Stagflation, Anyone?

Quote/soundbite of the day (yes, I know it’s early) courtesy of

Societe Generale estimates that a $20 a barrel increase in oil prices may cut global GDP by 1%

That, my friends, is the very definition of stagflation: rising prices coupled with falling growth. The “S” word has been bandied about over the last few years, but my sense is that it was mostly just as a curiosity. We may need to consider it seriously in our macro portfolio outlook.

The last time we had stagflation was the 1970s. While my investing career doesn’t go so far back – I’m not that old – I do remember doing an undergrad paper on it when it was still a relatively fresh memory in the markets. While the details have become fuzzy over time, the (rather obvious) conclusion was that 1970s era US stagflation was foremost a result of the supply-side price shocks of the two oil embargoes during that decade, as well as the structural rigidity or “stickiness” of the cost of labor in that era.

While this is a very different time in a number of ways, it may be a good idea to go back and look at what worked and what didn’t work in the markets then, and try to see if any of it might apply now. One thing I can remember without doing any research that did work was precious metals, but they were coming off a low base; in this era, they have already had a strong run.

Anyway, this is a theme I will return to in more detail in future. Let me leave the topic with one more observation: the previous stagflationary era marked the onset of modern despotism in the Arab – and by extension of the Iranian revolution – Islamic world, which followed the optimism of the 1960s (remember GA Nasser or the UAE?). It could be that this one will be marked by its eclipse. That could rival the collapse of the Warsaw Pact as a positive force for peace and democracy in our time. Now we just have to figure out how to position our portfolios.

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