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With the latest bond and stock market selloff, Vincent's call for a 100 basis point yield shock, in December 2017, no longer seems crazy. Yet, many investors likely feel that rates cannot move much higher, and that it will be “business as usual” once volatility settles down.
In reality, we are witnessing a secular inversion of the great savings glut of the past two decades. Since 1999, Germany, China, and OPEC countries have accumulated surpluses of $8 trillion, bidding asset prices up, and bond yields down.
This report argues that 2018 will mark the start of a triple savings glut:
- The U.S. will become the world’s largest oil producer, shrinking the surpluses of OPEC and Russia. Higher US oil production means higher costs, higher net demand, and higher velocity for money.
- Germany will abandon its balanced budget policy, and a massive pending demographic shock will melt the country’s savings
- India’s growth will outstrips China. For the first time in two decades, deficit countries will grow faster than surplus countries, putting a secular upward pressure on yields.
It is very possible, even likely, that yields retrace a bit over the short-term. But the unfolding savings squeeze means that the secular path for yields is higher for longer. Much higher for much longer.
