We are entering the first stages of stagflation where we suffer from lower growth and higher inflation.
Stagflation or recession
Neither are good for either your wealth or your health. We are currently seeing slowing growth and higher inflation, a bad combo if there ever was. The question that remains is whether we remain in a slow dance of death where we are mired in stagflation for a long period of time due to the inability and short sightedness of central bankers to spot the previous signs of overheating or whether inflation will be controlled quickly enough to avoid recession?
Central bankers were and ,in some cases still are in thrall to their political masters instead of maintaining their independence and remembering their sworn oaths to monitor and control price stability. The political leaders of the Free World are a motley crew of low grade apparatchiks of tenuous ability and have encouraged and cajoled their central bankers to continue with their reckless strategies of pumping up assets to produce a bubble. As we all know, the only way to get rid of a bubble or painful blister, is to pop it which can be very painful. So currently we are in the early stages of stagflation without entering the stages of a full blown recession yet but my suspicion is that most central bankers are in denial, particularly the ECB and the BoE and that the Fed has left it too late, albeit being further ahead of their international counterparts.
Asymmetric inflation
this occurs when the cost of living goes up but wages fail to follow in tandem. This will create a problem for governments all over the globe and you are staring to see some signs of civil unrest. There have been recent riots in North Africa with several thousand Moroccan refugees storming the Spanish held enclave of Melilla, leading to the death of over thirty people. We are seeing civil disobedience in some Chinese cities due to their draconian Covid lockdowns and the unions are starting to flex their muscles in Europe, particularly in the UK. So, unless inflation starts to fall sharply, which looks unlikely taking into account the continuing strength of the oil price and diminishing grain exports from the Ukraine, central banks will be forced into raising rates much quicker and higher than they themselves and their political masters would want, leading to an unavoidable recession in most of the world.
What does this mean for markets?
Markets have recovered some equilibrium in recent days with the S&P up over 3% on Friday and there was a certain amount of capitulation in the last few weeks, particularly for those devotees of the crypto space. Since then, Bitcoin has rallied approximately 20% from it’s lows, the oil price has fallen over 15% from it’s recent $130 highs and the 10 yr Treasury bond has backed off it’s recent 3.5 % yield. We are likely to see some end of quarter rebalancing this month which could boost the market further.
A technical perspective
The 50 day MA is at 4065 and we are currently standing at 3926. There needs to be some consolidation here to sustain a decent move higher. 4,100 is not an impossible height to reach before we move inexorably lower but move lower we will. Bear markets spend two third’s of their lives rallying. Until there is a real sign that inflation has peaked and with it rate rises, recession is not far off and with it a declining stock market. Be careful out there.
.