Why long-term interest rates are more likely to fall.
While investors are currently preoccupied with shorter-term questions of higher interest rates, inflation and tightening economic conditions, the reality is interest rates have been on a consistently declining path for the last three decades and those forces responsible for this phenomenon remain relevant and in some cases are likely to strengthen.
What are some of these forces?
The increase in size and influence of governments and central banks (financialization) is highly disinflationary and no longer reversable. Central banks decision to manage through crises, with as little damage as possible to financial assets (2001, 2008, 2020) by pumping in liquidity and support means any slowdown in liquidity or increase in interest rates or volatility can bring the entire house of cards down. Finance is already at least 5x larger than the real economy and it will continue to grow.
Technology is also disinflationary and unstoppable, changing the way businesses manufacture their products and altering distribution channels, as well as people from the fruits of their labour, while lowering the marginal cost of almost everything towards zero. The new technological phase (3rd generation tech) we are entering is likely to be more capital intensive (require significant private and public investment), but it should ultimately even be more disinflationary as automation becomes more advanced.
Inequality is unlikely to be corrected any time soon and in fact most studies indicate that inequalities depress demand and lower rates, as wealth and assets continue to concentrate in the hands of the few with a low propensity to consume, while the rest of us need ever lower rates to keep going.
In the United States, the bottom 50% of the households have absolutely no net assets (wealth) but the top 1% own as much as 40% (up from 27% in 1989). While somewhat extreme, the same pattern is evident in most other countries.
Demographic trends will continue deteriorating (except for the least developed economies), and while this implies higher consumption rate for certain groups, it will be more than offset by rising wealth concentration and slower growth rates.
Weighted Average 10yr Government Bond Yields
Source: Bloomberg
On balance, it seems that low interest rates are likely to endure. Higher interest rates are simply incompatible with either financialization, technology or demographics. This implies that bonds are not dead, and in equities, while there will be regular value rallies (some strong), the future still belongs to quality sustainable growth supported by historically low interest rates.
