Investors, CFOs and others concerned with the outlook for long-term interest rates should look at Nouriel Roubini’s recent paper on global imbalances. Roubini lays out ten competing interpretations of the global imbalances (U.S. trade deficit, trade surpluses in certain other countries), and he comments on the validity of them. Some interpretations are part of common discussion in the U.S. (twin deficits), while others are more the province of specialists ("dark matter").
I find Roubini a bit too pessimistic–but I’m also seeing more plausibility to his pessimism than I previously had seen.
I am not changing my long-rate outlook (up one percentage point in the next year) as a result of this paper, but I will emphasize the risk of a sharper rise in long rates. Couple this to the potential for a sharp depreciation of the dollar, which would impact companies involved in international trade.
Business strategy implications: Investors and CFOs should do some contingency planning for a three or four point rise in long rates over the next two years. Couple this with a possible fall in the dollar, which is good news for U.S. exporters and competitors to imports; bad news for importers, including companies that use a lot of imported goods as feed stocks.