Leitmotif 5: Time to pay the piper

Like the fairy tale children, markets have heard the music and are following

The late economist Rudy Dornbusch once said that “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.” At the start of 2023 I warned that higher-for-longer real interest rates would combine with excess debt accumulation in the prior decade of low interest rates to produce a rash of debt crises, defaults, hyperinflations, and deep currency devaluations. Perhaps because too few in markets believed in my higher-for-longer rates view, that forecast proved to be too early. Nevertheless, undaunted, I made the same forecast in my Leitmotifs for 2024.

Cracks have begun to show. Nigeria and Egypt, both consensus unsustainable debtors, experienced sharp devaluation and are on the verge of hyperinflation. More tellingly, two of my less consensus unsustainable debtors, Brazil and France, began to be noticed by markets with the former seeing significant pressure on its currency and the latter seeing its sovereign spread underperform its large European peers.

Throw in increased defense expenditures and 2025 may be the year that macro-credit traumas finally validate my forecasts. Let’s take a look at what to look for.