Macro Economic Views and Analysis

How to Protect Your Money and Grow Your Wealth in a High-Inflation Economy

By Devesh Vishwakarma | March 20, 2023 | Macro View , Most Recent

In today’s world, the threat of high inflation is real, and it is having a negative effect on your wealth and investments. Inflation Rate in February 2023 around the world: United Kingdom: 10.1 Euro Area: 8.5 India:6.4 United States: 6 China: 1 (Source:...

In today’s world, the threat of high inflation is real, and it is having a negative effect on your wealth and investments.

Inflation Rate in February 2023 around the world:

United Kingdom: 10.1
Euro Area: 8.5
India:6.4
United States: 6
China: 1

(Source: Tradingeconomics.com)

Inflation can cause your wealth to shrink quickly and make it difficult to maintain your financial health. It’s important to understand how high inflation can affect your money and what strategies you can use to protect it from the effects of inflation. Here, we’ll look at several ways that you can protect your money and grow your wealth in a high-inflation economy.

Invest in Real Assets

Investing in real assets, such as stocks, bonds, and commodities, is one way to keep up with inflation. When prices increase due to rising inflation, these investments will also rise in value and provide additional income. The key is to diversify your investments across different asset classes so that you are not overly exposed to any single asset class or sector. This will help ensure that you don’t suffer too much from market volatility or sudden changes in prices due to economic events. (Correlation with Stocks and Inflation trends)

Invest in Precious Metals

Another way to protect yourself from high inflation is by investing in precious metals such as gold and silver. Precious metals tend to hold their value over time and have been used as a store of value since ancient times. Investing in precious metals provides diversification benefits since they are not correlated with other asset classes like stocks or bonds.

Avoid Cash Deposits

One thing you should avoid when trying to protect yourself from high inflation is keeping your money in cash deposits at banks or other financial institutions. This is because cash deposits typically earn very low-interest rates, which are often lower than the rate of inflation, meaning that your money will lose purchasing power over time if kept in cash deposits for too long. Therefore, it’s best to avoid keeping too much cash in deposit accounts if possible and instead focus on investing it into higher-yielding investments like stocks or bonds, where it will be less likely to lose its purchasing power over time due to inflationary pressures.

Protecting yourself against the effects of high inflation doesn’t have to be complicated or require taking on large amounts of risk. By following some simple strategies, such as investing in real assets and precious metals and avoiding cash deposits, you can ensure that your money remains safe while growing over time, even when faced with periods of high inflationary pressure on the economy. With these strategies, you can confidently move forward, knowing that no matter what happens with the economy, your finances remain secure and continue growing despite rising prices due to inflationary pressures.

Will the Fall of SVB Bank Trigger a Financial Crash?

By Devesh Vishwakarma | March 12, 2023 | Macro View , Most Recent

Summary: As of Dec 31, 2022, SVB had total assets of $209 Billion, total client deposits of $175.40 Billion and total outstanding Loans of $74 Billion SVB Stock Price fell by 60.41% to $106.04 on March 09, 2023 Total Number of Employees: 6,567 SVB CEO, Greg W Becker...

Summary:

As of Dec 31, 2022, SVB had total assets of $209 Billion, total client deposits of $175.40 Billion and total outstanding Loans of $74 Billion
SVB Stock Price fell by 60.41% to $106.04 on March 09, 2023
Total Number of Employees: 6,567
SVB CEO, Greg W Becker reduced his ownership by 11% by selling 12,451 shares in the company
On 14 Feb 2022, Forbes featured SVB Financial as the 20^th Best Bank in the USA

Investors watching Silicon Valley Bank (SVB) with trepidation in recent weeks have evoked memories of the 2008 financial crisis. As the tech-focused lender’s share price drops to historic lows, many are left wondering if this is another Lehman Brothers moment. With economic uncertainty compounded by a global pandemic, understanding what’s happening at SVB and how it could affect your investments is more important than ever.

What caused Silicon Valley Bank Collapse?

