How You Can Tear a Page from the Inflation King’s Playbook
Editor’s Note: The Port Phillip Publishing office is closed today — as are most offices around Australia — for the Queen’s Birthday public holiday. But we’ve convinced our friend, investing guru Jim Rickards, to pen this note. Today Jim explains how one of the world’s richest men is steeling himself for the prospect of hyperinflation. Go here to discover what could be the most important financial advisory you will ever read — Jim Rickards’ Strategic Intelligence. Now, over to Jim…
Hugo Stinnes is practically unknown today, but this was not always the case.
In the early 1920s, he was the wealthiest man in Germany, at a time when the country was the world’s third largest economy. He was a prominent industrialist and investor with diverse holdings in Germany and abroad.
Chancellors and Cabinet ministers of the newly formed Weimar Republic routinely sought his advice on economic and political problems. In many ways, Stinnes played a role in Germany similar to the role Warren Buffett plays in the US today.
He was an ultra-wealthy investor whose opinion was eagerly sought on important political matters…who exercised powerful behind the-scenes influence…and who seemed to make all the right moves when it came to playing markets.
If you’re a student of economic history, you’ll know that from 1922 to 1923, Germany suffered the worst hyperinflation experienced by a major industrial economy in modern times.
The exchange rate between the German paper currency, the reichsmark, and the US dollar went from 208 to 1 in early 1921 to 4.2 trillion to 1 in late 1923.
At that point, the reichsmark became worthless. People swept it down sewers as litter. Yet this hyperinflation did not wipe out Stinnes. Why was that?
Later, he inherited his family’s business and expanded it by buying his own mines. Then he diversified into shipping, buying cargo lines. He used his own vessels to transport his coal within Germany along the Rhine River and from his mines abroad. His vessels also carried lumber and grains. His diversification included ownership of a leading newspaper, which he used to exert political influence.
Prior to the Weimar hyperinflation, Stinnes borrowed vast sums of money in reichsmarks. When the hyperinflation hit, Stinnes was perfectly positioned. The coal, steel and shipping retained their value.
It didn’t matter what happened to the German currency, a hard asset is still a hard asset and does not go away even if the currency goes to zero. Stinnes’ international holdings also served him well because they produced profits in hard currencies, not worthless reichsmarks.
He kept some of these profits offshore in the form of gold in Swiss vaults. That way, Stinnes could escape both hyperinflation and German taxation.
Finally, he repaid his debts in worthless reichsmarks, making them disappear.
Not only was Stinnes not harmed by the Weimar hyperinflation, but his empire prospered and he made more money than ever.
He expanded his holdings and bought out bankrupt competitors. Stinnes made so much money during the Weimar hyperinflation that his German nickname was ‘Inflationskönig’, which means ‘Inflation King’.
When the dust settled and Germany returned to a new gold-backed currency, Stinnes was one of the richest men in the world…while the German middle classes were destroyed.
Interestingly, you can see Warren Buffett using the same techniques today…
It appears that Buffett has studied Stinnes carefully and is preparing for the same calamity that Stinnes saw — hyperinflation. Buffett recently purchased major transportation assets in the form of the Burlington Northern Santa Fe Railroad.
This railroad consists of hard assets in the form of rights of way, adjacent mining rights, rail and rolling stock. The railroad makes money moving hard assets such as ore and grains.
Buffett next purchased huge oil and natural gas assets in Canada in the form of Suncor Energy Inc [TSE:SU]. Buffett can now move his Suncor oil on his Burlington Northern railroad in exactly the same way that Stinnes moved his coal on his own ships in 1923.
For decades, Buffett also owned one of the most powerful newspapers in the US: The Washington Post. He sold that stake recently to Jeff Bezos of Amazon.com Inc [NASDAQ:AMZN], but still retains communications assets.
Buffett has also purchased large offshore assets in China and elsewhere that produce non-dollar profits that he can retain offshore tax-free.
A huge part of Buffett’s portfolio is in financial stocks — particularly in banks and insurance companies — that are highly leveraged borrowers. Like Stinnes in the 1920s, Buffett can profit when inflation wipes out the liabilities of these financial giants, while they nimbly redeploy assets to hedge their own exposures.
In short, Buffett is borrowing from the Stinnes playbook. He’s using leverage to diversify into hard assets in energy, transportation and foreign currencies. He’s using his communications assets and prestige to stay informed on behind-the-scenes developments on the political landscape. Buffett has now positioned himself in much the same way that Stinnes did in 1922.
Of course, the middle classes in the US and Australia would be wiped out, just as they were in Germany.
My advice to you when it comes to billionaires like Buffett is to watch what they do, not what they say.
Stinnes saw the German hyperinflation coming and positioned accordingly. Buffett is following the Stinnes playbook. Perhaps Buffett sees the same hyperinflation in our future.
It’s not too late for you to take some of the same precautions as Stinnes and Buffett.
My Australian associate, Tim Dohrmann, has analysed these precautions and found three of the best ways you can possibly protect your wealth from rampant inflation. You can access Tim’s tips immediately through our brand-new advisory service, Jim Rickards’ Strategic Intelligence.
for Money Morning
James G. Rickards is the strategist for Strategic Intelligence, the newest newsletter from Port Phillip Publishing. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Jim also serves as Chief Economist for West Shore Group.