In this episode, I speak with Harley Bassman, publisher of The Convexity Maven about the influence of demographics on interest rates, when inflation returns and alternative income options in today's low rate environment.
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I was interested in speaking with Harley about his recent commentaries covering the state of interest rates and his case for mortgage REITs. I ended up reading all of his past commentaries. They are informative and educational, sophisticated yet approachable, and I appreciated his high level view of the economic landscape.
It's likely no surprise that in this low rate environment investors in search for yield have found their way to alternative income assets like mortgage REITs. Yet, there are risks with anything that takes on leverage to achieve higher yields. While rates are low, allowing for cheap funding of leverage, one has to keep an eye on the outlook for rates, among other risks related to the asset class being invested in. With that in mind I sought to explore a couple of themes common in his commentaries to help provide broader context.
One, the relationship of demographics and interest rates. This underappreciated dynamic may help explain the long-term declining trend in rates. It may also provide an idea of what happens as boomers fully enter retirement and millennials start entering their peak earning years.
Second, the relationship of the velocity of money and inflation. Inflation, as many think of it, has been missing despite massive monetary stimulus. Will fiscal stimulus spur velocity and inflation? And if so, how much inflation? In any case, according to Harley, there still may be time to safely navigate the Federal Reserve's low interest rate policies with alternative income assets like mortgage REITs, BDCs and muni closed-end funds.
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