Rude Awakenings


  • The global economy and financial markets could be entering a new era of potentially radical change.
  • We expect the next recession to be shallower, but also longer and riskier than in the past.
  • While there’s still a path to a relatively benign outcome for the global economy and markets, it’s a narrow and difficult path, with stretched valuations leaving little room for error.
  • Low equilibrium policy rates should anchor global fixed income markets.
  • We expect to remain cautious in our positioning while preparing to play offense when rude awakenings present themselves.

Ten years after the financial crisis, the global economy and financial markets could be entering a new era of potentially radical change that will make the next decade look very different from the last. Investors who assume that the future will resemble the post-crisis past could be in for a series of rude awakenings. Rather, we want to be prepared for the challenges ahead and to be in a position to play offense when these awakenings eventually occur.

The post-crisis global environment has been characterized by financial repression (via regulation and dominant central banks), mostly passive or restrictive fiscal policies, weak growth in productivity and real wages, subdued inflation, largely uninhibited trade and capital flows, and low macro and market volatility. Meanwhile, aggregate global debt levels have continued to rise.

Over the secular horizon, we expect a very different macro landscape to emerge, for better or worse. Important shifts are already underway: The monetary-fiscal policy mix is changing as central banks retreat and fiscal policy becomes more expansionary, the regulatory discussion is moving from the financial to the tech sector, and economic nationalism and protectionism are on the rise.

One way the real economy could break out from the post-crisis lull on a sustainable basis is through a significant pickup in productivity growth as the diffusion of new technologies finally accelerates via stronger business investment. However, stronger potential growth would likely also produce higher real interest rates.

Another scenario that could come to pass in (or after) the next recession, which we expect to occur at some point over the next three to five years, is a more extreme populist backlash than seen thus far. This could come in different flavors: radical income and wealth redistribution, more aggressive protectionism, nationalization of key companies or even industries, or attacks on central bank independence.