Just about everyone thinks that interest rates
are going to be very low for just about forever.
This is a chart of 10-year, 10-year Treasury forwards,
which shows what investors think 10-year Treasury rates are
going to be in 10 years' time.
As you can see, the indicator is up against its all-time lows.
This is important in large part because sustained low interest
rates are so often cited as the crucial justification
for today's very high stock prices.
After all, investors who need returns
have little choice but to buy stocks.
So what could upset this near universal consensus
around low rates forever?
Inflation is the obvious choice as it
would force bond yields up to prevent returns
from going deeply negative.
Now given the Covid-19 crisis, which
has slowed economic activity so much,
the immediate threat is deflation, not inflation.
But at the same time, take a look
at the sheer amount of money that government
monetary and fiscal stimulus has forced into the US economy.
Classically, such a vast money dump
would suggest that inflation was right around the corner.
Indeed, we did see a spike of inflation
in July, though investors have shrugged this off
as a one-off event caused by technical factors.
Some dissident economists argue, however,
that when the crisis passes, all that government stimulus
combined with the return of demand
along with political and demographic changes
around the world will lead to a return of high inflation.
That's something to think about for stock market investors
because the stocks that have benefited most from falling
rates are the high-growth tech stocks like Amazon, Apple,
and Netflix.
These stocks almost single handedly
have powered the recent rally.
If that reverses in an inflationary world,
markets are going to tremble.