The Dog That Isn’t Barking

One of the things I’ve been pondering lately is the possibility that we are in the midst of a regime shift. I’m not talking about a cyclical change but rather a long term, secular one. For all of my investing career – and for almost everyone’s entire investing life – interest rates have been falling. Disinflation that has occasionally morphed into outright deflation – think 2008 – has been the biggest trend in the world, proving for nearly four decades that investing genius is most often nothing more than a big ol’ bull market. Investing since the early 80s has been pretty easy – nerve wracking at times but still pretty simple. All you had to do was ride out the rough spots – ’87 crash, S&L crisis, various EM crises, dotcom crash, 2008 – and wait for interest rates to fall and stocks to rally. Hedging was as hard as owning some long duration bonds.

There have been a plethora of explanations put forth for the endurance of this trend from demographics to technological advance to globalization. And of course monetary policy has played a role. Paul Volcker kicked things off when he crushed inflation with massive rate hikes in the early 80s (and caused the first emerging market crisis of my investing life in the process). Then Alan Greenspan managed to cause the Crash of ’87, navigate the S&L crisis, engineer the first and only “soft landing” of my career in the mid-90s, create another EM crisis in Asia, blow the dotcom bubble in response to the Asian crisis he largely created, pop the dotcom bubble and create a housing bubble to replace it all while managing to get people to believe he was “the maestro”. Pretty nifty trick if you ask me.

Ben Bernanke and Janet Yellen followed but frankly neither of them merit much mention when it comes to this disinflation trend. Their legacy will be the next secular trend, the one I’ve been pondering. The transition we’re in now – and have been for a couple of years – is from a long term downtrend in rates and inflation to a long term uptrend in rates and inflation. If I’m right, if we have seen the trough in rates and inflation, investing in the second half of our lives (I’m still an optimist at 57; where the heck is that singularity?) is going to be a lot different than the first half.

I know what you’re thinking. Secular stagnation is not the stuff inflation is made of and that is true. But the election of Donald Trump was, in a way, the hoi polloi’s response to secular stagnation and to my way of thinking, the entire disinflationary trend of the last 3 decades. The last 35 years have been great for creditors but the election of Trump – the self-proclaimed king of debt – means it is the debtors turn. And nothing favors debtors like inflation. And I have no doubt that Trump will pursue inflationary policies. Indeed, he’s already on that path even if the markets don’t know it yet. Tariffs, huuuuge budget deficits, Fed bashing and talking down the US Dollar are all inflationary.

That Trump would pursue inflationary policies was entirely predictable from a public choice theory viewpoint. Politicians, like everyone else, pursue their own best interests. Last I checked Donald Trump’s wealth was almost all in real estate or real estate related assets -which just so happen to benefit from higher inflation, especially if the owner is deep in debt. Which is exactly what I suspect we’ll find if we ever get a peak at Trump, Inc.’s books.

I bring all this up (and will continue to do so assuming I’m right; if not I’ll forget all about it and hope you do too) because one of my favorite financial writers, Ben Hunt, has a new article posted at Epsilon Theory that touches on this idea that the big surprise down the road will be inflation. Dr. Hunt has been hinting at this for a while but really made it explicit in this post, Things Fall Apart (Part 3) (and yes you should read parts 1 and 2 as well).

His latest post concerns the narrative that doesn’t exist, the dog that doesn’t bark, the complete lack of concern about the US budget deficit. With a newly elected Democratic House of Representatives, a President who loves to make a deal and no one worried about deficit spending, Ben thinks we are about to get the mother of all infrastructure bills. Just one more item on this inflationary bill of particulars.

Here’s Dr. Hunt:

Unless and until a Budget Restraint! narrative reappears, there will be no budget restraint. There will just be spending. There will just be fiscal stimulus. Now, it won’t be called spending. It won’t be called stimulus.  It will be called “investment”. You know, like “investment in our future” or “investment in our country” or “investment in our crumbling infrastructure”. Because who can be against “investment”?

And people still ask me how it’s possible to have an inflationary world.

Read the rest….

P.S. Not everyone agrees by the way. Steve Chapman at Reason believes divided government means more fiscal discipline. And my buddy Gary Evans over at Global Macro Monitor agrees that rates are going higher but also thinks the markets will fret over deficits and create greater political conflict. BTW, Macromon has done some great posts on why he thinks rates are going higher and I urge you to head over there and read them when you have some time to devote to it.

The Gathering Storm In The Treasury Market


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