Stagflation is here and that’s bad news for regular folks like us AND the markets AND the overall economy. What is stagflation?
For those not quite sure what the term means: stagflation is when, at the same time, we experience severe inflation but a stagnating economy.
OK, so where to from here?
Well, here’s where things get tricky.
Normally, with an economic slowdown, central banks would want to stimulate the economy by dropping interest rates or adding liquidity to the system by expanding their balance sheet (which is a fancy way of saying ‘buying assets’)
But they can’t do that now. Inflation is already running hot in ways that are pinching household budgets and corporate profits. More stimulus will simply exacerbate that, and the public will increasingly put pressure on politicians to tame inflation.
Of course, the way for central banks to tame inflation is to taper or tighten, which is exactly what you DON’T want to do during an economic slowdown because you simply make it worse. And with so many companies now levered to the hilt, a recession or god-forbid interest rate hikes would kill a lot of them. That of course leads to job layoffs, company closures, loss of tax receipts, etc.
So the Federal Reserve is stuck between a rock and hard place here. On one hand, it can keep inflating and eventually household spending drops, corporate profits buckle, asset prices eventually fall, and angry voters throw out the incumbents at the next election.
On the other hand, the Fed can taper or tighten and crash the system quickly. That also results in lower household spending, lower corporate profits, falling asset prices and angry voters.
So whichever path it picks, the Fed is going to lose.
Transcript
Adam Taggart: Stagflation is here and that’s bad news for regular folks like us and the markets and the overall economy. If you want to know why and what’s most likely to happen next then keep watching. Welcome to Wealthion. I’m Adam Taggart, founder of Wealthion, with a brief explainer video on why it appears we may be heading into the most dreaded of economic conditions, stagflation.
For those not quite sure what the term means, stagflation is when at the same time we experience severe inflation but a stagnating economy. Think of it like this. Prices go up fast but economic growth falls hard. Does that sound like today? Well let’s take a look. Are prices going up? Yep, they sure are. The consumer price index or CPI is currently at 5.4%, its highest reading in the past 20 years and just look at how far it has shot up from near 0% just back in early 2020.
The prices of many of the essentials for living have jumped double digits since last year. Anyone buying food at the grocery store, heating their home, or filling up their car with gas can tell you that. Especially those paying over seven dollars a gallon for gas in California and as we’ve been tracking for months here at Wealthion, asset prices are at all-time highs. Stocks are booming with the S&P back at a record high. Home prices are at record highs as well. Even alternative assets like cryptocurrencies are booming again. Here’s the latest chart for Bitcoin.
Okay so, check. We’ve got rising prices.
To be in stagflation though, we also need to see slowing economic growth. Are we? Well GDP in the US has grown robustly since Q3 of 2020 as pent-up demand was released, as the global economy started opening back up again after the lockdowns much of the world experienced in the first half of 2020. So looking in the rear view mirror the economy looks pretty strong at first glance but if we look at real-time numbers, they show an economy that is sharply decelerating. The latest Q US GDP forecast calculated by the Atlanta Fed’s GDP now service is a paltry 0.5% and if you look at the green line in the chart here, it was only a few months back when Q3 GDP was initially being projected to be over 6%. So from late August until now that forecast has plunged from over 6% to barely above 0%. That is a majorly sharp slowdown in expected economic growth. We’re also seeing similar slowdowns elsewhere in the global economy. In Asia, especially China, Europe, and South America. So yes, we are now seeing significant economic deceleration and it’s likely to get worse as the costs resulting from rising inflation start to bite into corporate profit margins.
We’ve already seen a number of stocks recently slammed after earnings calls in which their forward projections disappointed analysts as some analysts like Danielle DiMartino Booth, who I just interviewed last week, are predicting an upcoming earnings drought in future quarters. If you haven’t yet watched my interview with her, it’s a very good discussion. You can click the link above to watch it. So, fast rising inflation? Check. And sharply slowing growth? Check again. Yep, it sure looks like stagflation ahead but the markets haven’t quite woken up to that reality yet. It seems like we’re in sort of a wily coyote moment where we’ve gone off the cliff but gravity has yet to exert its downward pull. So we see bonkers data like this which shows that Tesla stock has vaulted higher by over 2,000% since the pandemic hit last year while car buyer sentiment has fallen off a cliff to its lowest level in 40 years but the euphoria isn’t limited to the story stocks like Tesla. The entire S&P index is trading at an all-time high while volatility is at record lows.
As Sven Henrik observes here, the vix to S&P ratio has never been lower, marking a record high in market complacency. In summary, the market is still pricing in perfection. In fact, better than perfection while the fundamental outlook is deteriorating rapidly.
So where to from here? Well, here’s where things get tricky. Normally with an economic slowdown central banks would want to stimulate the economy by dropping interest rates or adding liquidity into the system by expanding their balance sheet and folks that’s just a fancy way of saying buying assets but they can’t do that now. Inflation is already running hot in ways that are pinching household budgets as well as corporate profits. More stimulus will simply exacerbate that and the public will increasingly put pressure on politicians to tame inflation. Of course the way for central banks to tame inflation is to taper or tighten, which is exactly what you don’t want to do during an economic slowdown because you simply make it worse and with so many companies now levered to the hilt a recession or god forbid interest rate hikes would kill a lot of them. That of course leads to job layoffs, company closures, loss of tax receipts, etc.
So the Fed is stuck between a rock and a hard place here. On one hand, it can keep inflating and eventually household spending drops, corporate profits buckle, asset prices eventually fall, and angry voters throw at the incumbents at the next election. On the other hand, the Fed can taper or tighten and crash the system quickly. That also results in lower household spending, lower corporate profits, falling asset prices, and angry voters, so whichever path it picks the Fed is going to lose. This is why investing in today’s climate is so treacherous for the individual investor like those watching this video.
Even though on the surface we can cheer the all-time record prices, the ugly truth is that the system has become so distorted by intervention that risk has piled up in ways that much of the market is clueless to. Like an avalanche, it could unload destructively at any time. Perhaps tomorrow, perhaps not for a month, perhaps for even longer than that. Don’t forget that today’s current asset prices have been largely pushed there by the 10 trillion dollars in monetary and fiscal stimulus the US flooded into the system in response to last year’s pandemic outbreak. To grow and certainly just to maintain their elevated levels, today’s asset prices need continued injections of the same amount of stimulus or even more but looking ahead the Fed is talking about tapering and congress is having trouble getting more and more funds approved.
So as Michael Pento warns, we are staring at the largest monetary cliff and the largest fiscal cliff in US history next year. How will markets react to that? Well it’s hard to envision anything other than falling. So in closing, we appear to be arriving at the part of the story where the can can no longer be kicked further down the road. The consequences are catching up to the central planners in the form of spiking inflation and dying growth. In other words, stagflation.
So we recommend that people start preparing for the predictable outcomes to this that we’ve discussed here on this channel and if you haven’t yet sat down with a seasoned professional financial advisor who can work with you to create personalized strategies for your portfolio to survive stagflation, make that a top priority. If you don’t already have a good one then consider scheduling a free, no strings attached no obligation consultation with the advisors endorsed by Wealthion. To do so just fill out the short form at Wealthion.com and we’ll connect you with them. I hope you found this explainer video helpful. If you have any feedback let me know in the comment section below especially if you want to see more videos like this and please help this channel reach more people by hitting the like button and then clicking on the red subscribe button below, as well as that little bell icon right next to it. Remember folks, our prospects for the future are determined by the steps we take today so be sure to start taking smart steps now. Thanks for watching.
