The 4-step playbook for investing in a world of surging debt

There’s never been a better time to work as a finance journalist. The truth is, bad news sells, and every week, there’s a new story that changes the status quo in markets, providing us content creators with a never-ending flow of inspiration.

It could be the AI disruption that has left no industry unscathed, or the war in Iran that has shaken global energy markets and consumer confidence, or the trillions of dollars that governments are ploughing into defence. There’s always something to write about, particularly when risks abound and markets climb their wall of worry.

But Chad Padowitz, the Co-Chief Investment Officer at Talaria Capital, believes investors have become complacent about one risk that isn’t making headlines.

There are significant levels of debt in the financial system, whether that’s at the consumer level, corporate level, or within governments. Padowitz believes this ballooning global debt has massive implications for inflation, interest rates, and how we invest.

There are three possible scenarios in which this could play out:

The “best case” scenario: We experience a productivity boom thanks to AI and robotics, or even substantially improved government policy, enabling us to grow out of debt. Given the trends we are seeing in demographics and politics, Padowitz thinks this is unlikely.

The even more unlikely scenario: Governments decide to just stop spending money. Or they decide to default. This would be incredibly difficult for obvious reasons. The political will for this is “just not there”, Padowitz says.

The “most likely” scenario: Financial repression, where governments effectively drive inflation to a higher level than interest rates so that debt is inflated away. Money moves from savers to those with hard assets.

So, how do you invest in a world of financial repression?

Padowitz recommends investors look to companies with minimal debt/strong balance sheets. Low-duration investments will enable investors to get their money back quicker - like value stocks, lower PE companies, and potentially higher dividend-payers. Diversification of returns (capital gains and income) will be equally important, as will focusing on real assets.

“If you’re going to get financial repression, real assets keep their value because they're productive assets,” he says.

“That could be property, infrastructure, precious metals, equipment - anything that cannot be disintermediated easily, that can maintain its real value so it's inflation-protected, will stand you in good stead.”

In this episode of Basis Points, Padowitz dives into the four steps for navigating ballooning global debt and shares three stock picks that embody this kind of thinking.

5 lessons from Talaria Capital’s Chad Padowitz

1. Income is the forgotten half of equity returns

Padowitz flags this as something he wishes people asked him more about. Over 140 years of US data, around 50% of total returns in equities have come from income. In Australia, that figure is even higher. The dominance of the Magnificent Seven has created a false impression that equities are purely a capital gains game, and he believes advisers who overlook income as a return driver are missing half the picture.

2. Put options can be a great strategy for patient investors

Rather than buying stocks outright, Talaria sells exchange-traded put options on stocks the team has already done the fundamental work on. They collect a premium (annualising at around 18%), while agreeing to buy at a slight discount. These are fully cash-backed, with no margin calls and no counterparty risk. This is a differentiated way to generate income beyond dividends.

3. Beware accounting tricks that mask valuations

On NVIDIA specifically, Padowitz points out that share-based compensation (often treated as a below-the-line cost) significantly inflates reported earnings. When adjusted properly, NVIDIA’s valuation is materially higher than the headline PE suggests. Advisers recommending high-growth tech stocks to clients should pressure-test the numbers they're being shown.

4. Currency hedging needs to be on advisers’ radars

With the Australian dollar up more than 10% against most currencies over the past nine to ten months, unhedged global equity managers have delivered approximately a 10% drag on returns, regardless of their stellar (or not so stellar) stock selection. Advisers with unhedged international exposure need to have an active view on this, rather than treating it as a passive decision.

5. The future is unknowable, but most investors aren't acting like it

Padowitz's closing message to advisers is that paying 20–30x earnings for any asset implicitly locks you into a confident view for the next 15–30 years. In an environment of AI disruption, geopolitical flux and financial repression, that confidence can no longer be justified. Humility about the future should translate into a preference for shorter-duration cash flows where you get your capital back sooner.

In case you missed it, last week on Basis Points we were joined by Anacacia Capital’s Jeremy Samuel. He shared the investing principles he took away from legendary investor David Swensen at Yale, including the importance of an equity bias and backing aligned teams. Plus, he shares some of the opportunities that the Anacacia team is backing across public and private markets.