Get your older relatives out of fixed-income assets like treasuries, bonds, and annuities. Get them out of any industry that depends on low cost of capital.
If the current trends in debt financed borrowing for AI infrastructure expenditure continue, we’re going to see literally historically unprecedented interest rates as first the US and soon the global economy dumps all excess capital into financing the data center construction boom. We could easily see interest rates above 20%. I would be surprised if they don’t eventually rise to a much, much higher level than that.
That is going to have mind-numbingly large implications for the world economy which I will write about when I have more time, but one of the clearest ones is any asset with a fixed rate of return, especially long-dated debt, is going to become almost worthless. People usually think of treasuries as a “safe” asset, but that is quickly going to stop being the case.
Older people in the US and other developed countries usually hold a significant portion of their assets in bonds, treasuries, and other fixed income assets. Most of these assets are going to massively depreciate in the next 3 years as the opportunity cost of locking up your money in an asset that returns 4% annually goes up exponentially.
We could easily see the face value of 10 year US treasury bonds drop by 70% or more by the end of the decade.
This isn’t a giant part of most retirees portfolio, but it’s an easy loss to avoid: even holding your money in cash will do better than treasuries.
I am no investment guru, but the one thing I unequivocally do not believe, is that the AI revolution will have this kind of consequence, in which potential economic productivity (however that is measured) grows at historically unprecedented rates, but the manifestation of this is just that known asset classes rearrange their rankings as desirable destinations for investment.
Quite apart from the fact that all this likely involves creation of artificial superhuman intelligence which will replace the human species in general, developments this potent would inevitably shatter society. You’re going to end up with movements that call for universal basic income and nationalization of core industries, or millions of unemployed white-collar workers conducting drone warfare against billionaires who have private armies of humanoid robots, or similarly disruptive outcomes.
If the global economy dumps all excess capital into the data center construction boom then (Cambridge equation) i.e. the lowest real interest rate possible.
Ceteris paribus, positive supply shocks cause deflation, not inflation. (To be clear, deflation is really bad and should be offset by the central bank.)
I would see a few things to consider before selling everything now. First, when are is the debt due? If there is no concerns about default and the time is still within the person’s planned holding period I could see an argument for scaling back some but not just exiting.
Second, what are the income needs. If the current rate is still generating the level of income desired then again, I don’t see the strong case for closing out the holdings now.
Third, if the holders are shifting their focus to maximizing returns rather than stabilized income and capital preservation then the dumping everything and investing later to get that 20% or more rate makes some sense but recognize it for what it is, a change in investment approach and a shift in the risk exposure.
Last, somewhat related to the holding period, most of these investors probably have some type of targeted duration and ladder structure in their debt holding. Might make sense to adjust the portfolio duration but they will likely enjoy most of the gains and avoid most of the real losses you see as holding mature and get rolled over into new debt.
How about taking on debt? I’ve been toying with taking out a mortgage in my home city for the past few months and have been trying to game out how prudent this is under various timelines. I assume if I could get a fixed interest rate (or at least a 5 year fixed) this would be better. Regardless, job prospects given AGI are bleak
I do think AI economics is going to be different than anything else, but I think its unlikely things change this fast.
Governments seem reluctant to increase rates other than to fight inflation these days, and I think you underestimate the amount of money institutionally mandated to keep money here. ie I don’t think a couple of years is enough to move entrenched pools of capital from investing in the US government to Google bonds IMO. No matter the returns Google provides, they’re thought of as fundamentally different institutional categories with different trust levels. It would take decades of 20% consistent bond returns from Google before that money would be moved.
The government isn’t going to have a choice about raising rates. They will literally not be able to sell treasuries if they don’t raise the rates.
And if somehow the investors and the government cooperate and decide to continue lending the government money at 4%, it won’t matter in a couple of years because that pool of money will be much smaller by comparison.
Yes, I’m with you in theory, but I don’t think that pool shrinks in a couple of years. The stock market has given better returns than treasuries for hundreds of years, yet there’s a large pool of capital that has not moved there, or cannot move there. If humanity survives this at all, I think that world doesn’t have treasuries falling in face value by 70% and all money moving into AI datacenters and the guys with the guns unable to raise money.
Unless the guys with the guns becomes the AI labs in which case OpenAI doesn’t give you 20%. They give you 5% and keep the rest for themselves.
I don’t think the government is going to borrow much money. I think they’re probably going to just print it. If we can actually control superintelligence and we don’t just die (a big if), the tech is going to be massively deflationary. At the same time government revenues from income tax are dropping, income from corporate tax is going to go up and deflation is going to make money printing extremelly compelling.
Get your older relatives out of fixed-income assets like treasuries, bonds, and annuities. Get them out of any industry that depends on low cost of capital.
