Inflation Hedges Continued

Published on: May 14th, 2020

Julian Brigden discusses how falling volatility and rising equities have reinforced optimism about a V-shaped recovery. Yet, Brigden says that this is premature, and some further weakness in equities is likely. Brigden encourages investors to focus on inflation hedging and that tangible assets, commodities, precious metals, and mining shares are all candidates to buy for that purpose.

Comments

  • TB
    Tad B.
    17 May 2020 @ 12:13
    Liking the $30 silver target 👍 SILJ will also benefit hugely from this..... (if you are a Brit AND already own it) Would SCNY (short Chinese RNB long USD) be a decent type of proxy for the DIXY ? I'm in the UK too....... and many etfs have been withdrawn from any "new" investments for us. Existing holdings (pre KIIDS nonsense) are allowed to be held.
    • JB
      Julian B. | Contributor
      29 May 2020 @ 16:39
      Trading Renminbi is risky as very political. I'd rather trade "freely" floating currencies like AUD, GBP and even EURO (that's saying something because I hate trading that). PS You are lucky in the UK can use SAXO or even spread bet to trade!
  • DT
    Drain T.
    23 May 2020 @ 13:04
    julian you nailed that silver tactic nice 1 .. i was to busy soiling my self to buy as it slid through 15 to miss out ( i gotta grow a pair ) wd
    • JB
      Julian B. | Contributor
      29 May 2020 @ 16:35
      Don't beat yourself up! Its all about sizing risk. You don't want to choke on your first bite. So nibble and add if it tastes good!
  • JC
    John C.
    17 May 2020 @ 21:41
    Great insights from these comments. Thanks to everyone. Thanks especially to Harry who does a great job of clarifying points made by Julien & Raoul. John C.
    • HM
      Harry M. | Real Vision
      19 May 2020 @ 19:29
      Very kind of you to say.
  • DR
    Derrick R.
    18 May 2020 @ 13:29
    noob question about the new recommendation to "sell XLF" - other than buying puts, can anyone give me an example of how JB means to carry out this trade?
    • PG
      P G.
      18 May 2020 @ 20:11
      I was also wondering.
    • CH
      Charlie H.
      19 May 2020 @ 14:50
      Direct short
  • MJ
    Michael J.
    15 May 2020 @ 02:03
    Question: Can somebody explain to me the 6:1 payout ratio on DBA
    • MC
      Melvin C.
      15 May 2020 @ 06:16
      difference between target and stop-loss relative to entry price
    • HM
      Harry M. | Real Vision
      17 May 2020 @ 12:05
      Exactly!
    • DR
      Derrick R.
      18 May 2020 @ 14:05
      as in, for every $6 invested in the trade, make your $6 back plus $1?
  • JM
    James M.
    14 May 2020 @ 21:42
    Thanks Julian, as a UK investor I'm unable to buy EWW, XME or DBA due to the lack of a KID, are there any alternatives available to UK based investors that you would recommend?
    • JM
      James M.
      14 May 2020 @ 21:57
      The same applies to XLF & DXY too, so the majority of the recommended trades I can't carry out as a UK investor unfortunately. Any alternatives that are available for anyone UK based would be really helpful
    • JM
      Jake M.
      14 May 2020 @ 22:28
      why not just open an international brokerage account with say Charles Schwab?
    • JM
      James M.
      14 May 2020 @ 22:31
      Jake, I have already done that. As a UK national you are not allowed to buy these ETFs even through international brokers
    • SH
      Sahil H.
      15 May 2020 @ 00:52
      Damn, maybe you can look at the composition of those ETF's and trade them individually if you want to follow the trades? Here is the doc that outlines the composition and weightings of the DXY: https://www.theice.com/publicdocs/futures_us/ICE_Dollar_Index_FAQ.pdf
    • rj
      rodolfo j.
      15 May 2020 @ 01:58
      What about opening a US LLC to trade? I know there are more costs involved (accountants, us bank, etc), but may be worth it.
    • MC
      Melvin C.
      15 May 2020 @ 05:49
      James, you can trade them if you can get your broker to classify you as a professional. I did this. There are requirements (net worth, experience in the financial sector etc..). Otherwise, you will have to find other instruments that offer a similar profile, as already suggested by others.
    • gh
      g h.
