Lacy Hunt & Brent Johnson: The US Has Entered A New Inflationary Era That Will Prove Bad For Bonds
Summary
Lacy Hunt has pivoted from his deflation view: capital scarcity and de-globalization now make inflation the bigger long-term risk for US bonds.
Net national saving has collapsed to near zero while AI, semiconductors, grid expansion, and space exploration are driving huge capital demand — pushing real rates higher.
All three Fisher equation components (real rate, expected inflation, risk premium) are heading up, with rising Treasury interest expense likely to lift the risk premium.
Higher rates disproportionately burden lower-income households (Hunt argues), deepening the K-shaped economy while the top two deciles capture the gains.
Hunt expects hard assets and precious metals to perform well in this regime; the dollar may weaken near-term but bounce in episodes.
Adam Taggart's takeaways
- Top takeaway Frames the discussion around the bombshell claim that the US has entered a prolonged inflationary era that will be bad for bonds, and argues that in such an environment hard assets and precious metals historically hold their value better than paper assets
- Argues that Treasury Secretary Bessent's intervention to buy long-dated paper meddles with the price signal the Fed needs from the long end and undercuts Fed Chair Kevin Warsh's stated preference for letting markets set rates
- Critiques the Federal Reserve's stealth balance sheet expansion since mid-December, contending that growth in bank loans and deposits is amplifying inflationary pressure rather than supporting productive real-economy activity
- Warns that the current deficit and capital-demand dynamics are happening in the good times and that a recession would force stabilizers and stimulus on top, worsening capital scarcity and the inflation outlook
Lacy Hunt's takeaways
- Top takeaway Pivots from his long-held deflationary view, arguing that a structural capital shortage combined with the end of three decades of globalization has pushed the US into a sustained, more volatile inflationary regime with higher trend interest rates
- Notes that net national saving has collapsed from a historical average near 7% of net national income to near zero in 2026, even as massive physical capital demands from AI, semiconductors, the electrical grid, space exploration, and federal deficits are pushing real rates higher
- Frames de-globalization and reshoring as shrinking the global economies of scale and turning the production function adverse, in his view producing durable inflation that overwhelms the disinflationary drag from elevated debt
- Applies the Fisher equation and expects all three components (real rate, expected inflation, risk premium) to rise, citing year-over-year M2 growth approaching 7.5% in mid-2026 versus Friedman's optimum of about 4-4.5%
- Calls the outlook unfavorable for bonds and points to precious metals and other hard assets as historically strong stores of value during inflationary regimes
Brent Johnson's takeaways
- Top takeaway Expects the dollar to face increasing problems going forward, but sees cyclical safe-haven episodes pulling it back given that no other economy is positioned to lead the global economy in 2026
- Suggests hyperscaler credit demand is now a meaningful driver of long-end Treasury yields and frames that as a reversal of the traditional fiscal-dominance crowding-out dynamic