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.