      15 May 2020 @ 06:00
      IG have EWW, XME and DBA. They are, fundamentally, a bucket shop and not a broker. This has its own risks - they have an incentive to stop you out, and their markets are not necessarily attached to the underlying in times of stress - but you can trade them. I only checked the spread-betting platform but they probably have them as CFDs too - presumably a derivative of the ETFs is allowed even if the ETFs themselves are not. I like the spread betting side because it avoids tax return complexity (never mind the requirement to actually pay tax!) but if you are (for eg) hedging some taxable asset you already own, CFDs may make sense.
    • BF
      Brad F.
      15 May 2020 @ 07:50
      The simple solution here as a retail investor is to trade the US ETFs using CFDs (Contracts for Difference) - you get basically the same price and trading costs without any complex issues. I use Interactive Brokers for this, I can access most of the same instruments on the long side on IG.com, but on the short side they often refuse to give me a borrow, so I use Interactive Brokers on the short side more often. If you want to trade these longer-term ideas in your ISA - which is what I do - then you need to find a UCITS equivalent ETF, there aren't always good options but if you search for "UCITS USD ETF" you will find a selection, I put on the DXY trade (albeit I am on the long USD side) using a selection fo UCITS ETFs on the major currency pairs in roughly the same proportion and the DXY is weighted. With the UCITS ETFs my warning would be to watch our for liquidity, some of these ETFs trade by appointment and I have been stung more than once,
    • JM
      James M.
      15 May 2020 @ 10:47
      Thanks everyone for the suggestions. Brad F great tip on the the UCITS equivalent ETFs, these are really helpful for trading the LT ideas in an ISA which is one of the things I was looking for.
    • DR
      David R.
      15 May 2020 @ 13:15
      Then there are the (so far) little-known tax implications to non-US persons invested in US-domiciled assets, caused recently by Trump's big tax changes in 2018. Including all financial assets. Even funds that invest back in your home country! There are numerous onerous and greedy US tax clauses that now devastate foreign investors, about which most investors don't know or ignore - at grave financial peril as US will without warning confiscate your assets, even abroad by arm-twisting FI's and FFI's (under threat of removal from SWIFT). This happens daily now. One of the most egregious US tax grabs of foreign investors about which you should be aware is that US takes approx half of the balance of your account and assets (that's half the entire value, not just half of the unbooked gains) upon your death. No US financial will release monies to your estate without first paying the US IRS now. To help avoid this tax calamity, there exist some funds domiciled in the EU that are equivalent to their US counterparts, except they're more expensive to own. You can buy those instead. Another workaround is to incorporate as corps don't die of their own cause. Beware, US taxes suck and as foreign capital becomes aware of the current US tax trap, foreign investors might flee the US this decade like rats fleeing the sinking US ship Titanic. Indeed, foreign investors dumped more US bonds in April-May than they did in the previous six years combined.
    • DR
      David R.
      15 May 2020 @ 13:45
      ^ Clarification... US Treasuries are the one US asset exempt from those new trump tax rules for foreign investors in US. So you'll not forfeit half (or any) of your UST's if you die, as you will for your other assets held in US. That's a real GOTCHA for foreigners using Interactive Brokers, for example. IB and the like must take half the balance of your account and pay it to IRS before releasing the rest to the estate of a non-US person.
    • CJ
      Christopher J.
      16 May 2020 @ 07:43
      xlfq aiga or open tradestaion account which is better as you can short
    • HM
      Harry M. | Real Vision
      17 May 2020 @ 12:41
      Does AIGG have a KID? I recall buying it in 2008 in the UK. However that may predate new FSA rules.
  • JM
    Jake M.
    14 May 2020 @ 21:53
    Noob question: why does surge in M2, monetary/fiscal policy necessarily mean money flow into commodities, as opposed to just equities or paying down debt?
    • JM
      Jake M.
      14 May 2020 @ 22:31
      ie, where does the real demand come from for commodities in coming economic environment?
    • MP
      Mate P.
      16 May 2020 @ 18:08
      Great question, theres no real demand imo, but speculative positioning and algos tied to M2 can lift these things for a while. Timing is everything in this case.
    • HM
      Harry M. | Real Vision
      17 May 2020 @ 12:40
      1) global demand is weak, but people have still gotta eat, switch on lights etc. So while there is less demand growth there will still be some demand. 2) If you put out a lot of money to offset real economy weakness, you will (if you keep trying!) eventually create a stagflationary environment. And we are in a peculiar global environment. Usually there are just a few countries issuing huge amounts of money and global investors can step around them. This time round pretty much every country is trying to fill a fiscal hole by issuing debt which has finite demand. I would guess the "beauty contest" switches from the bond markets to the fx markets, and we will find out who cant pay their bills when their currency performs poorly. But there are a lot of countries trying to pay for real goods and services with IOUs right now. That will work fine right to the point where people lose faith in IOUs. We are setting monetary conditions to keep the status quo in the economy as far as is possible. However, the question remains as to what the new equilibrium is. It probably wasn't the old equilibrium.
