From an investment outlook by William Browder, founder and chief executive of Hermitage Capital Management, and presented at last month’s LCF Rothschild emerging markets funds conference:
In case you can’t read the fine print, the slide references this 2003 Federal Reserve paper about the effects of budget deficits on interest rates. Put simply, the paper asserts that a one percentage point rise in the projected deficit-to-GDP ratio generates a 20 – 40bps increase in the 10-year bond rate rates.
Of course, that’s purely based on deficit measures, and completely ignores the potential need for loose monetary policy in times of financial stress — something which the world’s central banks have responded to in force via quantitiative easing, as the below Hermitage slide should also show:
And since we’re talking developed country deficits, QE and emerging markets — which tend to be linked to hard commodities — you can probably guess where Browder is going. One more slide:
Full presentation in the Long Room. (Muchos gracias to Eminence Noire)."
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