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What The U.S. Debt Surge Means For Equities

May 04, 2020 2:30 PM ETSPY, VNQ, XLE, XLI, XLK, XLP, XLV5 Comments
Ben Laidler profile picture
Ben Laidler


  • US government debt nearing US$25trn, and its WWII debt/GDP peak. Then the US quickly cut debt with higher taxes and GDP growth. This will be much more difficult today.
  • Is a recipe for lower-for-longer GDP growth and bond yields, favoring long duration and quality growth equities, such as Staples and Tech.
  • Inflation is not impossible, as the economy recovers with large fiscal deficits and high debt/GDP, supply chain disruption, and large cap pricing power. Inflation is off investors' radars with expectations near lows.
  • Energy, industrials, healthcare, and real estate sectors have historically been best inflation-era performers.

US debt and what to do about it

We look at the investment implications from the surging US fiscal deficit and debt/GDP levels, on the back of the government's COVID response. We think this ultimately means both lower-for-longer GDP growth and bond yields, which would favor defensive and quality growth equity sectors. We also examine the ‘tail-risk’ scenario of an inflation pick up, as a mechanism to reduce debt/GDP levels. Whilst unlikely, current inflation expectations are very low, implying making hedging against such risks relatively attractive. Healthcare and real estate are our two favored sectors with the best inflation-beating track record.

US deficits and government debt soaring

US government debt approached US$25 trillion in April, and the federal government is forecast to run a US$3.8 trillion deficit this year, equivalent to 19% of GDP, and a $2.1 trillion deficit next year, according to the non-partisan Committee for Responsible Federal Budget (CRFB). Over the last 20 years, US government debt has grown by US$19 trillion, or by 80%.

Debt/GDP almost back to peak levels

The end of World War II is the only time in history with budget and debt figures comparable to today. Then US debt/GDP peaked at 118% in 1946, compared to the 111% projected for 2020. Debt/GDP fell quickly after this peak, returning to the pre-war c40% level by the mid-1960s, and troughing at 30% in the 1980s.

However, looking at the four main economic policy levers available to reduce current debt levels, we do not see a similar debt reduction on the cards in the near future, and think investors need to be prepared for higher-for-longer debt levels.

US debt GDP

Three of four levers harder to pull now

1. Higher taxes or lower spending: The pre-WWII level of tax revenue/GDP never exceeded 8%. By the immediate post-war era it had

This article was written by

Ben Laidler profile picture
Ben Laidler, CEO of Tower Hudson Research, and publisher of the daily 'Eye on the World' investment report. He has over 25 years global investment research experience, on both the buy and sell-side. Most recently Ben was Global Equity Strategist, Head of Global Equity Sector Research, and Head of Americas Research, at HSBC in New York. Previously he worked at JP Morgan, UBS, and Rothschild Asset Management, in New York, London, and Santiago. He is a regular contributor to Bloomberg, CNBC, Financial Times, New York Times etc.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (5)

bluescorpion0 profile picture
1. Why does telecom do badly for all inflationary periods? I read a study they have enough pricing power to raise prices even under regulation by at least inflation rate. Or is this another type of telecom?

2. What do you think of TTT as an inflation hedge ? If fed does yield curve control even ttt will fail. How can we have inflation if there is yield curve control?or is the fed willing to take unlimited losses ?
The United States Treasury Department said it plans to borrow USD 2.9 trillion during the April-June quarter to deal with the coronavirus pandemic. According to The Wall Street Journal, this is five times what the United States borrowed at the peak of the 2008 financial crisis.

The borrowing estimate is USD 3,055 billion higher than what was announced in February this year, the US Treasury said.

The "Deflation" issue is because most of the money printed by the Fed is going into the wealthier people so...this money makes the gap between rich people and medium-class and poor people larger and larger. For this reason, you'll be able to see real inflation into some kind of things: Stocks, some type of houses (crazy prices of houses in some residential areas for example), Paints, Jewels...all the stuff for rich people that make the gap between rich people and poor people larger and larger.

thumb.ai profile picture
@Ben Laidler, do you have an idea why G7 inflation produces different sector results than US only inflation? Beyond Energy I mean
thumb.ai profile picture
Makes more sense to me seeing debt matching WWII when I remember we have been at war since 9/11 attack, spending Trillions.

Comparing Financials for WWI, WWII, and 2001-2014:


Alternate calculation, updated annually now thru 2019, to $6.4T

Interesting read. I noticed energy has been doing really well lately, while utilities lagging. XLU/SPY has reached multiyear low despite rates went down a lot. Gold has been up a lot too. All those are stongly against deflation reality we are in.
Maybe these are in line with investor's inflation hedge thesis? Smart players anticipate what's happening next.
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