In 2008, banks took a dive due to risks associated with subprime mortgages. Fast-forward 12 years, and we’re in for the same song’s second verse – interest rate bets gone wrong! Banks, like SVB, had their depositors funded by VCs at rock bottom rates while hoping that those same interest rates stayed low or went lower still; but when they instead increased… well, it’s not looking so rosy. And unfortunately, SVB isn’t alone here either –California-based Silvergate Capital (SI) failed earlier this month too.

SVB Financial is now facing unforeseen difficulties related to high-risk investments in non-public companies, wineries, venture capital opportunities, and bonds with prolonged maturities.

SVB Financial Group’s $1.25 billion share sale, which included an extra $500 million purchase from General Atlantic, had depositors running for the hills when it was announced around the same time Silvergate Capital went insolvent. To make matters worse, they also planned to raise another half-billion through Convertible Bonds – talk about a stressful situation! All this resulted in a massive bank run.

What next?

On Monday, 13 March 2023, the FDIC will provide $250,000 to all depositors of SVB Bank. Those with more than this amount in deposits will have to wait until funds are received from the receivership’s liquidation process or unless government intervention takes place again next week. Speculation is growing over which financial institutions may be facing a similar fate as reports show some regional bank stocks declining substantially – hinting at an old-fashioned “bank panic”. Nevertheless, U.S.’s largest banks remain well safeguarded due to changes made after 2008’s global economic crisis, paving the way for continued stability and security within our financial system.

Moving Forward

We had a not-so-friendly reminder of the 2008 financial crisis with the biggest bank failure in recent US history. Investors should take caution – stock prices aren’t begging you to buy! But if you’re feeling bold, now could be your chance: some reputable banks have recently taken significant dives that may be worth checking out. Ironically, the financial sector is the one that benefits the most from rising interest rates.

Market Outlook for 2023

By Devesh Vishwakarma | January 18, 2023 | Macro View

As the Federal Reserve works to lower inflation, more interest rate increases are likely to significantly impact the economy in 2023. The Fed may need to raise short-term rates to control inflation and stabilize economic growth as part of its monetary policy. Higher interest rates can slow lending activity and reduce consumer spending, negatively affecting business investment and economic output.

Changes in interest rates will have an effect on investments as well. Since higher rates tend to increase borrowing costs for businesses, investments that rely heavily on borrowing money could become more expensive. This could make it difficult for companies to finance new projects or expand their operations, resulting in fewer job opportunities and slower economic growth.

On the other hand, rising interest rates can create opportunities for savvy investors who understand how to take advantage of changing market conditions. When short-term rates go up, it tends to push down stock prices while increasing bond yields. Investors willing to take on some risk may benefit from investing in stocks or bonds at specific points during rising interest rates. Additionally, some investments, such as real estate or commodities, can become profitable by hedging against inflation when interest rates rise.

Investors should also consider diversifying their portfolios by combining short-term bonds and long-term investments such as stocks, mutual funds and exchange-traded funds (ETFs). Having both types of investments allows an investor to adjust their strategy depending on what is happening with interest rate levels. By doing this, an investor can capitalize on both potential increases in value from long-term stocks or ETFs and benefit from the safety of holding bonds with relatively stable returns during periods of deflationary pressures or overall market volatility caused by rising interest rates.

Given a rising interest rate environment, whether or not you should invest depends solely on your risk tolerance and financial goals. While there can be opportunities for savvy investors who understand how changes in interest rate levels may affect different investments, there is also the risk that markets could react unexpectedly when faced with these changes. Therefore, investors need to stay informed about current market trends to make better decisions when considering any investment strategy when interest rate levels are increasing.

The Impact of Covid-19 on the Future of Interest Rates

By Devesh Vishwakarma | June 10, 2020 | Bonds , Macro View , Most Recent

No one could have predicted the onset of the novel coronavirus pandemic in late 2019 and early 2020. The virus spread across the planet in a matter of months with no real end in sight. It is safe to assume that investors from around the world need to think about a “new normal” going forward. For many, that means figuring how the future of interest rates will look post-COVID-19.

