“The market’s view should be intolerable at the Fed,” Cabana said. “They will have to be credible in keeping rates low to generate upside inflation risk premium. That could be highly inflationary.”
He’s advising clients to wager that the gap between five- and 30-year yields will widen as a way to hedge that risk.
Deglobalized, Depressed
Structurally, decades of globalized supply chains that stifled inflation may be at an impasse, with economists buzzing about the potential for what’s known as re-shoring and the resulting depressed global economy. For Yale University economist Stephen Roach, this backdrop combined with the growing debt pile bodes for higher inflation in the years ahead.
“When you couple the trend of offshoring to re-shoring with a likely resurgence of pent-up consumer demand if we get a vaccine, you have a lethal combination of higher costs,”’ said Roach, who famously warned about the U.S. housing bubble more than a decade ago at Morgan Stanley, among other bearish predictions.
“And the job destruction occurring is set to be a lasting feature of this post-Covid world,” he said. “Without labor income from employment, the recovery is going to fall short and that is the stag part of the stagflation scenario.”
This article was provided by Bloomberg News.