Veni, vidi, vocavi, Part II

Anniversary note, Part II: Casualties of roar

As described in Solved: Drivers of the dollar cycle and Clash of Themes, the rise in real interest rates is the “roar” of a powerful, decade-long US capex impulse as America, and some other economies, transition from globalization to automated Localization.  In Part I – along with a well deserved if slightly tongue-in-cheek victory lap – I described how much further I expect the bear steepening of US rates to run.  Here, I discuss the casualties of roar: the effects of rising real US rates on asset prices (specifically equities), non-US government rates, and macro debt sustainability in a select group of advanced and emerging market economies for which market-based real interest rates are available.

But I also consider what the constellation of asset prices are telling us about interest rates.  Ultimately, all returns generated by an economy derive from its marginal product of capital, the incremental real return on one more dollar of investment.  Hence, equity prices’ behavior may tell us as much about real interest rates as the reverse.  From an asset allocation, or cross-asset macro perspective, this implies a Finance analogue to Heisenberg’s uncertainty principle in Physics: we cannot pin down the fair value of two different asset markets simultaneously, only make judgements about their relative value.  Considering a broad range of interest rates, exchange rates and assets prices, I assess relative the value of bonds versus equities, and of US assets versus those of other economies in the context of my US rates views.