In the weeks that followed the arrival of the coronavirus, yields in the United States and Europe dropped to unbelievable lows. The returns on investments were now slim-to-none and recession could be on the horizon. While some fear that these low yields and even lower interest rates could bring widespread financial losses, problems with debt, and much higher inflation rates that will push interest to higher rates than the ones before Covid-19, others stand firm in the belief that interest rates will remain low long after the pandemic has disappeared. They are not guessing, either — there are plenty of good reasons for some experts to feel this way.

Looking back so we can look ahead

Because the novel coronavirus is exactly that — a new phenomenon — it is impossible to know what is going to happen in the months and years to come. For this reason, financial experts on either side of the debate have made educated theories about the future of interest rates. Truthfully, though, the best bet seems to be to look at past pandemics and the impact they had on the market. It will allow us to make the smartest predictions about our future post-COVID-19. To understand the future of interest rates, we have to look back at pandemics and interest rates over the last 70 years.

Recently, the San Francisco Federal Reserve Bank, economists Òscar Jordà and Sanjay Singh, and former PIMCO senior advisor Alan Taylor looked at 15 pandemics since the 14th century that resulted in the loss of over 100,000 lives. They concluded that, in each instance, the pandemic had a long-lasting impact on interest rates that kept them low for decades. Of course, there are limiting factors worth mentioning: These past pandemics had a significant impact on the labour force, effectively decimating the number of workers in relation to the capital. Covid-19 has mainly impacted older, retired people that only make up a small percentage of the modern workforce in the United States and the United Kingdom. Additionally, the fiscal response to the novel coronavirus is much larger than responses in past decades. Increase in money supply could lead to higher inflation and higher interest rates, not lower.

Estimating the long-term impact

Even without these two holdups mentioned in the previous section, there are a couple of other reasons to believe that the financial impact of the coronavirus on interest rates is likely to stay negative going forward. For starters, most businesses are expected to want to save their money instead of spending it to make up for the losses they experienced during Covid-19 shutdowns. It has happened in the past, most recently in the wake of the 2008 global financial crash. It seems fair to say that people will plan on saving instead of spending. All this saving will hopefully offset the high deficits that have plagued the world during the coronavirus pandemic. In addition to saving, it is fair to assume that banks in the U.S. and the U.K. will keep their short-term interest rates low. Not to mention, debt-to-GDP ratios will almost definitely go higher after the end of the Covid-19 pandemic. Thankfully, this all sounds a lot more complicated than it actually is. In reality, the United States has actually already done something similar in the past. In the wake of the Second World War, the U.S. government kept a cap on long-term Treasury yields (at 2.5%) that had been there since before the war began. It helped keep borrowing costs low during the following economic boom and subsequent increase in inflation. These new policies helped to keep the U.S.’s debt-to-GDP from doing permanent damage to the economy. Eventually, when inflation skyrocketed past 20% in the early 1950s, the government finally gained the ability to set monetary policy (commonly known as the Treasury-Fed Accord of 1951). Ideally, if North American and European countries follow a similar plan, the long-term financial impact will not be as severe as some of the less constructive alternatives some experts have predicted.

The bottom line

While this might sound like a lot of confusing economic jargon, the point is a lot less difficult to understand: it might feel like the Covid-19 pandemic is the first and only crisis of its kind in the entire history of the world, but the truth is that it’s just one of many similar situations the planet has already gone through. The novel coronavirus is certainly a unique pandemic, no doubt, but pandemics have come and gone in decades past and the economy has always found a way to thrive. There is no denying that Covid-19 is a crisis. It is not to be taken lightly, whether you live in the United States, the United Kingdom, or somewhere else entirely. From humanitarian issues to healthcare concerns to economic anxieties, the long-term impact of the pandemic will not just fade out. It is going to take some time to get back to “normal.” The good news is that, eventually (and hopefully sooner rather than later), the threat of the virus will go away. Based on the vast amount of evidence from the past decade, the coronavirus’ impact on interest rates will also be around for a while. With this in mind, investors should definitely prepare for an extended period of record low-interest rates for quite some time.

What is the impact of lockdown on the price of crude oil?

By Devesh Vishwakarma | May 26, 2020 | Commodities , Macro View