Printing money is nice, paying it back is not so nice

The stimulus train is about to stop

Inflation numbers around the globe has started rising, which is to be expected given the most severe monetary stimulus in history. From our economics 101 sessions we know that inflation and interest rates are negatively correlated, meaning that when interest rates are low, inflation tends to rise and vice versa.

Not that high inflation is necessarily a bad thing, we knew beforehand that inflation will rise as people have more cash in their pockets, it just shows that the intended plan is working, that is, to save the global economy from the economic effects caused by the COVID-19 pandemic. However, as we know everything comes at a price, which brings us to the point where monetary policymakers will now have to take a monetary stance where the goal is not to save the economy from COVID-19 anymore, but to save the economy from hyperinflation, a situation where our everyday goods and services will become too expensive and will lead to less than anticipated economic growth, a situation that occurs when interest rates are kept too low for too long.

What are the next steps?

Most economies, mostly developed economies, have specific, pre-determined inflation levels that they aim to hold in order for their economies to grow at natural rates and to keep a balance between stuffing people’s pockets with cash (monetary stimulus) and to keep the prices of goods and services intact.

As previously mentioned, inflation rates and interest rates are negatively correlated, meaning that higher inflation levels will be addressed through higher interest rates in order to bring inflation levels down. This in turn means that general debt will become more expensive across the board. Essentially the access to capital will be more expensive therefor there will be less to be spent on general goods and services, which creates a decrease in demand which leads to the decrease in prices of general goods and services.

This does not mean that the economy is going to crash, it is merely a mechanism which is used to ensure that the economic participant’s earnings grow in line with the rest of the economy to ensure that the population can be financially independent and not solely rely on the government to carry their financial needs in a case where their earnings are growing at the same pace as the day-to-day costs that they will incur.

We are keeping a close eye on the U.S. CPI rate as well as their interest rate as they will most likely be one of the first economies to pave the way for higher interest rates in order to combat inflation.

Who are we?

Caveat Capital Management is a strategic advisory firm based in Cape Town. Caveat Capital Management specializes in structuring tailor-made investment portfolios that serve your needs now and grow with you as your needs change. Caveat works to maximize your gains and minimize the risk.

What we offer

Caveat Capital Management has a competitive fee structure that incentivizes the portfolio manager to perform and the remuneration is highly linked to the performance of the portfolio. Caveat Capital MGMT (Pty) Ltd is a CATII – Authorized Financial Services Provider (FSP no. 24777) registered at the South African Financial Services Conduct Authority (FSCA). Meaning that we have the required licensing to structure full-discretionary portfolios structured to your needs.

Disclaimer

This report does not guarantee the suitability or potential value of any information or particular investment source. The information provided is not intended to, nor does it constitute financial, tax, legal, investment or other advice. Before making any decision or taking any action regarding your finances, you should consult a qualified financial adviser. Nothing contained in this publication constitutes a solicitation, recommendation, endorsement or offer by Caveat Capital Management, but is merely an invitation to do business.

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The information in and content of this publication are provided by Caveat Capital Management as general information about the company and its products and services. Caveat Capital Management does not guarantee the suitability or potential value of any information or particular investment source. The information provided is not intended to, nor does it constitute financial, tax, legal, investment or other advice. Before making any decision or taking any action regarding your finances, you should consult a qualified financial adviser. Nothing contained in this publication constitutes a solicitation, recommendation, endorsement or offer by Caveat Capital Management, but is merely an invitation to do business.

Caveat Capital Management has taken and will continue to take care that all information provided, in so far as this is under its control, is true and correct. However, Caveat Capital Management shall not be responsible for and therefore disclaims any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable, directly or indirectly, to the use of or reliance upon any information provided. Past performance is not an indication of future performance. Caveat Capital Management does not provide any guarantee regarding capital or performance.

Caveat Capital MGMT (Pty) Ltd is a CATII – Authorized Financial Services Provider (FSP no. 24777) registered at the South African Financial Services Conduct Authority (FSCA).