Demographics vs. Trends
With yields showing some spunk recently and working back to test a long-term trendline, as shown in the chart at right, it seems that every talking head has opined on the move. Most of the commentary has been focused on short-term explanations, from politics to an uptick in growth. However, a remarkable paper from the BIS takes a different tack, and following the old adage that “demographics are destiny” asserts, in its title no less, that “Demographics will reverse three multi-decade global trends”. Particularly, the paper discusses how “As the world ages, real interest rates will rise, inflation and wage growth will pick up and inequality will fall”
In simple and concise prose, the authors walk through how the dynamics of U.S. fertility and longevity, along with China’s integration into the global economy brought interest rates down over the last three decades, and how, though there may be some factors that delay or reduce the speed of change, those dynamics are about to reverse. Finally concluding that policy measures should be implemented to encourage a switch from equity to debt finance, the full article is worth reading, full of insights worth mulling over by any macro investor.
Elections in Italy
While eyes will be aimed stateside this coming week with Trump’s first State of the Union and an FOMC meeting, we took the time to look across the pond at Italy. Italy was making financial news this past summer when Monte dei Paschi was threatening to bring down more than just its own walls. Now, with 10-year BTPs yielding >65bps less than US 10-years, it is facing what could be a rather turbulent election. One major candidate has promised to take Italy out of the euro, after the country has already seen the development of a number of local currencies and proposed the issuance of Fiscal Credit Certificates, which are essentially tax credits that can be used as a currency. Did we mention that, according to one proposal, they “would circulate in the form of paper with the same size as the euro banknotes”? With Italians already taking the prize for the most disgruntled members of the EU the upcoming elections could prove to be firework-filled as even moderate candidates may adopt creative fiscal ideas to win over voters disenchanted with Brussels.
