Stagflation is here! During inflationary times, owning some physical assets, especially gold, makes sense.
It’s no secret that retirees are facing an extremely difficult time right now.
Inflated interest rates have been well above the Federal Open Market Committee’s 2 percent target for nearly a decade and a half. [1] Since then, the FOMC has raised interest rates six times, including three increases in 2019 alone. [2] Meanwhile, mortgage applications have fallen by about one-third since hitting an 11-month high earlier this summer. [3] That means the housing sector is backsliding after a brief recovery following the tax bill passed in December 2017. [4] Gasoline costs have dropped by more than 10 percent since April, helping bring down the overall CPI. [5] But core CPI, which excludes volatile food and energy items, rose 0.2 percent in July, the biggest increase since October 2016. [6] Real-time economic data also suggest the economy is slowing. Growth slowed to just 0.1 percent in the second quarter, according to the Commerce Department. [7] Job openings hit a record high in June, suggesting a tight labor market. [8] Overall employment grew by 162,000 jobs in August, the largest gain in five months, though job gains were concentrated among part-time workers. [9]
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And he also mentioned that gold has outperformed most asset classes during times of economic downturns.
Given the fact that she’s the chief investment strategist at the world’s largest hedge funder, I think Patterson has an easy way of “reading” the economic environment and determining how to proceed. In the present case, she sees chronic high inflation and sluggish economic activity and determines that we are currently experiencing stagflation. Her team then proceeds by analyzing which assets perform well during periods of stagflation and invests accordingly.
It’s a simple approach that I feel sets an excellent example for everyone else – so let’s take a closer peek at it.
So let’s get started.
Patterson: Stagflation Is Simply “Slowing Growth and Higher Than Expected Inflation”
If we assume that the Fed will continue to struggle to keep down interest rates, then we see that there will be a period where rental and housing prices rise even though they’re not rising at an annual rate of 2 percent.
Housing starts slowed in September, according to new Commerce Department figures released Friday. Starts fell 1.6 percent to an annual rate of 714,000 units, down from 816,000 in August. Economists polled by Reuters expected starts to rise to 750,000 in September. However, economists say the slowdown was likely due to seasonal factors rather than any underlying weakness in the economy. “The decline in housing starts was probably just a statistical fluke,” said Chris Rupkey, chief financial economist at MUFG Union Bank in New York. “We’re seeing a very softening in the overall economy.” Still, he added, “we’re not talking about a recession yet.” Separately, construction of single-family homes dropped 2.1 percent to a seasonally adjusted annual rate of 940,000 units, the lowest level since October 2016. Single-family homebuilding accounts for around half of total housing starts. Building permits were unchanged at a rate of 1.09 million units. Permits declined 3.8 percent to a pace of 1.079 million units in September, the lowest level since May 2017. A measure of builder confidence hit a 14-and-a-half-years high in November, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Survey. That was the highest reading since April 2006.
“We’re beginning to see delinquency rates rise, for instance, and we’re witnessing confidence surveys falling substantially,” she says. “So we believe we’re heading towards a stagflationary climate.”
“The Federal Reserve is in a really unenvied position,” he said. “If they tighten too much, they risk making things worse for the economy. If they don’t loosen up enough, they won’t get the kind of price stability they need to keep confidence in the system.” [1]
“We’re not going to define it narrowly,” she said. “We’re just saying that we think there’s a chance for a stagflationary environment.” So, in her opinion, that’s enough to justify making some asset allocation changes. And among the stocks, she thinks particularly well during times of stagflation is oil.
In order to determine which assets would perform best during times of high inflation and low growth, Bridgewater analysts examined historical data on these two variables. They found that during periods of high inflation and slow growth, precious metals outperformed traditional investments such as stocks and bonds. For example, between 1973 and 1982, the price of an ounce of pure 24-karat yellow metal rose 590%. By comparison, the Dow Jones Industrial Average (DJIA) fell about 40%; the S&P 500 Index lost around 60%, and U.S. Treasury bills yielded just 1.4%. Even though the DJIA recovered somewhat after 1982, the bull market in equities lasted until 2000. Meanwhile, the price of an American Eagle coin increased by about 508%, while the price of platinum doubled. Since then, however, the price of platinum has fallen sharply, and the price of an ounce has declined by almost half. As for the price of a dollar bill, it has risen steadily since 2002, reaching $1,000 per note in 2011. But if the value of money continues to increase, why haven’t investors clamored to buy physical cash? Because they’re afraid of inflation.
If structural changes to the global economy continue to perpetuate inflation and stagflation, then we could be headed for another economic crisis.
Patterson predicts that there will be inflationary structural shifts occurring throughout the world’s economies which, when combined with more cyclical influences, could result in persistent stagliation.
According to Patterson, these two factors (globalization and green energies) will lead to lower prices and, thus, less inflation.
Stagflation is a real threat, so we should take a closer inspection of our portfolios.
There is no need for us to unnecessarily complicate either the economic landscape or the path through it.
