October 2021

The Fed’s Freedom to Tighten is a Paper Tiger

All is well, it seems. Stocks have continued their ascent untroubled by, well, much. Part of this is attributable to the risk-free interest rate on ten-year Treasuries below 1.5%. But the other part of it is compression of the risk premium, which is supposed to compensate equity investors for multiple potential risks. This is primarily a product of the history lesson that the Federal Reserve has repeatedly come roaring to the rescue when the ground begins to shake. In the apparent absence of such tremors, it appears to most observers that things are somnolent.

But it pays to look for signs that that may not persist for as long as the crowd believes. The salient development of recent decades is the persistent increase in debt across multiple sectors of the economy, and of the world. Debt accumulation rose to excessive levels in the first decade of the millennium, ending with the global financial crisis and the deleveraging of the household sector in the U.S. But debt has continued to grow elsewhere.

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John R. Gilbert

Senior Research Consultant