The immediate investment outlook is dominated by the prospects for a successful COVID-19 vaccine and the probable economic recovery path ahead. Looking beyond these key issues, there are a number of other potential threats that could have significant ramifications for the global financial markets. We examined two in some research reports last week:
The first report examined the risk of deflation and concluded that, in sharp contrast with what is discounted in global government bond markets, the likely path ahead after a disinflationary next year will be a very mild upward tilt to core inflation.
The second addressed whether the boom in U.S. debt growth over the past 10 years risked triggering a financial crisis. The report noted that these concerns were overdone. The household sector is still in good financial shape, and debt servicing in the heavily leveraged nonfinancial corporate sector provides a critical cushion, providing of course that the economic recovery gradually improves.
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