Macro Risks and Active Accelerants Paper 1: The Framework

Debt, the master variable, and how it becomes the market event

Every year the major institutions publish their risk outlooks. Every year they list geopolitics, technology and trade fragmentation, and every year markets still surprise them. This paper argues that they are treating symptoms as causes.

Since the end of the gold standard in 1971, global debt has grown from around 100% of world GDP to more than 235%. Four decades of falling interest rates sustained that rise. Leverage built first in the private sector and then moved to governments after each crisis. In a world of structurally higher rates, that debt now drives three reinforcing risks: public debt financing, high interest rates and the reversal of global trade.

The paper sets out how a debt problem turns into a market event, in three phases, each with its own signature in the government bond yield curve. It shows why some sovereigns are protected by their central bank and others are not. It explains how accelerants, from loose monetary policy and malinvestment to outside shocks such as the pandemic, have turned slow deterioration into sudden crisis. It closes with the three signals that tend to appear before the wider market acknowledges the problem.

This is the first of a three-part series. Paper 2 analyses the two accelerants in play today. Paper 3, a quarterly paper for clients, sets out where each market stands within the framework and the investment themes that follow.

To request a copy of the paper, please get in touch.