High stakes

Is the damaged caused by the conflict in Iran permanent or temporary? That might be THE question that investors need to ask and find an answer. There are deflationary forces, mostly caused by technology, more specifically AI, combined with inflationary forces, caused by money printing and now, an oil supply shock. Who wins that battle will depend on how things evolve and how long they last. If the technology boom continues, it might be able to balance the (hopefully) short lived oil shock and muddle through it. But there is a component that seems permanent. Look at the chart below: long term yields have come up after ZIRP (zero interest rate policies) during the pandemic, globally. The blue lines are the current yields. The red lines are the expectation of the 10 year yields in 10 years. All of them are above current levels. Not by much, but enough to put a lot of pressure on budget deficits, that are already stretched. The latest surveys and betting markets are showing no rate cuts until next year in the US, and likely across the world. The corollary of all this, is that is not enough for tech to be deflationary, it needs to bring a huge jump in productivity to allow for GDPs to outgrow the rising yield debt. And it needs to do it quickly. But that’s the good news. The bad news will slap us in the face if tech not only does not bring productivity gains, but it flops, even if temporarily. If AI does not fulfill its promise, deficits will explode and those red lines will explode up as well. We need robots with AI, with the huge risks for society (and perhaps humanity) that come attached to them.

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