US allies like the United Kingdom and Germany. 20 more countries are on the waiting list.

China has also entered into major bilateral trade agreements with various countries, such as Russia and Australia, with the deals denominated in Yuan.

Seeing that the value of the United States Dollar is being challenged these days, it would be prudent to consider positioning a portion of your investment portfolio according to Hugo Stinnes’ playbook.

Employ leverage using US Dollar denominated debt. If possible, try to get a loan with the longest interest fixing period so as to minimize interest rate risks. Check for any prepayment penalties. The more flexible the loan agreement as to the option for the borrower to prepay, the better.

Invest in Hard Assets. Agricultural land that produces wheat or livestock is one example of an asset worth buying. Physical gold bullion is also another hard asset that holds its value in times of inflation or severe currency devaluations. The smaller the bullion (i.e. 1/10 oz) the better for the holder as this affords ease of exchange and improved liquidity.

Invest Offshore. These days, there are a lot of funds that cater to different investment styles, market expectations and scenarios. With advancements in technology and the present interconnectedness of markets, it is easier for individuals to spread their investments across the globe by finding reputable offshore investment banks and fund managers.

Build a war chest. The markets can dip drastically and the value investor can pick up great bargains if he is armed with a war chest of liquidity. Aside from investing in hard assets, allocate a portion of your portfolio to hard currencies (apart from the US Dollar) which you can dip into on short notice, should you find attractive investment opportunities during a financial crisis.

Deleverage. Should the US Dollar significantly decline in value, have a plan for paying off your US Dollar denominated loans- and that should be at a significant foreign currency exchange gain.

Posted in Investing


What are the Effects of a Disbanded OPEC

Just this month, OPEC announced that it is lifting restrictions on the oil production of its members. With the extreme divergence in member countries’ pricing and output requirements, it seems the organization has given up on setting a number all its members can agree on. Each oil producing country can just do what it wants. Each to his own.

The price of crude oil has already dropped 50% from its June 2014 levels. Combined with the slowing global economy, the glut in oil supply portends even lower oil prices forthcoming.

Countries like Venezuela and Iran desperately need oil prices to be much higher than their current levels. However, other OPEC members who are low-cost oil producers – such as Saudi Arabia and the United Arab Emirates – refuse to slow down their production.The cost to produce a barrel of oil differs among oil producing countries. As a result, they have different break-even points. Venezuela is asking to raise oil prices to at least $88 USD per barrel in order to profit from its investment. Iran needs the oil price to be at least $135 USD in order for production to be feasible.

The Saudis, on the other hand, have a relatively lower oil production cost. They can price oil as low as $30 USD per barrel if they have to. As a result, Saudi Arabia continues to pump more oil into the world market.

The Saudis actually have a more complicated agenda than simply reaching a break-even point. Saudi Arabia is actually using the lower oil prices to kill competition and regain lost market share in world oil production.

Since 2008, after the housing crisis crippled the United States’ economy, the US government has been encouraging fracking as a means of significantly spurring employment and GDP growth. However, this has led to a glut in world oil supply and lost market share to other oil producers, in addition to the resultant decline in price.investing

The average breakeven prices of shale oil companies operating in the United States range from $60 to $79 USD per barrel (factoring in land and capex). By increasing world supply and causing oil to fall below those US breakeven prices, Saudi Arabia will be well on its way to regaining what it lost to US oil producers.

The Saudis are said to have already incurred a loss of $300 Bn USD for the year 2015 alone. But with the recent OPEC decision to lift the cap on oil production, it seems the Saudis see their goals well worth the sacrifice.

This is especially so, considering that Saudi Arabia also has another agenda apart from profits. The Saudis are effectively using oil production as a kind of weapon to undermine their regional enemies. Iran needs oil prices to be over $100 USD per barrel. Meanwhile, Russia, which relies on its income from oil to fund around 50% of its national budget, needs oil priced at least $96 USD per barrel.

The Saudis view a radicalized Iran and an increasingly imperialistic Russia as major threats to its security. With waning support from its American ally, Saudi Arabia is resorting to this oil strategy to pull one over its enemies.

Split between high-cost and low-cost oil producers, between Sunni and Shiite Muslims and their respective allies, the virtual disbanding of the OPEC threatens to trigger a host of repercussions to global politics and the economy.

Iran and Russia, historically, have not been countries to easily back out of a fight. There is a likelihood that these nations will retaliate in some form or another.

Russia has been building closer ties with China in recent years. It recently closed two major pipeline deals with its Asian ally. Once these projects are completed, Russia will no longer be dependent on its western customers who have a propensity for slapping it with sanctions to express their disagreement with its foreign policy moves. This is cause for concern for Europe which imports 65% of its oil. Japan and India are also major oil importers but, unlike Europe, they are allies of Russia.

Meanwhile, the economies of high-cost oil producers like Libya, Nigeria and Algeria will take a hit and cause their already shaky governments to further weaken. We can expect that part of the world to become more unstable and radicalized.

Iran’s reaction will also definitely impact the world, it being the Middle East’s biggest economy. It can do any number of things to destabilize the Middle East region, for example, causing tumult in the Persian Gulf or the Strait of Hormuz.

As for the United States, shale oil wells will soon be grinding to a halt if oil prices continue their decline. A big cause for concern though, is that the recent boom in US oil production was financed by $500 Bn of debt. With the decline in oil prices, losing oil companies are now defaulting on their corporate debts and threatening to sink the US economy into another crisis, this time in junk bonds.

Considering the trends discussed above, it is likely that oil prices will not stay low for long. Those invested in the oil industry should factor in all these geopolitical and financial variables as they rebalance their portfolios. (data in this post acquired through LOM)

Posted in Blogging


Social Media Icons

Visit Us On TwitterVisit Us On FacebookVisit Us On GooglePlusCheck Our Feed