In the 1980s oil fell to $10 per barrel and gas prices plummeted to under $1 per gallon – shocking the world!
The world was shocked because in the 1970s we were told repeatedly and with certainty that we had reached “peak oil” and that prices would continue to shoot up forever – so much so that civilization itself was at risk!
The current surge in commodity prices such as wheat, nickel, copper, and oil is fostering similar doom and gloom predictions – of mass shortages and runaway inflation.
So, in light of that, why is Raoul Pal, the founder and CEO of “Real Vision” buying bonds in a bet that interest rates will fall?
He explains why in this excellent 13 minute (at 2x speed 😊) video. I HIGHLY recommend the video, but I will summarize a couple of main points here.
Pal thinks higher prices will crush demand and that a recession is looming – which will bring down both prices and rates.
He also thinks technology will continue to solve our issues with shortages and higher costs.
Three Types of Inflation
Pal also alludes to different types of inflation – and that is what is confusing so many people.
- Cost-Push Inflation. This is an increase in prices caused by higher input costs, such as labor or raw materials, like we are seeing right now.
- Demand-Pull Inflation. This is an increase in prices caused by surging demand like we saw after the COVID lockdowns were lifted and after the government mailed out stimulus checks.
- Monetary Inflation. Jeff Snider of Eurodollar University fame reminds listeners constantly that “inflation” is always a monetary phenomenon – meaning that true inflation is ONLY caused by the creation of too much money. Snider points out that “cost-push” and “demand-pull” inflation, as described above, are not actually “inflation.”Snider further points out that the Fed does NOT increase the supply of money; banks do by lending. And because banks are not lending, the money supply is not increasing.
Hence, even though cost-push inflation will affect prices for some time, we don’t have monetary inflation in the way we had in the 1970s (when banks were lending and money turned over in the economy much faster).
So yes, prices will likely continue to rise but they will likely level off and could even fall for the reasons Pal gives. Snider too reminds us of the “peak oil” stories we have heard time and again over the years – only to see prices fall.
Financial Repression Too
One more reason to bet on bonds (and lower rates) is “financial repression,” as described by Lyn Alden. This is where the Fed holds rates artificially low (because our gov’t can’t begin to afford higher rates) and way below the inflation rate – like the Fed did in the 1940s.
“Smart Money” In Bonds
So yes, rates and prices are screaming higher right now.
But bond holders still seem to be betting on lower rates or they would be demanding far higher yields than a measly 2% when inflation is close to 8%!
There is an old axiom that says “the smart money is in bonds” because bond investors tend to predict the future much better than anyone else.
Bond investors could well be wrong (as could I obviously), but I am betting nonetheless on the wisdom of smart money investors.
Lock Now! (My Final Point)
Borrowers would be wise to lock in their rates now nonetheless, as I expect rates to continue to climb in the near term and there is no telling when rates will fall.
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