  • PO
    Paul O.
    14 May 2020 @ 22:19
    Julian, these inflation-hedge trades are really interesting - I've recently bought silver, which has moved well this week, so thanks for that! Rather than a more reflationary world, if things move into a more stagflationary, as well as hard assets inflation, do you anticipate oil price inflation too (despite negative/ very low GDP growth rates)?
    • AR
      Alexander R.
      15 May 2020 @ 18:41
      Silver is doing great it broke out and probably goes higher It is though difficult to see silver as investment and not trade at this point We are in deflationary investment and will be for a while, inflation is coming but not just yet. Silver probably will go lower this year, but for the time been it can be a great ride up
    • HM
      Harry M. | Real Vision
      17 May 2020 @ 12:22
      Answering for JB. So to paraphrase Forest Gump, an inflation hedge is meant to hedge inflation. If it doesnt do the job then discard. So one piece of advice is that while JB really likes them, respect stops etc. Simply because there are unknown, unknowns too. If we move into a stagflationary world (which looks very likely to me) silver might perform anyway, or it might struggle cos of real economic weakness. To some degree the market will tell us. Same with pretty much all "inflation hedges". We don't really know till we see the inflation so we need to be prepared to jump horses. That said, its not like commodities started off expensive. And stagflationary world has a tendency to make commodities expensive cos there is less investment in productive capacity. As for oil price inflation, yes. JB does anticipate MUCH higher oil prices in a 2-3 year time frame. Productive capacity will degrade without investment and there will be no (or very little) investment at these prices. RIght now there is too much oil. Even with no economic growth, the oil markets will come back into balance because of the lack of new investment on that 3 year time frame. Unless of course we remain in lockdown for 3 years!
  • EW
    Elliott W.
    14 May 2020 @ 22:26
    Question: the currency trade recommendations seem to be the exact opposite to what Raoul has been talking about i.e. USD strengthening.......I am really confused.....
    • SH
      Sahil H.
      15 May 2020 @ 00:46
      From the talks that Raoul and Julian have done, they both disagree on the direction of USD especially the EURUSD pair. However, from what I've got out of it Julian seems to be looking at much shorter time frames so around 3-6 months. Whereas Raoul trades longer time frames so 6-24 months.
    • AR
      Alexander R.
      15 May 2020 @ 01:41
      time frame is different
    • HM
      Harry M. | Real Vision
      17 May 2020 @ 12:13
      Sahil is partially right, and this is particularly true of risk asset markets. But there is one other difference. I think JB and RP differ on their views on the Fed's "reaction function" and whether there is really anything the Fed can do about this. I think JB would argue that ultimately, the Fed will keep supplying as much money as the system needs to avoid a deflationary collapse. RP argues that the deflationary forces are so strong, that the Fed will ultimately be powerless to prevent a deflationary collapse. The pressure on the real economy (debtors) will become intense if real interest rates drop to -5%. It would certainly make it necessary for the Fed/UST to do utterly unprecedented things to offset that pressure. But a US which didnt do those things would be in a terrible place. So its partially an analysis of that "end game" where they differ. I think RP thinks there is no escape from the deflationary gravity (see Japanese example) while JB is arguing that when it comes to it, the Fed/UST will do whatever it takes to prevent that outcome. And what it takes may well put Gold, or whatever stores of value which remain robust (bitcoin?), at incredible levels.
  • MH
    Madhushanka H.
    15 May 2020 @ 07:00
    I understand that M2 supply is going up, what about M2 velocity? Looking at https://fred.stlouisfed.org/series/M2V, it seems like M2V is also going down at fast rate. As Roger mentioned many times, we are not sure if the timing of the bazooka is correct. We know that Fiscal needs time, and without a vaccine for Covid19, it will be a challenge for fiscal expansion. If bank lending and fiscal spending are not going to workout, there is a high chance that conditions favor Raoul's deflation thesis. Anyway, Thanks to both Julian and Raoul for challenging our confirmation biases. This Inflation vs deflation debate is fascinating topic to watch on RV.
    • Mo
      Master o.
