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Over to The Veteran for today's Opening Belle, and he's talking stagflation 👇👇
A new phrase (or at least one that is new to many) has recently done the rounds on Wall Street and financial media.
The phrase in question is Stagflation.
It's a term that hasn't really been in use for almost 50 years.
And thank goodness for that because it harks back to a very dark period in our economic history, the 1970s.
A period that’s synonymous with instability, rapid price rises, poor labour relations, growing debts and deficits, and sedentary financial markets.
Stagflation is a mashup of the words stagnation and inflation and describes a period in which an economy experiences low or no growth, but at the same time has to contend with rising prices.
Stagflation became a reality in the 1970s thanks to a series of so-called oil shocks.
For example, in October 1973 OAPEC: The Organization of Arab Petroleum Exporting Countries, a forerunner to OPEC, launched an oil embargo against leading economies targeting not just the USA, but also Japan, Canada, the UK and the Netherlands.
The embargo lasted just under six months running through to March 1974 and during that time the price of oil rose 300%, from $3.0 per barrel to $12.0 per barrel.
That was a change in pricing that the western economies couldn't cope with, and one that confirmed to the Middle Eastern nations that not only did they have an abundance of a very valuable and much-needed commodity, but when they acted collectively they had a whip hand in any negotiations with the western consumer nations.
Economists at the time were initially at a loss to explain stagflation and perhaps more importantly how to remedy it.
The effects of stagflation would last for almost a decade, not helped by a further oil shock, once again instigated by the Middle eastern petroleum producers in 1979.
Economists came to understand that stagflation came about when the national and global economies suffered a supply-side shock, which can raise prices at the same time as it depresses economic activity or growth. Sharp spikes in the price of oil were just such a supply-side shock.
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But why is the idea of stagflation being bandied about again almost 50 years after it last reared its head?
Well for one thing the global economy has suffered a recent supply-side shock, perhaps the biggest supply-side shock it's ever known, in the shape of Covid 19.
And even though we have learnt to live with Covid and have adapted the way that we work and trade with each other, we still don't really know what the long term economic impact of the disease will be.
After all, in March and April last year the tiny virus effectively brought the global economy to a grinding halt. Thankfully we are at a stage in our evolution where we are networked and able to leverage the internet and other electronic communications methods.
We were also able to collaborate and work to develop vaccines in record short time, which though not a cure, should help to limit the long term risks to our health.
Of course, the other factor that meant the global economy could spring back to life as quickly as it did was money.
Trillions of dollars have been pumped into the global economy via governments and central banks.
Governments have paid workers wages, boosted unemployment benefits, subsidised rents and other business overheads with grants, loans and various support schemes.
Whilst central banks have boosted their balance sheets printing new money, albeit electronically, with which to buy bonds and other assets.
Effectively supporting the financial markets and creating one of the hottest bull markets in history as they did so.
US Government Debt and the Federal Reserve Balance Sheet
Government debt in the US had been rising rapidly since 2016 but it has grown even more quickly over the last 18 months.
And with Joe Biden keen to spend more money still, supporting and stimulating the economy, it's likely to rise even further from its current $28.52 trillion.
So why are debt levels a 'problem'?
Well, there are two main sources of concern:
One is that at some point the debt will have to be repaid and the final bill is growing daily even with interest rates close to their lowest levels ever.
The second is that the growth in debt is unsustainable and that sooner rather than later the crutch of government spending and central bank stimulus will have to be withdrawn, potentially creating a supply-side shock to the economy of its own.
And let’s not forget that crude oil prices have risen by 47% in the last six and half months alone.
What concerns money managers and traders now is the prospect of so-called secular stagflation in which interest rates, growth, inflation and investment returns all remain low for a prolonged period.
For now, that seems unlikely as inflation and prices are being driven higher and the economy does appear to be growing.
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Stagflation is seen as a possible end game for the economy post-Covid, rather than something that will suddenly appear tomorrow.
UBS Wealth, which helps to manage around $3.2 trillion of assets for the world's rich and affluent, wrote to clients recently, to specifically address the threat of stagflation.
Their Chief Investment Officer Mark Haefele doesn't see signs of impending stagflation in global economic data and remains bullish of risk assets such as equities.
Though he and his colleagues are suggesting that their clients diversify their portfolios looking for yield, but also positioning themselves for reopening. The money manager believes that Japan and the emerging markets may offer the best opportunities in this regard.
The threat of stagflation should not keep you awake at night, but the possibility of it appearing in future is a good excuse for you to review and take stock of your portfolios.
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