Of all the multiplying villainies of nature swarming the market right now, investors are most concerned about two of them: inflation and recession…
The White House stirred the pot on July 21, when it published a blog post claiming the long-standing definition of a recession – two consecutive quarters of falling real (or “inflation adjusted”) gross domestic product (“GDP”) – wasn’t valid.
The post went on to offer several paragraphs of convoluted, overly complicated blather about how the National Bureau of Economic Research can officially determine when we’re in a recession. In my opinion, the blog post was codswallop. It was the government trying to save face ahead of the news that would come the following week…
Because seven days after the post, the Bureau of Economic Analysis reported that real GDP fell 0.9% in the second quarter – its second consecutive quarterly drop.
Folks… no matter what the White House claims, we are – according to the hard data – in a recession, and we have been for some time now.
“But,” you may ask, “how can we experience inflation while the economy is in a recession?”
The answer lies in a macroeconomic force that nobody wants to name…
When inflation happens during an economic recession, it’s called “stagflation.”
Stagflation occurred in 15 out of 44 quarters from the early 1970s through the end of 1980. Take a look…
Real GDP fell for six consecutive quarters in 1979 and 1980. At the same time, inflation, interest rates, and the price of gold raged… peaking in 1980.
High inflation was a key ingredient in generating negative real GDP. This means that inflation and contraction are not only possible, but when inflation is bad enough, they go together like famine and war.
That’s the situation we’re seeing today: negative real GDP growth alongside high inflation.
Inflation and recession are too often discussed as exclusive conditions… But stagflation corresponds with a lot of folks’ everyday experience, as they wind up spending more to buy the same or less stuff.
Even though it’s unlikely to ever make headlines (most talking heads view it as too complicated to bother explaining), stagflation could influence your daily life for a while to come…
Year-over-year changes in the monthly Consumer Price Index (“CPI”) – the most widely accepted inflation proxy – have been below 4% for most of the 21st century and below 2% for much of the past decade. But now, inflation is at 8.2%…
The Federal Reserve’s inflation target is 2%, which means it will likely keep raising interest rates until the monthly year-over-year changes in the CPI fall back down to that level.
Many people – including some of my Stansberry Research colleagues – believe the Fed will “pivot” and stop raising rates soon. It’s possible. But I doubt it’ll do so before the end of the year… and before inflation falls back to 2%. Fed Chairman Jerome Powell clearly stated at his July 27 press conference that “ongoing increases… will be appropriate.”
Investors should prepare for rates to run higher than expected… for longer than expected.
Even if the CPI settles in around 4% to 5%, that’s more than twice the level that we’ve seen for most of the past decade.
Couple that with the ongoing recession, and it’s clear that there’s risk of continued, or perhaps recurring, episodes of stagflation over the next several years.
Throughout history, governments have all behaved the same way… When there’s a war or other crisis and they start running out of money, they start printing it in excess. This is our reality right now.
The U.S. government has printed too much new money, too quickly. And the effects of this are just now hitting Americans in the form of higher rent and soaring prices for food, necessaries, and luxuries.
In this kind of environment, we must focus on finding investments that preserve wealth… and generate good returns for years to come.
Good investing,
Dan Ferris
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Source: Daily Wealth