Saturday, September 3, 2022
Ever feel like you're going nowhere fast? That's stagflation in a nutshell; working harder for less while getting squeezed by paying more. A hallmark of the Biden Administration has been the failure of the economy. The jobs number gets a lot of ink, but the jobs are typically service-orientated, lower wage, and not full-time. And that's the bright spot in the economy!
A combination of raging inflation and economic stagnation has resulted in morass of stagflation. Recent market trends indicate that rather than achieving escape velocity from the Bear Market begun in January 2022, we may have several months to go especially if the S&P 500 tests the June '22 lows again. Couple that with a housing recession (mortgage rates have doubled since January), persistently high oil prices, and large companies freezing their hiring and we're in dire straits.
One of the only options for Americans is that most favored by Third World residents; buy hard assets as soon and quickly as possible because fiat money (think paper money NOT backed by gold) is worth less every day. Hence we have seen massive, incoherent, gains in machinery, durable goods, and of course real estate. But even the latter might be in for trouble now as the Federal Reserve is on a mission to break the back of inflation.
The noted investor Warren Buffett once said that "5% interest rates will attract money from the moon." Expect the Fed Funds rate to exceed that by the end of the year. There is no stopping a motivated Fed on a mission with the implicit backing of the Biden Administration.
With equities range-bound and drifting lower investors are in a pernicious position of having their dividends taxed at a higher rate, underlying corporate growth slowing, and innovative small companies being snuffed out of existence.
Stagflation ends when inflation is tamed and economic policies enable the free market to function. Two years into this Administration offers little hope that anything will change. The question that needs to be answered by investors is this: "What is the impetus to buy?"