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Interest Rates: Inflation Genie
Benjamin Graham, the father of Value Investing was famously quoted as saying… ‘You are neither right nor wrong because people agree with you’.
Your right because your numbers are right.
Consider, Australia and United States today continue to offer the best short and long term interest rates amongst the developed world (Chart 1).
This is in the backdrop of the 30 year treasury yield in the United States falling since 1982 (Chart 2).
The result is the complete collapse of inflation in the United States and the developed world.
Many are calling it the bottom with inflation starting to turn back upwards (Chart 3).
However, we have another theory on inflation.
Inflation is dead or at least will remain at almost nothing for the next decade or longer.
Why because technology has been working its magic during this entire period.
Advances in robotics and artificial intelligence are combining to eliminate humans from the work force. Fewer people working means less wages and less wage pressure which stops inflation.
We have a game changer underway with computing which began mass production 30 to 40 years ago and so inflation may not get off the bottom for decades which means that interest rates may not return back to their long term historical averages for a very long time.