Stagflation Stikes

Here’s a novel idea: If you’ve had it with being wrong, try being right.

Last week, Fed Chairman Jerome Powell got a bit snitty when discussing interest rates and the economy, and what some of us clearly recognize as “stagflation.”

Your particular scribe (that’s me) has been warning for more than a year that stagflation was very much a very real possibility…

The way I saw it—and the way it has shaped up—inflation was never just going to go away quietly. And the supposedly raging Biden economy is not nearly as raging as cheerleaders in the media have long insisted.

So, here we are…

Inflation, after a short siesta, is back harassing the US economy. The most-recent inflation reading was 3.5%, decently above the previous reading of 3.2%, and well above the Fed’s preferred (and arbitrary) 2% rate.

At the same time, recent economic plot points are telling the story of a sad drama unfolding in America rather than an upbeat romantic comedy…

GDP growth slowed to a turgid 1.6% in the most recent quarter, and research indicates that much of that growth stems not from middle-class Americans but from the much-smaller group of rich Americans for whom price tags don’t mean a whole lot.

The Dow Jones Transport Index is down, indicating a slowing economy. That index declines as trucking, shipping, and air-freight companies see their earnings slip, which happens when demand for their services retreats—which happens when the customers and businesses that demand shipping services need less of that service because, well, the economy is slowing.

Employment recently decreased for the first time since 2020, and consumer sentiment is down more than a little. And when the consumer ain’t happy, ain’t no one happy.

Now, granted, maybe I’m just too cynical at my age—just over eight in dog years. And maybe I’ve seen too many lies, and too many bureaucrats and politicians dissemble and obfuscate and omit.

But the data tells me that we have entrenched inflation and an economy that’s not nearly as spry as some want us to believe…

Bureaucrats do not like us focusing on the truth. It muddies their preferred narrative. They want us to invest in their vision of reality—a happier, if wrong, version. Theirs is the “newspeak” version of the American economy, where slow growth is a “surprisingly strong economy,” and where middle-class Americans having to work two and three jobs to survive is a “resilient job market.”

So it is with Señor Powell, who, getting back to his comment last week, had this to say:

I was around for stagflation [in the 1970s]. And it was 10% unemployment, it was high-single-digits inflation… and very slow growth. Right now, we have 3% growth… and we have inflation running under 3%. So I don’t really understand where that’s coming from. I don’t see the stag or the -flation, actually.

Just to be clear, JP also didn’t see the “-flation” coming post-COVID, either.

He promised us that whatever price impact a gigazillion dollars of econ stimulus might have, it was sure to be “transitory.” (If you were a Field Notes reader back then—the early days of 2021—I warned that we’d see inflation approaching 10%, which is exactly what we got.)

I guess transitory has now been recalibrated to mean several years, because we most certainly did get inflation. Big-bad-wolf-blowing-on-a-house-of-twigs inflation that continues to menace the economy.

Moreover, the 1970s, as I mention time and again, was a very different America, with a very different debt level.

Debt back then was not nearly so widespread at the government, corporate, or consumer level. I’d argue that 3% inflation today is close to being as painful as 10% inflation was 50-ish years ago.

Inflation at 10%—and high interest rates—spread across much smaller debt loads, while definitely pinching pocketbooks, was not as financially debilitating for families because they didn’t lose increasing amounts of their paycheck to debt-servicing costs.

They could adjust their consumer spending to deal with inflation on food and gasoline and such.

But today’s inflation, coupled with interest rate rises, means not only are consumer prices higher—but repayment costs are painfully higher for American families who, statistically, are subsisting on debt. (Same for Uncle Sam and his monumental debt.)

Thus, their monthly debt costs are consuming a much larger chunk of their paycheck, leaving increasingly little for all those niggling discretionary purchases like, oh, say, food, electricity, rent, gas to get to work…

On top of this, America is wildly more unaffordable for most Americans today than it was in the 1970s.

One example: The typical American home across the 1970s cost about 3.5x the typical American salary.

Today, a typical house costs more than 7.6x the typical salary.

So, America is increasingly unaffordable for the typical American. And higher interest rates—even if they are lower than in the 1970s—spread across higher home values means markedly more economic distress today than it did in the Jimmy Carter years (especially when salaries have lagged far, far behind inflation over the last half century).

Thus, while JP says he’s had it with talk of stag and -flation in the same sentence, the truth is that the truth doesn’t care about his feelings.

The US economy is stagnating. And prices are inflating.

That is, contrary to Fed dissembling, “stag-flation.”

What can we do about this personally?

Own commodities. They’re going to do well, just as they did in the 1970s.

I’m talking about gold, of course, but that’s also an anti-dollar/monetary crisis play.

I’m also talking about exposure to certain industrial metals such as copper and the newest addition to Global Intel portfolio, nickel.

These should all do well as Jerome Powell’s non-stagflation stagflation roots even deeper.