Dividends and Central banks need exit strategy, BlackRock vice-chairman says

This year we do not have to worry about inflation and likely next year, for growth and inflation usually go hand in hand. If there is growth people are chasing fewer resources, which tends to push up prices which causes inflation as every company increases prices because their prices went up. Normally central banks are doing their best to maintain a balance between growth and inflation.

For most of us, we do not have to worry about the large macro issues, because until the banks charge high fees or increases rates for investment certificates, we grin and bear it or stay calm and carry on. One person who does worry about macro trends is Phillipp Hildebrand, the vice-chairman of BlackRock and former Swiss central bank chief. BlackRock is the world’s largest asset manager and it is reasonable thing to examine their website to see some trends on it.

In a recent interview with Tim Shufelt of the Globe, Mr. Hildebrand said ultimately central banks need independence again, so they can react when inflation expectations again. For the past 30 to 40 years, the control of inflation expectations is the anchor of the whole monetary system.

Mr. Hildebrand does not see a plan to move from limiting the damage of COVID to being worried inflation. The challenges include sustainability, debt levels which the OCED average is probably running at 120 to 130% of GDP. If and when inflation comes back, what happens to the cost of servicing costs of the debt. Higher inflation means higher interest rates means higher costs to servicing the debt.

Linking to dividend paying stocks, one of the things as individuals want is the economy to return to what is considered normal and people can and want to meet and greet in large numbers. As we move to normal, then governments will need to pay attention to the size of deficits and cutting the costs of government. As long as dividend paying stocks are yielding more than bonds, leaving your money in dividend paying stocks is a very good thing. Later in 2021, hopefully you will look at bond yields and dividend yields to diversify your holdings.

There are more questions than answers, till the next time – to raising questions.

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