Inflation expectations for long-term bonds are the highest they have been in decades. Less globalization, massive government debt, geopolitical risks seem to be offsetting the disinflationary impulse generated by the technology boom that started with the proliferation of internet in the early 1990s.
Technology development and artificial intelligence will almost assuredly be disinflationary, but we think there is a high risk of increased debt burden on social benefits.
The total cost of government debt is rising rapidly. It’s the total size of the outstanding government debt times the weighted average coupon (interest rate). Today, that number is 3.38 per cent times US$39 trillion of outstanding public debt or about $1.3 trillion annually. That represents more than four per cent of U.S. GDP. The burden on government to fund the debt will continue to grow with no end in sight. At some point this will matter for equity markets, but I can’t tell you when.
The more we see inflation expectations rise, the worse the debt picture gets. Inflation needs to be controlled and wars are notoriously inflationary. I’ve thought and read much about opinions on AI’s impact on the world from many perspectives. For now, it’s a huge tailwind for equities, but it’s lifting many companies to extreme valuations.
