Interview: Torsten Slok, Chief Economist at Apollo Global Management, Inc. - Interest Rates Will Stay Higher for Longer
Key highlights:
Supercore inflation has been moving up in the last few months, and that’s a major problem because it means that inflation in the huge services part of the economy is beginning to reaccelerate.
I think interest rates will stay higher for longer which is a very important headline. When you look at the futures markets for the Fed’s policy rate as well as for the ECB’s policy rate, the conclusion is very clear: We are not going back to zero.
Now that interest rates are going to stay higher for longer, highly leveraged companies, companies with no coverage ratios, with weak cash flows, with high debt levels, are more vulnerable.
There’s $10 trillion in Treasuries coming to the market this year which is more one-third of US GDP. Someone needs to buy that. $9 trillion of it is existing debt being rolled over, and $1 trillion is new debt related to the budget deficit. This may be a particular challenge when the biggest holders of US Treasuries, namely foreigners, continue to shrink their share. So if there’s more Treasuries coming in terms of five, seven, ten, twenty and thirty year maturities, that runs the risk that long-term interest rates will be going up.
If you think about what interest rates will do over the next three to five years, there are several important other reasons why they may be higher. One important reason is that the US now has chosen deglobalization. We want to trade less with China and other countries. The consequence of that is that much more stuff – shirts, ties, toys for kids etc. – have to be produced in the US. As a result, we will have higher inflation. So deglobalization is an important factor, putting upward pressure on inflation and on interest rates in the long-run.
The second force is energy transition. We woke up one day and said we don’t like fossil fuels. Therefore, we need new energy sources and that transition is going to be costly. The next thing is more defense spending, and that also means higher inflation. And broadly speaking, you likely have less immigration globally which will run the risk of putting upward pressure on wage inflation. The bottom line is we may run the risk that inflation is going to stay higher for longer, meaning you could actually have a situation where rates could be even higher than today.