We see it everywhere, in all the media, financial or not, inflation, particularly in the United States and in certain European countries, has taken on epic proportions.
State of play
For example, the White House spokeswoman recently said that a inflation above 7% would not be surprisingwhich is, it seems, a peak for forty years. Europe is not to be outdone with inflation of 5% annual in the euro area for the year 2021, the highest for twenty-five years.
As you can see, the situation is exceptional. What are the causes and how can the ordinary saver remedy it, so as not to see his financial income being completely eaten away by said inflation?
The first cause: too much money (in circulation)! The accused, although presumed innocent: the central banks of course. Indeed, particularly following the crisis of subprime and the credit crunch what followed, some states began to create / print a lot of currencies.
In this regard, a detailed article by the Financial Times January 22/23, 2022 is very instructive. It summarizes a book written by an economics journalist, Christopher Leonard, entitled the Easy Money Lords. In this one, we learn in this article, the author quotes abundantly Thomas Hoenig, central banker of Kansas, who was one of the only ones to oppose the decision of quantitative easing of the American monetary authorities in 2010, intended to find a solution to the financial crisis of 2008. The author, Leonard, reports that the creation of astronomical quantities of money by the fed was nothing more than an experiment in monetary policy, the consequences of which were not anticipated. Moreover, they had not been tested in the history of mankind. He also recalls that the fed is both a “government agency” and a privately-owned bank, which may, as such, have profit-making or commercial interests.
It is understandable: this enormous inflation in certain countries, in particular the very indebted ones, does not seem to be in any way a skilfully orchestrated and calculated maneuver, but a very risky experiment, which quickly went wrong, to the point of becoming irrelevant. control !
Very interesting you might say, but what do we actually do?
Economic and legal measures
Governments are finally coming to terms with the facts: it is now time to contain this galloping inflation. Indeed, in the opposite case, and this has been the case in recent years, financial assets, especially bonds, based on central bank key rates, negative or close to zero, yield almost nothing. However, this is a huge problem at a time when life is getting longer and longer: pensions have to be financed.
Consequently, and after long years of relative inaction, central banks are finally using the instruments of choice to reduce inflation, mainly (i) the quantitative tighteningor vice versa quantitative easingand (ii) the rise in key interest rates. Many banks believe that the fed will raise, in several stages, the US key rate between 125 and 175 basis points during 2022.
Investment products to use
In order not to depend too much on the economic policy games of the “big guys of this world”, the ordinary investor can – and should undoubtedly – use means of market finance, in order to protect himself from inflation which can, if it remains high, depriving it of capital income in terms of real.
We can think of various investment products that are adapted to this inflationary environment.
For example, the inflation-indexed bonds. As explained by a french site “This investment is specifically aimed at investors who wish to protect themselves against rising prices. Since 1998, the French State has, for example, issued equivalent Treasury bonds indexed to the consumer price index in France”.
More complex products are then constructed on the basis of such investments, such as a large number of collective investments investing in inflation-indexed bonds or even structured products backed by said instruments.
caveat and recommendation
Be careful however, these products, when they are complex, can sometimes not be very understandable for a non-specialist. For example, their fees (such as buying or selling commissions) may not necessarily be obvious at first glance.
A special mention is due to the usual suspects what are retrocessions (i.e. extras received by intermediaries indirectly). Indeed, even if, since a rich and now classic case law of our Supreme Court (started in 2006 already) which obliges, each time a little more, to specify the terms and the quota of the retrocessions received and kept, many intermediaries do not charge more (the creation of investment classes free retro having apparently increased), retrocessions do still exist.
However, not only the aforementioned case law but recently a law, I have named the Federal Financial Services Act (section 26)make it necessary to declare all this in more and more detail.
Therefore, in order for both parties to the relationship (the client and the manager/advisor) to be completely satisfied, it is important that any fees and retrocessions are clearly stated, as far as possible, in accordance with the above rules. In doing so, the client will knowingly renounce the retrocessions and will thus accept that his manager retains them as additional remuneration for his good and loyal services. This is the best solution so that the relationship of trust is nurtured and lasts.
In conclusion, in order to protect your investment portfolios against inflation, do not hesitate to use all the subtleties and sophistications that modern financial science has created, but, good accounts making good friends, says our Powers judicial and legislative also apply, remember to agree fully and in advance regarding the actual cost of your inflation-indexed bond or other “anti-inflation” instrument!