If the current trends in debt financed borrowing for AI infrastructure expenditure continue, we’re going to see literally historically unprecedented interest rates as first the US and soon the global economy dumps all excess capital into financing the data center construction boom. We could easily see interest rates above 20%. I would be surprised if they don’t eventually rise to a much, much higher level than that.
That is going to have mind-numbingly large implications for the world economy which I will write about when I have more time, but one of the clearest ones is any asset with a fixed rate of return, especially long-dated debt, is going to become almost worthless. People usually think of treasuries as a “safe” asset, but that is quickly going to stop being the case.
Older people in the US and other developed countries usually hold a significant portion of their assets in bonds, treasuries, and other fixed income assets. Most of these assets are going to massively depreciate in the next 3 years as the opportunity cost of locking up your money in an asset that returns 4% annually goes up exponentially.
We could easily see the face value of 10 year US treasury bonds drop by 70% or more by the end of the decade.
This isn’t a giant part of most retirees portfolio, but it’s an easy loss to avoid: even holding your money in cash will do better than treasuries.
I am no investment guru, but the one thing I unequivocally do not believe, is that the AI revolution will have this kind of consequence, in which potential economic productivity (however that is measured) grows at historically unprecedented rates, but the manifestation of this is just that known asset classes rearrange their rankings as desirable destinations for investment.
Quite apart from the fact that all this likely involves creation of artificial superhuman intelligence which will replace the human species in general, developments this potent would inevitably shatter society. You’re going to end up with movements that call for universal basic income and nationalization of core industries, or millions of unemployed white-collar workers conducting drone warfare against billionaires who have private armies of humanoid robots, or similarly disruptive outcomes.
This seems backwards?
If the global economy dumps all excess capital into the data center construction boom then
Ceteris paribus, positive supply shocks cause deflation, not inflation. (To be clear, deflation is really bad and should be offset by the central bank.)
If the economy is automated, g will be >>20%, and so will r.
Okay but that’s an entirely different discussion than “building datacenters will make real interest rates go up”?
I would see a few things to consider before selling everything now. First, when are is the debt due? If there is no concerns about default and the time is still within the person’s planned holding period I could see an argument for scaling back some but not just exiting.
Second, what are the income needs. If the current rate is still generating the level of income desired then again, I don’t see the strong case for closing out the holdings now.
Third, if the holders are shifting their focus to maximizing returns rather than stabilized income and capital preservation then the dumping everything and investing later to get that 20% or more rate makes some sense but recognize it for what it is, a change in investment approach and a shift in the risk exposure.
Last, somewhat related to the holding period, most of these investors probably have some type of targeted duration and ladder structure in their debt holding. Might make sense to adjust the portfolio duration but they will likely enjoy most of the gains and avoid most of the real losses you see as holding mature and get rolled over into new debt.
How about taking on debt? I’ve been toying with taking out a mortgage in my home city for the past few months and have been trying to game out how prudent this is under various timelines. I assume if I could get a fixed interest rate (or at least a 5 year fixed) this would be better. Regardless, job prospects given AGI are bleak
Yes, I think buying a house now might make sense given what I expect to happen to monthly payments on houses
I do think AI economics is going to be different than anything else, but I think its unlikely things change this fast.
Governments seem reluctant to increase rates other than to fight inflation these days, and I think you underestimate the amount of money institutionally mandated to keep money here. ie I don’t think a couple of years is enough to move entrenched pools of capital from investing in the US government to Google bonds IMO. No matter the returns Google provides, they’re thought of as fundamentally different institutional categories with different trust levels. It would take decades of 20% consistent bond returns from Google before that money would be moved.
The government isn’t going to have a choice about raising rates. They will literally not be able to sell treasuries if they don’t raise the rates.
And if somehow the investors and the government cooperate and decide to continue lending the government money at 4%, it won’t matter in a couple of years because that pool of money will be much smaller by comparison.
Yes, I’m with you in theory, but I don’t think that pool shrinks in a couple of years. The stock market has given better returns than treasuries for hundreds of years, yet there’s a large pool of capital that has not moved there, or cannot move there. If humanity survives this at all, I think that world doesn’t have treasuries falling in face value by 70% and all money moving into AI datacenters and the guys with the guns unable to raise money.
Unless the guys with the guns becomes the AI labs in which case OpenAI doesn’t give you 20%. They give you 5% and keep the rest for themselves.
I don’t think the government is going to borrow much money. I think they’re probably going to just print it. If we can actually control superintelligence and we don’t just die (a big if), the tech is going to be massively deflationary. At the same time government revenues from income tax are dropping, income from corporate tax is going to go up and deflation is going to make money printing extremelly compelling.