Inflation is Coming: Warning Signs in the Cash Market

There’s no such thing as a law of gravity in financial markets. What goes up can keep going up without being hugged back to the earth by an invisible attraction. True, there ARE cycles. Markets swing from undervalued to overvalued over long periods of time. They can spend a long time being overvalued.

Now is one of those times. It’s beginning to feel a lot like 1999. Airbnb went public last Thursday and more than doubled. The shares opened at $68, went all the way up to $146, and closed just above $144. Not a bad day’s work for a company selling accommodation during a global pandemic. With a market value of over $100 billion, Airbnb is bigger than Marriott, Hyatt, and Hilton combined (for now).

Your editor was in Cheyenne, Wyoming last week when Airbnb went public. That was fitting because I was staying in an Airbnb on a trip to investigate real estate opportunities in Wyoming. I stayed at a house a few blocks from the state Capitol. It was cheaper and roomier that most hotels.

Cheyenne is Wyoming’s capital city, with a population of around 60,000. But it’s a Union Pacific city. That is, Cheyenne wasn’t established as a trading post in the settlement of the American west. It’s not located along a river or lake or other distinguishing water feature. But it IS where the Great Plains peter out before they meet the Rocky Mountains.

Union Pacific set up shop in Cheyenne as a place to maintain all its steam engines. It was the logical dividing point between east-west traffic in the continental US. But the city has never really gotten a lot bigger. That might be changing. Why?

For starters, Cheyenne has the size and feel of regional towns in Victoria and New South Wales. It’s physically smaller, less centralised and less densely populated. That makes it one off those ‘bolthole’ places people are flocking to as they flee big city lockdowns. But there’s more.

It’s not a rule that smaller rural cities and towns are more culturally conservative. But it tends to be the case, at least in these parts of the US. For example, when I arrived last Saturday there was a small protest out in front of the State Capitol. It wasn’t Antifa or BLM. It was a pro-Trump ‘stop the steal’ event. You’re not going to get that in Boulder or Denver down in Colorado.

Economically, Wyoming’s Powder River Basin was the state’s breadwinner for many years. It was home to open-cut coal mining. Most of the coal was sent back east to be burned in power plants and generate electricity (thus the dirty little secret that clean electric cars still have to be charged, mostly by burning a fossil fuel that comes from somewhere far away).

Today though, Wyoming is trying to make itself a hub for digital asset managers. Earlier this year, the state legislature passed a bevy of laws making Wyoming a virtual safe haven for crypto assets. It’s part of the effort to take cryptocurrencies and digital assets mainstream, to normalise them not only as part of the banking system but make them more common in the wealth management industry.

I was mostly interested in finding mispriced real estate that could appreciate in value over the next five years, or at least generate a nice income. Wyoming has no income tax. Neither do the US states of Florida, Nevada, Washington, South Dakota and Texas (which may be why California companies like Oracle and HP Enterprise and Tesla are making the move). But unlike most of those states, Wyoming doesn’t have any popular, hip, urban enclaves. Hence Cheyenne.

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Inflation on the Way…

What’s the rush to get out of cash and into real estate? US money supply is exploding. Check out the chart below. M1 is the narrowest definition of US money supply. It includes physical currency and coins in circulation, plus demand and checkable deposits and traveller’s cheques (not that anyone uses those anymore). What does it mean?


Port Phillip Publishing

Source: Board of Governors of the Federal Reserve System (US)

[Click to open in a new window]

It means M1 has increased by almost 65% in 2020 — and by nearly $700 billion in the last three weeks. What for? Is all that cash for a crisis? Is this a ‘pre-incident indicator’ that runaway inflation will be the big story in 2021? Or is there some other ‘technical’ explanation for the spike?

You’ll note that I’ve included the earliest starting date possible on the chart, around 1975. That’s not long after we entered the post Bretton-Woods era of the fiat dollar standard. The US dollar was cut loose from its link to gold 1971. The cost of the Warfare and Welfare States in the US made it necessary to change the nature of the US’ money, to detach it from something real and begin its long journey to full fakery.

Which is about where we are now. Yesterday I waited for my delivery of blueberry waffles and fried chicken from a local restaurant here in Baltimore. I’m in Baltimore to visit my co-author, Bill Bonner, to discuss changes to our asset allocation strategy in 2021. And the top of our list is how to reduce our allocation to cash ahead of what we expect to be rising inflation next year.

My chicken and waffles eventually arrived, courtesy of DoorDash. Like Airbnb, it recently went public. It didn’t quite double on its first day, but it WAS up 82% from its IPO price. This has been a windfall market for companies that promise investors a way through the pandemic — specifically with businesses that are booming because of the pandemic (or lockdowns by state and local governments who’ve made it illegal to go eat at a restaurant).

The waffles were excellent. But I wondered, as I ate them, if this is the top for the pandemic stocks like Airbnb and DoorDash. Soaring IPOs are often a sigh of a top in the cycle. At the other end, Spain and Portugal sold government debt with negative yield. This another extreme and a ‘pre-incident indicator’ that something is up.

What goes up eventually comes down. But in financial markets it’s not because of gravity. It’s because of a change in expectations. That change usually revolves around inflation. And judging by the surge in US M1 growth, inflation may be coming. When expectations catch up, the rush to real assets (or places like Wyoming) will be on. Get in early while you can.

Until next week,


Dan Denning Signature

Dan Denning,
Editor, The Rum Rebellion

PS: Readers of The Bonner-Denning Letter can expect to see the results of my conversation with Bill in the December newsletter. Bill has returned to the US after nine months in Argentina. We’re in agreement that cash, as an investment position, is increasingly risky IF we’re on the cusp of US dollar devaluation (negative rates) or massive American money printing. Getting that cash into safer asserts that provide retirement income is the big challenge of 2021.


Dan Denning is the co-author of The Bonner-Denning Letter.

Dan was a founder of Port Phillip Publishing back in 2005, which quickly became the leading publisher of its kind for independent financial research and insights. In 2014 he left to head up Southbank Investment Research in the UK. Dan is also the author of the 2005 book, The Bull Hunter. Today, he’s based in his home state of Colorado. Each Monday in The Rum Rebellion you’ll get Dan’s unique contrarian thinking to provide insights you won’t find anywhere else.

Dan Denning’s belief in free markets, sound money, personal liberty, and small government have underpinned everything he’s done during his 23 years in the financial publishing industry.


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