If Rates Don’t Go Lower, The World’s Not Going To Work

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and guests Porter Collins and Vincent Daniel discussed If Rates Don’t Go Lower, The World’s Not Going To Work. Here’s an excerpt from the episode:

Tobias: How do you feel about rates from here. Jim Grant had this thing over the weekend that I tweeted out where he said– I’ve looked at this. I know nothing at all about rates, but I can look at the rates– Rates are high in 1982, and then they’re low in 2022. That’s 40 years. They seem to move in very long cycles. And to be fair, I think that’s the extent of Jim Grant’s analysis too that it’s a long cycle. I don’t think he had anything else in there other than that.

But I don’t really know what happens here. Maybe we get some sort of cyclical reason to cut rates in the short-term. But it feels to me like rates probably are going up or going back to where they normally are over a very long period of time, and that should change the complexion of the securities market, stock markets pretty substantially. Probably, it’s a value trade from there. But there’s a lot of– [crosstalk] [laughter]

Jake: Lot of wishful thinking.

Tobias: I like to call it [unintelligible [00:27:09] [laughter]

Porter: Look, you’ve had one of the longest ever yield curve inversions. We’re going on almost–

Tobias: Yeah, it is the longest ever.

Vincent: Yeah.

Porter: It’s like a year and a half now, yield curve has been inverted.

Tobias: I prefer the 10-3. The 10-3 has only been since October 25.

Porter: Same thing.

Tobias: Yeah, 10-2 probably better.

Porter: Yeah. Since the rally in markets, it’s become more inverted.

Tobias: Yeah. That was because it was the bull steep enough for a while there. The 10-year ran up and it almost got back to it normalized by the 10-year running up. And then the 10-year got to 5, saw its own shadow, ran back to 4.3 or wherever it is now.

Porter: Most of the bulls are laughing at the bond bears and saying, “Oh, it was never about supply.” Well, okay, I disagree. But the supply of bonds coming from the Treasury in our lifetimes will never go down, up and to the right. We will have deficits as far as the eye can see. It’ll be different stagger, but the deficits will never end. That’s the one thing you can– In our next year preview say, “Oh, there’ll be a deficit this year.” And so we’re getting to a point where it’s got to be a problem.

I think this year you’ve– listen, 10-year went to 5 because of indigestion. You’re just going to keep have rolling periods of indigestion in the market that maybe, whatever they did in the end of October, beginning of November, whether it was the Xi meeting with Biden to change the currency, I don’t know. Whether it was Yellen who funded everything, the short-term, or the immaculate 30% decrease in healthcare costs that drove the CPI down. They had to get bond yields down. They had to.

Vincent: We’re in a screwed-up world, right?

Porter: Do you think it’s real? Like, none of this—

Jake: [laughs]

Vincent: On the one hand, I say to myself, “Well, rates have to go higher for a host of reasons.” One which Porter just said, which is probably our biggest reason, which is just supply demand to paper. Who really wants to own long duration paper when the people issuing that paper is basically telling you, “I’m going to debate you over a 5 -to-10-year period. Don’t worry about it, I’m going to do it hard too, if I need to.” Combined with the fact that I think the wage genie is out of the bottle. I don’t know if that changes acts on a severe economic slowdown.

But on the other hand, I say to myself, “Well, look what happened when the rates were getting to five and a quarter to five and a half.” This world was cracking, and it couldn’t survive higher rates because we just have too much debt that needs to refinance and roll, and we can’t have this stuff rolling at higher rates because profits are going to come cascading down. It’s all collateralized by stuff that is on leverage. And if that happens, then we have a massive deflationary backdrop. So I’m of the crazy mind of saying, “Well, rates should go higher, but they need to go lower, because if they don’t go lower, the world’s not going to work.”

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