Grim news on inflation

[Mick1]

I listen to a geopolitical expert named Peter Zeihan from time to time. This is a well-thought-out nine-minute video on the economy and what’s likely to occur to inflation and interest rates over the next decade. Curious as to your respective reactions.

Audaces fortuna iuvat

[Legend]

I like zeihan.

He doesn’t go off on one of the more salient topics:  fiscal policy.  We are financing bigger deficits than ever right now, and not really batting an eye at them.

The treasury had been funding the government with a bias for shorter term instruments in an apparent bet that interest rates will go down at some point, kinda like a person who buys a new house on a 5 year ARM thinking they will refinance in the next couple of years.  At some point they will have to shift to the long bond.

When the treasury moves long I think we will finally see what a mess this is. My par number for long bond interest is about 7 percent.  This is based on nothing more than basic math of 3 percent “new normal inflation” plus 2 percent “risk free return” plus 2 percent long bond term premium.  Thats 7 percent.

In other words, I agree with zeihan that now’s the time to borrow because rates are likely to go up, not down. He just takes a more tortured way of getting there by explaining it via demographics and capital flows.  If rates do go down it will be political and not mathematical reasoning that wins the day.

And, no, I’m not massively shorting long bonds on my hypothesis of 7 percent par.  I’m a big believer that markets can stay irrational far longer than I can stay solvent.  It would not shock me if interest rates are lowered as a sop to Wall Street yet again, of course leading to continuation of the massive asset bubble we are in.

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Sic transit gloria mundi (so shut up and get back to work)

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