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The Fed's 405% problem

Weekly investor research

23 September 2013

The past three months have provided a useful illustration of how Emerging Markets (EM) respond to external shocks from developed economies. As in previous similar episodes, asset prices over-reacted, while fundamentals remained solid. Value has been created in the process. Meanwhile, the Fed’s decision not to taper smashed the consensus view that the US is on track to strong recovery and materially higher real rates. Still, most market participants and policy makers are unlikely to grasp the reasons for the US economy’s weak performance until they acknowledge the role played by the 405% of GDP debt burden.

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