Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Cashing in on Hyperinflation, does De La Rue have a Future?

There is a way that you can profit from hyperinflation and inflation without investing in risky digital constructs like bitcoin, or buying gold or gold stocks. You can invest in De La Rue (OTC: DLUEY); the world’s largest printer of currencies.

For those of you unfamiliar with it; De La Rue has been printing banknotes for governments since 1860. Today it prints money for a variety of nations, including pound sterling for the Bank of England.

Strangely enough, that business might be very profitable in today’s world; despite the rise of electronic payment and cryptocurrency. An epidemic of hyperinflation in a variety of nations is increasing the demand for old-fashioned banknotes in our digital world.

Hyperinflation has been very profitable for De La Rue; in April 2016, Bloomberg reported that the company was owed $71 million by the Central Bank of Venezuela for bolivar notes. The Central Bank of Venezuela needs those notes in order to keep up with the demand for money in its country.

One of the strangest paradoxes of hyperinflation is that it often leads to serious shortages of cash. When hyperinflation hits, people need vast amounts of cash to buy groceries or pay bills which the central bank has to provide.

Outsourcing the Currency

A classic example is Venezuela where the new 20,000 bolivar note will be worth just $5 on the street, The Guardian reported. That means the Central Bank will have to provide a lot of bolivar which is where De La Rue comes in, it prints the money.

In today’s world most countries don’t print their money, they outsource the job. Modern printing technology makes it easy for anybody with a decent copying machine to counterfeit most documents. To prevent that all sorts of high-tech security features; such as De La Rue’s Safeguard polymer and magnetic strips, are added to banknotes.

If a central bank like that in Venezuela needs more cash because of hyperinflation it calls De La Rue or one of its competitors. That business can be very lucrative because governments have to pay De La Rue in currencies like dollars or pounds. The trade in currency can be huge; over the past year the Central Bank of Venezuela has chartered fleets of 747s to haul the cash to Caracas.

Hyperinflation can be Lucrative

Times seem good for De La Rue because inflation is not just plaguing Venezuela. It is also stalking a wide variety of countries ranging from Egypt to the Philippines to Mexico.

Even the United Kingdom is threatened by a dreadful decade that will lead to a toxic mix of high inflation and wage stagnation the Institute for Fiscal studies predicted. Since De La Rue currently has the contract for printing the pound, there is at least one company poised to cash in.

Another potential windfall for De La Rue is the possible crackup of the European Union. If the EU falls apart, a number of countries will need new currencies and guess who will print them?

Is De La Rue Making Money?

Del La Rue definitely needs some additional business because its financial numbers are not that great.

On September 30, 2016, the company reported revenues of just $629.41 million, a net income of $5.163 million, assets of $589.56 million and cash and short-term investments of just $55.22 million. Despite that the company displayed some flat in the form of $56.82 million in cash from operations.

Investors were rewarded with a dividend of 30.99¢ on December 7, 2016. Disturbingly that dividend has been falling, last year on December 2, 2015, it was 36.4¢ but it rose to 66.8¢ on June 22, 2016. So for all its problems, De La Rue is a pretty good dividend stock which provided a dividend yield of 3.93% on December 29, 2016.

Since it was trading at just $24.79 a share on that day, De La Rue can be considered a value investment, albeit a risky one. Value-investing purists would say De La Rue is actually a contrarian play, and it is easy to see why.

Does De La Rue have a Future?

There are two major threats to De La Rue’s future looming on the horizon: the growing use of digital payments and the move by some governments to abolish cash.

Government action is the biggest threat to banknote printers; India’s Prime Minister Narenda Modi’s demonetization strategy is the model here. On November 8, Modi effectively declared the two largest banknotes in his nation worthless, and put strict limits on the amount of cash that citizens can withdraw.

Modi is far from alone; the European Union has stopped printing the 500 euro bill, the world’s most valuable banknote. Spain has limited cash transactions to €1000, Cryptocoins News reported.

Former International Monetary Fund Chief Economist Kenneth S. Rogoff has gone farther. Rogoff wants governments to stop printing paper money entirely and issue only small denomination coins. He has even authored a book called The Curse of Cash to promote the concept.

The motivation behind anti-cash crusaders; like Modi and Rogoff, is to cut down on black market activities, tax evasion and counterfeiting. They argue convincingly that paper cash facilitates a wide a variety of destructive activities including terrorism, drug dealing, organized crime, smuggling, and illegal immigration.

Some central bankers want to go even further Governor Zhou Xlaochuan of the People’s Bank of China (PBOC) has labeled paper bills a “last-generation currency” that should be replaced. News reports indicate that the PBOC is in a rush to develop a cryptocurrency to replace the paper yuan.

Will Bitcoin destroy De La Rue?

An even greater threat to De La Rue and banknotes than cryptocurrencies might be electronic payment solutions such as Apple Pay. Cryptocurrencies are a major menace because they can enable payment without a national currency.

Payment apps allow average people to pay in the national currency – without a banknote. One advantage De La Rue has is that many large retailers in the United States have refused to accept Apple Pay and its various imitators. Another is that such solutions are not yet available in most countries.

Bitcoin in particular is booming right now, it was trading at $961.43 on December 29, 2016. Reasons why it is booming include currency controls and inflation in China, hyperinflation in Venezuela, inflation in Mexico and Egypt, currency controls, Modi’s demonetization policies in India, Brexit, the low price of gold and fears of EU breakup.

National banks including the PBCOC and the Bank of England are exploring the possibility of creating national cryptocurrencies. Commercial banks are also getting into the act, four major financial institutions; Bank of New York Mellon (NYSE: BNK), Banco Santander (NYSE: SAN), Deutsche Bank (NYSE: DB) and UBS Group (NYSE: UBS), are developing a digital currency called Utility Settlement Coin (USC) designed for use by central banks.

Could De La Rue Cash in on Cryptocurrency?

Such developments might help De La Rue because speculators and ordinary people will withdraw large amounts of cash in inflation-ravaged countries – then convert it all to bitcoin or ethereum. There are also the tens of millions of people; particularly working class individuals, that will still want paper cash.

A bizarre and highly-likely development would be central banks like that in Venezuela using a cryptocurrency like USC to buy paper banknotes from De La Rue. That means De La Rue might be in a position to cash in on cryptocurrency.

So yes, De La Rue will have a future, we just don’t know what that future is. If you’re looking for a contrarian investment on the fringes of the digital economy, De La Rue might be it.