American debt is ‘biggest macro time bomb’, says US equity manager

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If there is one reason to dislike America, it is the mounting public debt and the potential catastrophe this poses for global economics, according to Perinvest’s Chip Paquelet.

Paquelet, who manages the Perinvest (Lux) – Harbour US Equity fund, said failure to adequately resolve the US debt problem have largely been forgotten despite the dire consequences it could have.

‘The biggest macro time bomb facing us is what happens with this debt. The threat is high interest rates on our federal government's massive debt balance.’

‘This would trigger the compounding of interest which only gets worse and would probably lead to inflation. I'm not predicting this scenario in the near-term, but I am pointing it out as a vulnerable situation that would have dire consequences.’

While Paquelet said this would be the ‘worst case scenario’, he remains concerned about the debt issue's potential fallout. One solution, he says, could be found by looking back at the previous occasion the US found itself in this precarious position.

‘The last time they got into a situation like this was after World War Two,' he said. 'They got out of it by rigging the short-term rates and then leaking 5% inflation into the system and kept this for a very long time,’ .

Discussing macro concerns, Paquelet said there is currently no incentive to holding cash, as it does not properly protect against macro shocks.

Also, he believes a lot of investors are currently content to not make any money in exchange for not losing any. However, this tactic is becoming increasingly expensive in the current economic climate.

‘We are entering a situation where protecting your capital requires taking risks and that is not what it used to be,’ he said.

The Perinvest (Lux) - Harbour US Equity A USD has returned 5.3% over the past 12 months, while its benchmark, the S&P 500 TR, has risen 5.1%.