Energy could be the hedge of a decade for investors as inflation stays high

Energy could be the hedge of the decade for investors worried about the risk inflation poses to their portfolios. Read more here.

However, students of economic history have been finding the period after the Second World War is more analogous to our current situation. Gross domestic product growth isn’t negative, but growing slowly at around two per cent. Unemployment is low as many workers are now part of the service sector, which does not have the same large fluctuations the manufacturing sector does. However, debt-to-GDP ratios for the developed world are at all-time highs.

If interest rates were to be directed or allowed to climb to current inflation rates, most governments would not be able to service their interest payments over time and would, in effect, become either insolvent or need to “print more money” to make these payments. Total debt would continue to climb, especially as a ratio of GDP.

Interest-rate ceilings were created by central banks entering the market to buy government bonds to keep interest rates lower than natural market conditions. This causes an issue because there isn’t enough incentive for investors to hold sovereign debt if the current yield does not sufficiently compensate for the inflation risk.

In the meantime, it’s worth examining the cause of this inflation. Much of it is due to governments’ response to the COVID-19 lockdowns. Substantial amounts of cash were directly sent to people and companies by the government after their economies were locked down. The lockdowns also devastated supply chains and global trade, which rely very much on just-in-time production.

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