~Stagflation~
Significant preparations are made for bad weather scenarios when planning a big mountain expedition, but when the battering begins, it’s instantly clear to the mountaineer the time for planning is over; carrying out well-laid plans is suddenly essential for survival. Stagflation is as dangerous to the financial lives of savers and investors as are high mountain storms to the physical lives of mountaineers. The fact it kills more slowly allows for posture adjustments even after its arrival, unlike most mountain storms, and this is an important distinction, since stagflation is already here.
Stagflation is a portmanteau combining the words stagnation and inflation. It depicts an economy with little or no growth, high unemployment, and high inflation.¹ Last week’s newsprint of a 1.4% contraction in GDP confirms the U.S. economy is weak,² and the suddenly plummeting yield on the 10 Year Treasury bond seems to be confirming it. ‘Official’ Unemployment was recorded at just 3.6% in April,³ painting a rosy, but wildly inaccurate picture of America’s employment market. The far more revealing Labor Participation Rate, presently at a 45 year low (outside the Covid19 lockdown), proves real unemployment is an exponentially higher number. This week April inflation came in at 8.3%, the second consecutive “highest in 40 years” reading.⁴ No mountaineer would ever doubt the arrival of a deadly storm; though stagflation is more difficult to perceive, the above facts confirm it is here.
Given ‘the Fed’ now has to simultaneously fight a weak economy and high inflation, the following threats to savers and investors are escalated:
High probability of a near-term Bear Market in stocks
High volatility in the financial markets
High probability of a near-term recession
Higher probability of additional critical policy errors by ‘the Fed’
The systematic vaporization of cash savings by inflation
Economic and social disruptions due to ongoing supply problems
Final preparations might include:
If retired, have the equivalent of 5+ years of withdrawals in cash
If working, think twice before relinquishing earned income
Properly diversify your investments to mitigate the risk of a catastrophic loss.
Have a long-term mindset towards quality holdings, and ruthlessly beat your emotions into subservience with a stick, then slay them.
Tighten your budget, eradicate impulse spending, and payoff your consumer debt.
Watch less TV; instead, gain and use valuable skills to replace high expense budget items.
Exercise in the sun, create a restful bedroom atmosphere, and graze on healthy foods to minimize future health-related expenses.
Be thankful for what you have, and share some of the excess with those who can’t pay you back, then quickly forget all about it.
Think about it, Shaun.
“The prudent sees danger and hides himself, but the simple go on and suffer for it.” ~Proverbs 27:12
“God loves a cheerful giver.” ~2Corinthians 9:7
“A good man leaves an inheritance to his children’s children.” ~Proverbs 13:22
1 The Balance, “What is Stagflation?”, by Kimberly Amadeo, October 29, 2021
https://www.thebalance.com/what-is-stagflation-3305964
2 USA Today, “Economy contracts first time since 2020 in first quarter as GDP falls 1.4%”, April 28, 2022
https://www.usatoday.com/story/money/2022/04/28/us-economy-growth-first-quarter/9562730002/
3 Trading Economics, US Unemployment Rate
https://tradingeconomics.com/united-states/unemployment-rate
4 Yahoo Finance, “Inflation decelerates slightly from 40-year high as CPI rises 8.3% in April”, May 11, 2022
https://finance.yahoo.com/news/inflation-consumer-price-index-cpi-usa-april-2022-123135066.html
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.
All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss.
Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
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