Investment Idea: Inflation, June 1 2011

I am not an investment adviser and this should not be taken as investment advice.

Washington’s Blog
What should we invest in?

Given the extreme uncertainty in the investing environment, and given that housing, employment and wages, and some of the other fundamental economic measures are flashing warning signs, this is not a simple question.

Inflation

I have written thousands of essays examining the great inflation versus deflation debate (here’s the latest).

I can see both sides of the argument, as well as arguments for inflation and deflation at the same time.

And see this essay by Shah Gilani on Chinese inflation.

If you believe that hyperinflation is in our future, then you might want to hear what PhD economist John Williams suggested in 2009:

Williams is advising people to stock up on gold and booze to bargain with once the hyperinflation makes dollars worthless:

“Three or four years into the future I think we could be in a hyperinflation, within the current year you’re going to see much higher inflation than most people are looking at,” Williams told MarketWatch.

Williams said that his definition of hyperinflation would be a situation in which a $100 dollar bill would become more functional as a piece of toilet paper than a store of value.

“This is a time when you want to preserve your wealth and assets because inflation will knock the value out of it,” he added, advising that people buy physical gold and assets other than the U.S. dollar.

“Then when the hyperinflation hits you’ll see disruption of normal commerce, you won’t have enough $100 dollar bills to buy what you want,” said Williams, adding that items to barter with, such as a bottle of scotch, would be more valuable than actual cash, even in large quantities.

Sake as a Japanese Luxury Good
There is some segment of the population that is always going to have a lot of disposable income, even in these times.

Indeed, the gap between the affluent and everyone else has been growing so fast that it is bigger than it has been since 1917 … before the Great Depression.

As Reuters noted last year:

Ajay Kapur, a Deutsche Bank strategist [and] former Citigroup strategist created a stir five years ago when he built an investment strategy around his thesis that essentially divided the world into two camps: the rich and the rest.

Kapur told clients in 2005 that the United States and a handful of other economies were developing into “plutonomies” where the wealthy few powered economic growth and consumed much of its bounty, while the “multitudinous many” shared the leftovers.

Plutonomies come around only once or twice a century, he argued — 16th century Spain, 17th century Holland, the Gilded Age. The last time it happened in the United States was during the “Roaring 1920s”.

Some shrewd investment advisors have recommended buying rare art and fine wines to cater to the wealthy few.

Given the widespread fear of the Japanese nuclear meltdown – whether you think it’s founded or not – high-end sake made before the March 11th earthquake might be a smart investment.

There are a number of Japanese billionaires. And Japan has more millionaires than any country in the world other than the U.S. At least some of these well-heeled folks have a taste for sake . And wealthy people from other countries have a taste for Japanese beverages as well.

And they would likely pay top dollar to buy their favorite sakes made before the nuclear meltdown started, to make sure that they’re not exposed to any radiation.

A number of people have repatriated from Japan in order to avoid the devastation from the earthquake, the tsunami and the economic downturn.

There are also rumors that some of the wealthiest Japanese have moved to China, the U.S. or elsewhere. As Reuters noted on March 16th:

Thousands of people desperate to escape Japan’s deepening nuclear crisis have inundated private jet companies with requests for evacuation flights, sending prices surging as much as a quarter.
***
Workers are fleeing for Hong Kong, Taiwan, South Korea and as far afield as Australia and the United States as power outages and shortages of basic supplies compound the misery after Friday’s 9.0 earthquake and subsequent tsunami.

Expats will certainly be eager for a “taste of home” in the form of good sake and other Japanese luxury items.
Like wine, sake doesn’t last forever. Dry, high-alcohol sakes last the longest. Both heat and light will degrade the flavor of sake over time, so sake should be stored in the cool and dark.

Premium sakes usually have the “daiginjo”, “junmai”, “ginjo”, “koshu”, or “genshu” classification on the label.
You can get up to speed on the best sakes by reading this website (and these books) subscribing to Wine Spectator (see this and this) and by reading roundups like this.


Hard Alcohol Lasts Longer

Because sake doesn’t last all that long, an even smarter investment might be traditional Japanese versions of hard alcohol.

Shochu (pronounced as “show-chew”) is the traditional Japanese hard liquor.

Typically brewed from potatoes or wheat , shochu can also be brewed from rice , raw sugar , or even … wait for it … wasabi. Shochu is typically 25 to 35 percent alcohol.

Okinawa – the birthplace of Karate – has its own, stronger version of shochu called awamori (pronounced “ah-wah-mo-ri”), which ranges from 35 to 45 percent alcohol. So highly regarded is awamori among some Japanese connoisseurs that sake expert John Gauntner writes:

It was said that while wealthy people might entrust their money to others, they would always keep the keys to their awamori cellar with them.

Shochu, and especially awamori, should last a long time. And they fit into John Williams’ booze and gold recommendation.

Note: Okinawa is over 1,000 miles from Fukushima. But the potatoes, wheat, rice or other base materials could come from closer to the site of the reactors or to other types of contamination from the Japanese disaster. More importantly, perception is key, and pre-Fukushima alcohol will likely carry a premium.