Bridgewater Associates says stagflation is hereGold has historically been viewed as a safe haven when inflation rises.
Retirement savings are under pressure due to an uncertain economy.
Inflated interest rates have been well above the Federal Open Market Committee’s 2 percent target for nearly a year [and a half]. [1] Rates have been steadily climbing since March. [2] As they do so, the ensuing volatility has wiped billions of dollars out of American household net worth. [3] The full-bore tightening cycle we’re in right now suggests the central bank should see its target rise, but so far, that hasn’t happened. [4] A 10.6% decline in gasoline prices last week helped push down the headline CPI to just under 8.3%. [5] But core CPI actually rose in August. [6] Based on the way that the latest Atlanta Fed’s real-timed GDP gauge is trending, we could soon be facing a third consecutive quarter of negative economic activity. [7] Meanwhile, official unemployment data suggest a tight labor market, and consumers remain confident about their finances. [8] So is the economy really in a downturn, or are things just okay?
Stagflation may be defined as an economy whose inflation rate exceeds its growth rate, thus creating a situation in which nominal income fails to keep pace with the cost of living. A common example is the United States during the 1970s. During that decade, inflation was rampant (in part because of the Vietnam War), yet GDP grew at a sluggish rate. Another example would be Zimbabwe in 2008–2009. While inflation soared, GDP contracted. Both examples show stagflation, although the latter is considered hyperinflation rather than stagflation.
However, he also mentioned that gold had been one the best-performing assets historically during periods of stagflation.
She sees chronic higher prices and stumbles growth and decides we’re in the midst of stagflation. Her team determines which assets perform well during stagflationary conditions and proceeds accordingly.
It’s an easy way to get started, so let’s take a closer at it.
So let’s get started.
Patterson: Slowing growth and higher-than-expected inflation
For stagflation to occur, the rate of increase in prices has to be greater than the rate at which the Federal Reserve increases interest rates. She believes that this will happen because of the stickiness of rental and house pricing.
We’ve already seen the housing market slow down as home prices have fallen and as homes have become less affordable. But what happens then is people move into rentals instead of buying. Renting resets more slowly. And so rents rise more gradually. And so the rental price inflection point lasts longer; it’s kind of the stickier end of the housing market if you will. Sure enough, the housing inventory is growing again, as the latest government report shows.[13] In fact, the number of existing homes for sale fell 4.3 percent between June and July, according to the National Association of Realtors. That was the largest drop in nearly three years and followed an 8.9 percent decline in May. Meanwhile, the supply of new homes sold in July dropped 3.4 percent to a seasonally adjusted annual rate of 1.31 million units, the lowest level since October 2008.[14] As for the growth sides of the equation, I think it’s worth noting that the U.S. economy is currently experiencing something of a double-dip recession. First came the financial crisis, then came the Great Recession. So far, the recovery hasn’t been very good. Unemployment remains high. The real gross domestic product grew only 0.1 percent in Q2, below expectations. And consumer confidence is falling. The Conference Board said its measure of consumer sentiment declined to 72.6 in September, the lowest reading since March 2009. Meanwhile, the Federal Reserve Bank of New York reported that consumer credit increased $15 billion in August, the biggest gain since January 2011. Overall, consumer debt climbed by $16.8 billion in the second quarter, the most since the third quarter of 2007.
“We’re starting to notice that delinquencies are rising, and we’re noticing that consumer confidence is falling,” she said. “So we believe that we’re going to start to experience stagflation.”
“The Fed’s in a real tough spot,” he suggested. “If they tighten too much, they might exacerbate the recession. If they loosen too much, they won’t achieve the level of price stability they need.” [14] The “clinical” definition of stagflation is when there’s high economic growth but high levels of both low prices (inflation) and high rates of joblessness (unemployment). But like El-Eriani, Patterson doesn’t think it has to be defined so narrowly.
She believes that we’ve entered into a period of stagflation where we need to adjust our portfolios accordingly. Among the assets she prefers during these times is precious metals, which she thinks is an excellent investment.
Gold – and Sterling – Soared Through 70s Stagflation Patterson argues that Bridgewater analysts simply dug into “100 years of economic scenarios and market data” to see which assets would thrive under what conditions. Among their findings: Throughout the past century, times of low growth and high price increases were associated with strong performances for precious metal investments. In particular, between 1973 and 1982, average annual US consumer prices rose by 10.8%, and the average annual US GDP grew by just 3.3%. At the same time, however, gold and sterling soared in value. Between 1973 and 1982, gold rose 590%, and sterling increased 435%. These results suggest that investors should consider precious metal holdings if they expect to deal with an extended bout of stagflation.
If structural changes to the global economy continue, inflation could become an issue again.
Patterson predicts inflationary structural change taking place throughout the global economy, which, when combined with more cyclical factors, could result in persistent stagliation.
According to Patterson, these two factors (globalization and green energy) will serve to increase the length of time during which we experience stagflation.
Stagflatuation is a real threat, but we shouldn’t panic. We should just take some time to reassess our portfolios and ask ourselves whether we’re prepared for a potential economic downturn.
Given the recent market volatility, there’s probably no need for investors to worry too much about the economy or the stock market right now. But if you’re looking for an easy way to navigate through the current situation, maybe you could consider investing in physical assets like precious metals.