      15 May 2020 @ 08:01
      The velocity does not matter vis-a-vis gold. You are getting monetary debasement and inflation. Therefore the FED constantly has to "print credit" and "print money" to save the system whether it is producing inflation or not.
    • MH
      Madhushanka H.
      15 May 2020 @ 09:17
      Both of them agree with Gold. That's the last man standing. But you have other trades on the way to destination.
    • AR
      Alexander R.
      15 May 2020 @ 18:36
      I think the debate here is more complex If you want to protect your savings you buy good and this is where it ends But Julian is suggesting silver and GDX This is how you can make way more money than just buying and holding gold But if you timing is wrong this is how you loose money too
    • HM
      Harry M. | Real Vision
      17 May 2020 @ 12:05
      Absolutely! So what we see is the Fed acting to prevent monetary collapse. The collapse in velocity had to be addressed by the Fed by "printing" more M2. This has kept the system from collapsing. If they do not continue to do this the deflationary forces (you dont need me to list them) will eventually overwhelm, because the private sector can keep deleveraging. But why would the Fed stop? When would the US authorities welcome rioting, public disorder, and economic collapse. Turkeys dont vote for Xmas, and US elites will not volunteer for a political revolution and chaos. So we should expect the Fed to continue. to do what it takes to prevent those kinds of outcomes. Of course, events might intervene. But the most powerful argument for me is that when we talk to Fed officials they are perfectly aware of how horrible the situation is. How difficult the underlying problem is.
  • HR
    Humberto R.
    15 May 2020 @ 12:20
    Thank you for sharing! Very helpful, although I am hearing more and more about a possible gold correction back into the 1200 - 1400 range over the next year or two as corporations and individuals delever, i.e. deflation. As others have suggested on RV interviews and in comments, velocity of money has to dry up as people enter into, on balance, a more aggressive savings posture with their finances in light of what has happened. The ability to hold two opposing thoughts at once and position around those is difficult but necessary so I have hedges either way until it becomes more clear. IMO deflation will overwhelm inflation, especially given that over the last decade with all the monetary easing, we have not seen significant inflation. If you can't get it with money printing in a bull market, you probably won't get inflation in a recessionary downturn.
    • HM
      Harry M. | Real Vision
      17 May 2020 @ 11:59
      I can see why you came to this conclusion. JB came to the reverse conclusion. However I think thats because his view of the CB and the role of the US authorities. They will not stand still as the deflationary story unfolds. I think (as in so much of this) Japan provides the lesson. The Japanese did not act as aggressively as the Americans, and I think thats because their politics were conflicted. Destroying savings would never be a politically popular measure in a country with demographics like Japan. In the US, allowing the stock market to sink will destroy the middle class who use the stock market as a savings vehicle for their retirement. So one should expect the Americans to use every weapon in their arsenal to prevent deflation. It may not prevent stagflation of course! In Japan, the key lesson, is that at some point the population will not borrow more. If we get to that place then you will be right.
  • AP
    ANTHONY P.
    15 May 2020 @ 20:35
    Julian, This is a model of clarity and brevity. Thanks for this and for the AMA today. May I ask one question I tried, but filed, to get into the AMA?: Since Raoul's long-USD call in March, the EUR/USD has bounced up off of 107.8 (or so) four times. Do you know why? Is it active monitoring/intervention by the ECB or something else?
    • DP
      Duane P.
      16 May 2020 @ 03:21
      Yeah, I noticed this too. Very strange. They were very large moves too. That's an interesting theory though.
    • HM
      Harry M. | Real Vision
      17 May 2020 @ 11:52
      Answering for JB (he will come back and correct if I have got it wrong) I know that part of the answer is the Fed. They have been working overtime to prevent the evident shortage of dollars causing the same kind of screaming rally in the dollar as foreigners rush to cover unhedged dollar liabilities. The currency swap facility has prevented a dollar shortage from manifesting. RP makes an interesting point about relative liquidity in dollars and Euros. The ECB has done less, but the EUR market is also much less liquid. So I think its reasonable to argue that the balance of these markets has been roughly maintained by CB actions - for now at least.
  • PC
    Peter C.
    16 May 2020 @ 06:37
    Seeing this, is a 1st for me. Different and nice. I'm in a version of the gold trade but using GLD and individual major streamers & miners. My goal has been to get & stay at long targets & sell vol through out the process. This strategy has gotten me back to flat for the year:)
  • SD
    S D.
    15 May 2020 @ 04:31
    One of the greatest strengths of this service is its commitment to contradictory perspectives. It is a counter intuitive indicator of strength.