Beyond the Landing

Executive Summary

  • Inflationary pressures will likely be higher going forward than they’ve been over the past two decades. Higher real interest rates are necessary in such an environment to keep inflation at target.
  • Higher real interest rates put pressure on both expensive and leveraged assets. The combination of these two – which is not hard to find in the LBO market – looks particularly fragile.
  • Investors should prepare for a recession not by owning less risk, but by owning risk where they are well-compensated for it. Leverage is generally not compensated, especially in private equity and private credit.
  • Tax changes that occurred in 2017 make leverage more expensive (by capping interest tax deductibility) and bankruptcy more likely. Valuations suggest that these changes are not fully priced.
  • The combination of high quality and cheap assets materially improves companies’ resilience in recessions and return perspective outside of them.


The immediate assumption most people make about the macroeconomic research done by asset allocators is that our primary goal is to predict GDP prints and recessions and position portfolios accordingly. At first blush, this makes some sense. After all, the thing that makes risk assets risk assets is the fact that they are vulnerable to impairment in economic downturns. 1 If an asset allocator could accurately predict recessions, in principle they’d be able to sidestep many of the most damaging downturns in risk assets. If they were particularly adroit at it and moved their portfolios from risk assets into long-duration government bonds at the right time, they could turn those painful drawdowns into capital gains.