I'm not saying rushing out to buy property like that makes sense, looking at my database its clear that there a mini cycles in inflationary economies. Periods where things beat inflation by a wide margin and periods where things lag inflation big time, you want to be buying after a few years something has lagged inflation. When everybody is saying that thing is out of favor and other inflation hedges make sense.
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Global Macro Trading Journal
- Thread starter Daal
- Start date
A principle that can be perhaps inferred from this is, the shittier a country looks, the more likely that the currency is undervalued. Even though the nominal FX rates might fall, in all likelihood there will be counter-balancing factors such as higher interest rates, low CAPE ratios in the stock market (along with high nominal appreciation), high cap rates for real estate (along with high nominal appreciation), etc. Finance theory would say all of this is textbook but its always nice to see it in the data
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It also raises the idea that when investing in risky markets, if you are considering hedging the FX risk, you are probably better off saying "fuck it" and taking the risk. I have also seen some EM studies showing that not hedging added something like 2-3% a year in returns. Of course, if you hedge, you got to pay the interest of that country and thats what probably accounted for those returns differences. The data wasnt very long (i think it was 15 years long) but it is consistent with finance theory and other principles
I thought that during hyperinflations one could make money just by holding hard currency (USDs, EURs, etc), the data is showing that is not the case. I suppose what matters is FIRST burst of hyperinflation, that one that catches everyone off guard. Thats when people will rush into hard currency, real assets, etc. Then they reach a level where they are probably overvalued and they stay there until there are REAL changes to policies that makes people think hyperinflation risks are no longer significant. But the idea here is that once hyperinflation becomes an everyday thing, its too late to rush into dollars, real assets etc. At least in the sense that you will good money effortlessly, you wont, you can make some, but it wont be huge (it will be a normal amount) and it will involve volatility. The easy money is over. Venezuela is almost certaintly very deep in this stage
My father bought some small town land in the 80's with fixed rate debt. Shortly after there was a burst of hiperinflation and interest rates skyrocketed. He says that the guy who was selling all this land was quickly wiped out as people paid him back with virtually pocket change in just a short period. That's the kind of burst of hiperinflation that can produce HUGE returns to people if they were in the right assets (or a huge loss if they are not), but once people get spanked, they learn and adjust all prices. Then, that game is up. Dollars and other things become overvalued
Buffett is known for bashing gold saying there is no reason to own it, it doesnt pay interest, etc. But that is only true because he was fortunate enough to live in a stable country where inflation averaged something like 4% over 100 years. If you happen to be in a country that will have a high inflation/hyperinflation/currency collapse episode in its history, thats where gold will shine. It isnt even just about the appreciation of gold, its also about the rebalancing effect that you get. You will be selling gold into the HUGE first "rush to real assets/hard currency" and buying when people think things are fine and gold is down. That result of that will be to SIGNIFICANTLY improve the return/risk profile of the investment strategy. I havent run the numbers yet but I suspect that the Sharpe ratio of a strategy with 5-10% gold and one without will be meaningfully different. I suspect that this is true even in the US but in a country like Brazil, Argentina and a number of others, the effect should be huge
Point is, nobody knows the future, having some gold will protect the portfolio and make it more robust against tail events
Point is, nobody knows the future, having some gold will protect the portfolio and make it more robust against tail events
The long-term return of gold is the inflation rate but if you add in unexpected high inflation/hyperinflation episodes in, combined with rebalancing (selling into buying panics by people rushing into real assets for protection), then that return can actually resemble something like the stock market (or at least, real estate). That while decreasing the size and length of the total portfolio drawdowns
Brazil fiscal bill was approved by the Senate today, should be signed by the President today or tomorrow. Its huge for Brazil. Now it will be in the constitution for 20 years that no real increase in spending can occur (only nominal, the law will allow some flexibility after 10 years). It it does occur, a number of breaks will kick in (including no real increase in the minimum wage)
And the government still seems to have a solid base in Congress. Only 16 people voted against it. Thats out of 81 Senators (not all of them were present though). But there was so much support that only 70 Senators showed up, it passed with 53 votes, it needed 49. They were so certain it would pass a lot of supporters didnt even showed up
And the government still seems to have a solid base in Congress. Only 16 people voted against it. Thats out of 81 Senators (not all of them were present though). But there was so much support that only 70 Senators showed up, it passed with 53 votes, it needed 49. They were so certain it would pass a lot of supporters didnt even showed up
Now all Brazil needs is for the Central Bank to wake up and cut its ridiculously high interest rate. The expectation is that they will increase the cuts to 50bps from 25, with a small chance of 75bps. Inflation is headed to 5%, a 13.75% central bank rate after a 3 year recession is so laughlable you got to wonder what they are even thinking. It should have never gotten that high, a lot of the increase in inflation was due price controls in certain items. When the controls were lifted, prices were adjusted, but that was a one time pop. Now things have normalized. The slower they are in cutting, the lower will be the ultimate rate as disinflation plays out
I think long-term Brazil might even have an equilibrium SELIC rate of 7-8% with a 4-5% inflation. The consequences of that for asset prices will be significant imo
I think long-term Brazil might even have an equilibrium SELIC rate of 7-8% with a 4-5% inflation. The consequences of that for asset prices will be significant imo