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The Icarus Index

Weekly investor research

13 March 2017

We construct a new index of macroeconomic risk, which we name the Icarus Index in reference to the son of Daedalus, who fell victim to hubris while trying to fly between the sea and the sun. The Icarus Index suggests that the US is precariously close to a negative macroeconomic event, such as inflation, recession, or possibly both. Much like Icarus we think the Fed will find it difficult to steer clear of problems, in this case tightening enough to manage inflation without causing a recession. This problem is caused by the late start and extremely easy starting point for the tightening cycle and the overvalued level of the real effective exchange rate. We also provide an update about default rates for EM high yield bonds and explain why we are not afraid of the four most frequently cited risks in China: debt, slower growth, stock market volatility and capital flight. Finally, we present views on the most recent political developments in both South Korea and India.

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