I appreciate the argument but the difference with the 70’s is the Government debt pile. At even 6% long rates, questions of debt sustainability will surface and the rising interest on the debt will crowd out the private sector, creating a massive economic slowdown. Or are you suggesting the resulting collapse in asset prices would lead to income re distribution. If so it would likely be extremely messy and unsustainable for those in power.
Long term rates at 6, inflation at 8 and nominal wage grow at 10 is the recipe to get out of the debt trap without triggering revolution. Who pays? The savers of the world.
Fair, But if that is the destination it will be a very crazy ride. Ultimately agree that the brunt of any re balancing will be on the back of savers and financial asset investors. How we get there is what I am pre occupied with.
I think that would be a very reasonable view if markets were left to their own devices, but is that consistent with your views on the political change? Do you think governments' priority will be to fight inflation with high interest rates when massive investments are needed? High rates would disincentivize these investments. I think price controls - including in rate markets - are coming first. Then yes ultimately the inflation will have to be stopped and rates may be "allowed" to rise to 10%+ - but only after the investments to reindustrialize / renovate the critical infrastructure have been made. Seems to me like the smart policy would actually be to have a bifurcated rates market - high rates for speculative activities, e.g. mortgages to buy existing property, margin loans etc. and subsidized rates for infrastructure/industrial investments/construction - by expanding capacity this would actually lower inflation in the long run. But that's probably too sophisticated, so I think most likely are subsidized/controlled rates for everything, inflation be damned (in the beginning) - sold to the public as a necessity for national security.
So Russel, I one of your recent podcast you said you could see JGB and Bunds trading at a higher yield as Treasuries. Makes me wonder why you still prefer the TLT short position.
Okok Interesting! If the Fed is forced toward 7% to stabilize the currency against fiscal expansion, do you see this causing a "hard break" in institutional credit markets first, or will the "IGP Paradox" allow the broader population to absorb these higher rates for longer than the individual consumer's balance sheet would suggest?
My theory is government focuses on raising wages - which creates higher systemic inflation. To get inflation under control, it runs tighter monetary policy with creates offsetting asset deflation. This achieves the ultimate political aim of making assets affordable for working families. Higher wage growth actually leads to excellent nominal growth - and helps reduce the debt load.
I can see this path too. But this has big implications for your equity exposure. Why own banks in this set-up? Inverted yield curve is not good. Rates this high should push down house prices significantly more in real terms and also probably in nominal terms, so could cause a jump in mortgage delinquencies(?) I know Japan is a bit unique, low house prices, high savings, so perhaps your Japanese banks could hang in there. But European and US banks would not enjoy this set up, surely?
I agree with what you are saying - which is why I only have Japanese banks. It is the one market where rising property prices would probably still be seen a good political result. That being said, my vision is off much faster growth in Europe and Japan, so banks may well do okay.... US banks are hard to like in this environment.
I appreciate the argument but the difference with the 70’s is the Government debt pile. At even 6% long rates, questions of debt sustainability will surface and the rising interest on the debt will crowd out the private sector, creating a massive economic slowdown. Or are you suggesting the resulting collapse in asset prices would lead to income re distribution. If so it would likely be extremely messy and unsustainable for those in power.
Inflation is easy for government to generate- just unpopular. But no good choices left now
Long term rates at 6, inflation at 8 and nominal wage grow at 10 is the recipe to get out of the debt trap without triggering revolution. Who pays? The savers of the world.
Fair, But if that is the destination it will be a very crazy ride. Ultimately agree that the brunt of any re balancing will be on the back of savers and financial asset investors. How we get there is what I am pre occupied with.
Agree, the path is what matters. Russel Napier FWIW thinks we will get there very rapidly.
I think it will actually be a very popular policy with many people.
I think that would be a very reasonable view if markets were left to their own devices, but is that consistent with your views on the political change? Do you think governments' priority will be to fight inflation with high interest rates when massive investments are needed? High rates would disincentivize these investments. I think price controls - including in rate markets - are coming first. Then yes ultimately the inflation will have to be stopped and rates may be "allowed" to rise to 10%+ - but only after the investments to reindustrialize / renovate the critical infrastructure have been made. Seems to me like the smart policy would actually be to have a bifurcated rates market - high rates for speculative activities, e.g. mortgages to buy existing property, margin loans etc. and subsidized rates for infrastructure/industrial investments/construction - by expanding capacity this would actually lower inflation in the long run. But that's probably too sophisticated, so I think most likely are subsidized/controlled rates for everything, inflation be damned (in the beginning) - sold to the public as a necessity for national security.
So Russel, I one of your recent podcast you said you could see JGB and Bunds trading at a higher yield as Treasuries. Makes me wonder why you still prefer the TLT short position.
The TLT structure is really nice as it has no pull to par.
Okok Interesting! If the Fed is forced toward 7% to stabilize the currency against fiscal expansion, do you see this causing a "hard break" in institutional credit markets first, or will the "IGP Paradox" allow the broader population to absorb these higher rates for longer than the individual consumer's balance sheet would suggest?
My theory is government focuses on raising wages - which creates higher systemic inflation. To get inflation under control, it runs tighter monetary policy with creates offsetting asset deflation. This achieves the ultimate political aim of making assets affordable for working families. Higher wage growth actually leads to excellent nominal growth - and helps reduce the debt load.
Thanks for the knowledge 👏
I can see this path too. But this has big implications for your equity exposure. Why own banks in this set-up? Inverted yield curve is not good. Rates this high should push down house prices significantly more in real terms and also probably in nominal terms, so could cause a jump in mortgage delinquencies(?) I know Japan is a bit unique, low house prices, high savings, so perhaps your Japanese banks could hang in there. But European and US banks would not enjoy this set up, surely?
I agree with what you are saying - which is why I only have Japanese banks. It is the one market where rising property prices would probably still be seen a good political result. That being said, my vision is off much faster growth in Europe and Japan, so banks may well do okay.... US banks are hard to like in this environment.
Thanks Russell, I just wondered if you had thoughts to some well known commentators views for Central Banks to carry out yield curve control.
YCC is definitely a risk - its why I own gold
Excellent thought provoking articles lately.