{"text":[[{"start":4.3,"text":"Expectation inertia is a powerful force. Thirty-year Treasury yields went above 5 per cent in 2023 before heading back down. But in the last couple of weeks, as the same thing has happened, investors finally seem to be accepting the notion that America is leaving the era of lower interest rates, and entering a new world with many more inflationary vectors than in the past."}],[{"start":28.05,"text":"There are multiple reasons for this — from higher energy and goods prices related to war and tariffs, as well as re-industrialisation and rising defence spending, to the way in which AI giants are gobbling up real estate, chips, water and electricity, raising the price of these things across the economy at large. Lower demand for all those US Treasuries doesn’t help either. "}],[{"start":50.05,"text":"Then there are the slower drip issues such as rising debt, geopolitical strife and populism. These risks mean that lenders want a higher premium for shelling out their money over the next few years."}],[{"start":62.55,"text":"Taken together, the message is clear. “Investors should position for a persistently higher rate environment” for the short, medium and longer term, according to a recent client note from Apollo chief economist Torsten Sløk."}],[{"start":76.1,"text":"Put another way, we are seeing the end of an era: the era of cheap. Growth in America over the past 50 years or so has been predicated on cheap everything: cheap capital, cheap labour and cheap energy. All the major geoeconomic and geopolitical dynamics supported these things."}],[{"start":94.14999999999999,"text":"Thirty-year Treasury yields, for example, fell for almost half a century until quite recently, going from the mid-teens in the early 1980s to around 1 per cent during the pandemic. Former Fed chair Paul Volcker kicked off that era with the monetary tightening that began in 1979. But the trend kept going because all the big macroeconomic vectors supported it."}],[{"start":115.94999999999999,"text":"Decades of globalisation and technological advances in manufacturing reduced the price of goods. A flood of petrodollars (cash from oil-exporting countries) into the US created new and plentiful supplies of cheap money. The privatisation of retirement systems created a bigger demand for all sorts of new financial products, which Americans poured money into. Foreign borrowers wanted more US Treasuries because what country was a safer place to park your money than America?"}],[{"start":146.54999999999998,"text":"All those vectors have now changed or are changing. "}],[{"start":149.64999999999998,"text":"Each Treasury auction brings fewer international buyers, rather than more. Decoupling and the move of the US, Europe and others around the world to bring at least some of their critical industrial capacity back onshore will probably raise the prices of goods and services in the short to medium term (though it may also increase resilience in the long run)."}],[{"start":169.39999999999998,"text":"The petrodollar link, which many would argue helps suppress inflation, seems likely to be weakened as China tries to settle more and more of its own fossil fuel trade with other nations in renminbi. Perhaps more importantly, even as the war in Iran hits Asian energy importers such as China hardest in the short term, it will undoubtedly cause Beijing to double down on its moves to own the clean energy future, as the US backs away from its climate commitments. That will pull capital away from the US and towards China in the longer term. "}],[{"start":199.74999999999997,"text":"What about the cost of labour? Wage stagnation, particularly among workers without college degrees, was very much a part of the era of cheap. Outsourcing, declining union power, automation and shareholder primacy (which favoured financial engineering rather than investment in workers) all supported corporate margins, and bolstered the power of capital over labour. Are we about to see an end to that part of the “cheap everything” story too?"}],[{"start":227.69999999999996,"text":"This is the one area where caveats are still in order. It’s true that labour shortages, a greater number of industrial actions (including big, successful ones in major sectors like auto manufacturing), immigration constraints, and union membership growth in some areas (particularly white-collar work) have led to wage gains by workers in recent years. But those trends have been offset more recently by both rising healthcare premiums, the cost of which companies in the US offset in part by keeping wages lower, and artificial intelligence."}],[{"start":258.49999999999994,"text":"Technology may ultimately determine whether we are about to see more, or less, inflation at a net level in America. Will the productivity effects of AI be widely distributed across industries and individuals, creating new jobs and revenue streams? Or will it be just a tool to reduce jobs and increase corporate margins, even as the AI build-out itself creates so much inflationary pressure that the net result will be to raise, rather than lower, costs? In the more optimistic scenario, as modelled recently by the Yale Budget Lab, the national debt declines dramatically. In the pessimistic one, it rises, as government is forced to help displaced workers."}],[{"start":299.69999999999993,"text":"The former scenario could lead to lower inflation, while the latter could see it rise. It will take years for all this to play out. But one thing already seems clear: most market participants have spent their entire lives in the age of cheap. Adjusting to what is ahead will require leaving old expectations behind."}],[{"start":323.54999999999995,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1780480332_2175.mp3"}