Bank of America today succinctly waded into what I think is the most-important macroeconomic question right now: Was the 2000-2020 period of low inflation a sign of central banks taming inflation or a historical one-off that won't be repeated in the future.
Economist Michael Woodward writes:
He understates the final point as it would represent a potentially-catastrophic change. In just one example: in the 1990s, US 30-year yields averaged above 7% and that was a decade when CPI averaged just 3% and US government debt was under control.
A return to a 5% 'normal' would imply at least that. Tack on a 200 bps premium for mortgages and you have people borrowing at 9%.
In terms of equities, a 7% risk-free rate would severely impair the case for the S&P 500, which trades at a 3.5% earnings yield and a 1.3% dividend yield. That also doesn't factor in the drag to corporate profitability from higher borrowing costs.
What scares me is that globalization is objectively deflationary, demographics have undoubtedly been a sweet spot and technology made leaps in that period. We won't repeat that and may even be unwinding it via the trade war.
Perhaps AI and automation can spark a repeat -- or even an extension of that trend -- but that raises fresh set of questions.
This article was written by Adam Button at www.forexlive.com. Read More Details
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