First Bermuda Securities Frets Over U.S. Economic Policy and Inflation
20 February, 2023
The inflation rate for consumer prices in Brazil moved over the past 40 years between 3.2% and 2,947.7%. For the period 1981 to 2021, the average inflation rate was 294.0% per year. For 2021 the inflation rate was 8.3%. While not Brazil, U.S. economic policy-setting has reached an increasingly clear inflection point. Either inflationary expectations are dampened considerably, and interest rates stabilised – perhaps even come down – or the U.S. economy settles into a level of historically high mid-single digit inflation, low if any real GDP growth, and comparatively high interest rates. This is not an optimal scenario. Given political divisions in the U.S. whereby increasing domestic entitlements, transfer payments, fiscal stimulus packages, military spending and other government program spending enjoy support of the democratic majority, it is most likely inflation has all the fuel it needs for the foreseeable future no matter how aggressive the Fed’s efforts are to contain it. While many politically and economically hold out hope, it is unlikely the U.S. will ever return to a legislative platform of fiscal conservativism and budgetary restraint that crimps the effects of and potential for high inflation rates. Forecast: Look for high inflation and interest rates in the U.S. for the remainder of our lives. Buy companies that benefit from dollar-based liabilities exceeding the value of their dollar-based investment assets since the real dollar cost of paying back the liability will be less when inflation is high. Investing on the right side of LBOs where high levels of debt are employed may present an inflation hedge opportunity for some investors.
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About First Bermuda Securities Ltd.
First Bermuda Securities Ltd. (“FBS”), an exempted Bermuda company, is a strategic advisory, compliance consulting and listing services firm based in Hamilton, Bermuda. Please contact us or visit our website at www.fbs.bm for additional information. We welcome proposals to engage for mutual benefit and promise a prompt and confidential response.
