» INFLATION – WHAT Else? «
A statement by Gerhard Schaller.
NOTES ON INVESTMENT STRATEGY IN THE COMING YEARS
Deflation. Stagflation. Inflation. Hyperinflation. These four scenarios are currently the subject of discussion among macroeconomists, and are repeatedly played through in order to prepare capital investors for the right strategy for the coming years. Which of these four scenarios is likely to become reality?
In many respects, this debate reflects the helplessness of an academic discipline which has fallen into disrepute as a result of the financial crisis. This is because the predictions made by the experts in this field could hardly be more different. In our opinion, this merely has the effect of unsettling investors unnecessarily. We abide by our clear evaluation: the signs are pointing to inflation in the long term – what else?
Regardless of the current deflation trend, there are strong arguments in support of this viewpoint. There will definitely not be a repeat of the Great Depression of the 1930s. Such a scenario is the nightmare of central banks and politicians throughout the world. Their reactions over the last few months reflect this: printing presses were switched on, more and more money was printed, and in the long term, a course was set in the opposite direction – inflation. However, we believe that the threat of a currency reform or a currency devaluation, which is repeatedly discussed in Germany in this context, is extremely unlikely to become reality. The prerequisite for this would be hyperinflation, i.e. an inflation rate of 1,000% and more per annum. Institutional regulations and today’s knowledge of the economic complexities involved in earlier currency reforms argue against such a scenario.
Capital investors would therefore be well advised to allow for a mega-trend towards initially moderate but continually rising inflation rates in the long term. In order to make a profit, it is therefore important to generate income above the inflation rate by making corresponding investments.
IN DETAIL, THIS MEANS:
Bonds, particularly index-linked bonds, with which current interest payments rise parallel to inflation, are frequently vaunted as protection against inflation. However, anyone who believes that they should rely on such bonds for security reasons should always consider the associated emitter risks (Lehman Brothers!). Payments made to offset inflation are also immediately skimmed by the German tax authorities by means of withholding tax charged at a rate of 25%. It is therefore impossible to earn real money in this way.
Long-term bonds are subject to considerable interest rate risks as interest rises. They do not guarantee value maintenance in the long term.
Despite all statements to the contrary, gold does not offer any effective protection against inflation risks. Gold is rather a kind of insurance against extreme crisis situations (currency devaluation / hyperinflation). Gold with a percentage of 5%-10% – but by no means more – therefore belongs in a classically structured investment portfolio. In this case, investments should only be made in physical gold and by no means in gold certificates.
At the current minimal interest rates, bank deposits and savings deposits are subject to considerable inflation risks, at least in the medium term, and are therefore not a suitable investment in the long term.
Real estate comprises material assets and in our opinion will offer good protection against inflation in the coming years insofar as these assets are not purchased at excessively high prices. However, these investments entail location risks, insurance risks and not least the risk of further and higher taxation.
Shares, which as classical material assets have always provided good protection against inflation, are in any case a good alternative. Shares in particular become more expensive when prices rise. However, in view of this, investors should focus on the market in general rather than on individual shares, as all crisis situations entail the risk that individual companies could go into receivership (who would have thought, for example, that a company as renowned as Porsche is actually bankrupt?).
During times of inflation and currency reform, the winners have always been those who accumulated debts at the right time. These debts will be repaid at some stage, but these payments will be made with money which is considerably lower in value that it was at the time the debts were assumed. Investors are currently therefore recommended for example to acquire real estate at the current low exchange rate, partly using borrowed capital.
Conclusion
In the event of inflation increasing in the long term, we generally recommend two forms of capital investment: firstly, investments which become more expensive in times of inflation and therefore increase in value, and secondly those which because of their special structures and properties offer earnings in excess of the inflation rate. Exactly this is the case with our products such as the Sensus Strategy Fund they combine technical trading systems with situation-related, discretionary trading strategies, and can therefore make optimum use of minimal price changes and short trend movements usually within one day (intra-day trading). This makes our products independent of medium and long-term trend fluctuations.
The last few months of the financial crisis have shown how well this trading strategy works. We are convinced that our products can generate above-average returns for our customers which will be well above the respective inflation rates even in a future overshadowed by inflation.
