Hoisington Management’s Third Quarter 2021 Review and Outlook (5 pages) is now available here and well worth taking in. The bottom line is that the recent bout of supply-driven inflation is likely to be self-correcting because the pandemic dramatically increased debt throughout an already highly indebted global economy. The debt weight further reduces forward growth prospects and increases the deflationary gap (level of real GDP below potential), which erodes demand and inflation once more. Full circle:
During the 1970s, unlike currently, the velocity of money was stable (although not constant). As a result, the aggregate demand curve (C + I + G +X = M x V) also shifted steadily outward. This allowed the inflation from the supply side disruptions to become entrenched. Currently, however, the decline in money growth and velocity indicate that the inflation-induced supply-side shocks will eventually be reversed. In this environment, Treasury bond yields could temporarily be pushed higher in response to inflation. These sporadic moves will not be maintained. The trend in longer yields remains downward.
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