Inflation or Deflation ?

25  July 2020

Dear Fellow Investor,

Inflation or Deflation ?

 

2 year weekly chart of the CRB index from Bloomberg

Today Bloomberg reported that M3 or money supply in the US increased by 27 % so far in 2020. This is the largest increase in 30 years. Where is this money going and how will it affect our stocks ? Above is the Bloomberg chart of the CRB index which is a basket of the leading commodities. It includes grains, metals, energy and soft commodities. The CRB index is too big to be manipulated so in my opinion it is an honest measure of supply and demand for commodities. Notice the uptrend since April 2020. There is a pattern of higher highs and higher lows rising off the April lows. A lot of newly printed money is going into commodities or real assets. This is inflationary. Expect the up trend to continue. This is positive for our plantation shares and our energy share, Dialog.     

2 year weekly chart of spot gold from Bloomberg

Gold continues to make new 12 year highs. Gold is real money and a real asset that has stood the test of time for over 5000 years. While every paper fiat currency  has over time collapsed gold is still standing. It is  the safe haven for irresponsible government money printing. Rising gold prices signal inflation. Politicians love fiat currency because they can print unlimited quantities of it to buy votes. They hate gold because it can not be printed and can not help them get reelected. It takes hard work and lots of capital to mine. Unlike paper fiat currency, it is a limited resource.

Spread between 5 year government treasury bond  and 5 year TIP. TIP Is the treasury inflation protected bond and rises if inflation rises. This shows a strong base being formed showing support for an inflation scenario.

Value versus growth shares support the inflation scenario. Money is shifting into value shares to capture a secure yield as an inflation hedge which growth shares do not. Most high flying growth shares such as Amazon or Ali Baba do not pay a dividend.

Spread between value and growth shares. It is at the same level as the  internet boom of 2001.  Growth shares like Amazon, Tesla, Microsoft, Top Glove are trading at extreme bubble valuations.  Retailers are chasing them as research houses and the financial press hype them. At the same time value shares such as consumer companies, banks  and energy companies trade at undervalued levels. Value shares are unloved and shunned by the investment crowd. Warren Buffet added to his banking shares last week and spent 10 billion to buy Dominion Energy a natural gas company. Who do you think will be right in the end Buffet or the retailers ?    

Rubber gloves in Malaysia are in a bubble. What do you think is a better value Top Glove at over 100 times PE with almost a zero dividend or Wellcall at a PE of 10 and a dividend of 6 % ?  Wellcall is a play on oil and gas while Top Glove is a play on Covid-19,  Long after the Covid crises is solved consumers will still buy oil and gas.

Keep safe

Bill

A great weekend holiday is a trip to  Malacca. There are good deals on hotels and Air B&B . Also not so crowded with  tourists.