Sevens Report warns US debt may erode stock returns over next decade
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Sevens Report Research warned on Friday that America's $40 trillion national debt could lead to a lost decade for stocks, with inflation eroding real returns. Founder Tom Essaye said policymakers are likely to inflate away the debt rather than raise taxes or cut spending. He pointed to the 1966-1981 period, when high inflation cut real portfolio values by about 50% despite flat nominal prices.
Key Facts
- US government debt hit a record $40 trillion this week.
- Sevens Report Research founder Tom Essaye warned on Friday that inflation could erode stock returns over the next decade.
- Between 1966 and 1981, high inflation cut real portfolio values by around 50% while nominal stock values went nowhere.
- Yields on 10-year and 30-year Treasurys have climbed to some of their highest levels in the last two decades.
- Essaye said long bonds no longer work as a hedge for an underperforming equity market in an inflationary environment.
Debt-Driven Inflation Risk
US government debt reached a record $40 trillion this week. Instead of raising taxes or cutting spending, policymakers are likely to try to inflate their way out of the borrowing conundrum, according to Tom Essaye, founder of Sevens Report Research. This is the thesis behind the so-called 'debasement trade,' which is one reason for the recent surge in long-duration Treasury yields. Yields on 10-year and 30-year Treasurys have already climbed to some of their highest levels in the last two decades. Investors have worried about inflation from strong economic growth, rising oil prices, and government spending levels.
Historical Precedent and Portfolio Impact
Essaye warned of a lost decade in which high and persistent inflation eats away at real returns in stocks. He pointed to the period between 1966 and 1981, when stock values went nowhere but high inflation meant the real value of portfolios dropped by around 50%. In an inflationary environment, long bonds no longer work as a hedge for an underperforming equity market, Essaye said. Through 1966-1981, stock-bond correlation was persistently positive and long Treasurys fell alongside equities in real terms, because the airbag of the 60-40 portfolio fails in inflationary, fiscally dominant market regimes, Essaye said.
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Sevens Report warns US debt may erode stock returns over next decade
