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Israel and CPI-linked debt
As inflation rears its head around the world, Israel is no different from many other countries that have seen prices spike as of late. Where Israel differs from the rest of the world is not in experiencing inflation, but how the economy is leveraged to it. Let me explain: Israel suffered from bouts of hyperinflation during its 60 years of existence. Most salient was the 1970s which saw double digit inflation throught the decade, culminating in 100+% inflation in 1979. The beginning of the 1980s introduced stagflation and saw even higher inflation rates. Here’s where the history impacts today’s Israel: in an effort to combat hyperinflation, Israel created an economy-wide phenomenon of CPI-linked debt. This debt is not specific to a specific sector and according to a report produced last week by UBS’s Israel analysts, may compose over 50% of corporate debt, over 60% of the government’s shekel debt, and 60% of mortgages. After the last couple of boom years 2005-2006, most of the corporate debt raised by Israeli firms is also linked to the CPI. Merrill Lynch is out this morning as well with a study on the effects of higher CPI on Israeli firms. The money line from the UBS report: However the spike in CPI in Q2 could affect the bottom lines of many Israeli corporates and we are concerned that a continued high inflation could continue to weigh on the profitability of many Israeli companies. So, what’s an investor in Israeli firms traded in the U.S. to do? UBS suggests underweighting those institutions with high CPI exposure. The storm feared by analysts would play out with consumers being hit with rising prices in the market also being compounded with resets in adjustable rate mortgages that are linked to the CPI. In turn, this could curb consumer spending which is playing a bigger and bigger role in GDP growth. While Olmert clings to a feeble position in a government beset by scandal, UBS suggests that “the rise in CPI will also have fiscal implications as the Government could be squeezed by paying more on its CPI linked debts as well as collecting less corporate taxes.” by Aaron Katsman & Zack Miller (Israel Newsletter) Disclaimer: Please note that charts and commentary provided by the moderator are for educational purposes only. Any trades placed upon reliance on the moderator’s charts or information is taken at your own risk for your own account. Past performance is no guarantee of future results. While there is great potential for reward trading stocks, futures and options, there is also substantial risk of loss and you must decide your own suitability to trade. Future trading results can never be guaranteed. This is not an offer to buy or sell stock, futures, options or commodity interests. Most trading systems are based on historical formulas which have worked in the past. However, what has happened before may or may not happen again. You can lose all your money trading stocks, futures, and options and you must decide your own suitability as to whether or not to trade. Only trade with true risk capital you can afford to lose. Only trade markets you can properly afford to trade. Properly funded trading accounts typically perform better than those that are not. Never risk more than 2-3% of your account on any one trade. Always define your risk before entering a trade and place a stop to limit your risk. There are no guarantees or certainties in trading. Trading involves hard work, risk, discipline and the ability to follow rules and trade through any tough periods during a system’s draw downs. If you are looking for a guarantee, trading is probably not for you. Most people lose money trading. One of the reasons is that they lack discipline and are unable to be consistent. A system can help you become consistent. Ironically, worrying about the monetary aspect of trading can contribute to and cause a trader to make trading errors. Therefore, it is important to only trade with true risk capital. |
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