Stagflation? Everything Old Carter Is Back Again

[Kathianne]

Ok, Iran isn't holding our people hostage, Obama is:

http://www.cnbc.com/2016/04/01/wall-streets-latest-dirty-word-stagflation.html


Wall Street's latest dirty word—stagflationJeff Cox (http://www.cnbc.com/jeff-cox/) | @JeffCoxCNBCcom (http://twitter.com/JeffCoxCNBCcom)
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</time>A tightening labor market and rising inflation against a backdrop of slowing overall growth are painting an increasingly stagflationary picture for the U.S. economy.


Stagflation, or conditions in which costs are rising but growth is not, last was seen in the 1970s, before then-Fed Chair Paul Volcker had to push the economy into recession to slay the inflation dragon.


Now, with a variety of factors coming together to show inflationary-deflationary cross currents, Wall Street is bracing for another battle.
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[fj1200]

^There is not much going on at the inflation front. I think the Fed is out of bullets and has been for six? years. The rest is BO and his regulatory policies sucking much on the fiscal stimulus side.

[Kathianne]

^There is not much going on at the inflation front. I think the Fed is out of bullets and has been for six? years. The rest is BO and his regulatory policies sucking much on the fiscal stimulus side.

Stagflation though wasn't 'huge' inflation with exception of gas prices-which is one of the rising commodities of recent weeks. Food has been rising steadily-unlike the 70's I believe, neither cost is now figured into inflation figures.

[fj1200]

Stagflation though wasn't 'huge' inflation with exception of gas prices-which is one of the rising commodities of recent weeks. Food has been rising steadily-unlike the 70's I believe, neither cost is now figured into inflation figures.

Compared to today there was yuuuuge inflation.

http://i.bnet.com/blogs/cpi-energy.bmp

Food inflation is similar to the current CPI figures.

<iframe src="http://www.tradingeconomics.com/embed/?s=unitedstafooinf&v=201604041725n&h=300&w=600&ref=/united-states/food-inflation" height="300" width="600" frameborder="0" scrolling="no"></iframe>
source: tradingeconomics.com (http://www.tradingeconomics.com/united-states/food-inflation)

I think it was a stretch to worry about stagflation. The risks they mention are down the road:


"This is an extremely difficult situation. You have to choose your poison," Levanon said. "The Fed has a very difficult situation, where they're either going to probably have to live with high inflation, not in 2016 but more 2017 and 2018, or really slow down the economy beyond its already slow pace. That has risks of recession."

[Kathianne]

Compared to today there was yuuuuge inflation.

http://i.bnet.com/blogs/cpi-energy.bmp

Food inflation is similar to the current CPI figures.

<iframe src="http://www.tradingeconomics.com/embed/?s=unitedstafooinf&v=201604041725n&h=300&w=600&ref=/united-states/food-inflation" height="300" width="600" frameborder="0" scrolling="no"></iframe>
source: tradingeconomics.com (http://www.tradingeconomics.com/united-states/food-inflation)

I think it was a stretch to worry about stagflation. The risks they mention are down the road:

That is what there job is, to worry about 'future' in a not long-term way:

http://www.kiplinger.com/article/business/T019-C000-S010-inflation-rate-forecast.html

[fj1200]

That is what there job is, to worry about 'future' in a not long-term way:

Of course. But 2.4 and 1.4 are a long way from stagflation.

[Kathianne]

More on the issue, 'not the 1970's type, rather stagflation lite.'

http://www.wsj.com/articles/a-strange-signal-from-the-markets-stagflation-1458811802


...

The concern comes from a closely watched part of the bond market from which inflation expectations are derived. This year’s market rebound was accompanied by a sharp rise in these inflation expectations, which moved from a February low of 1.2% a year for the next decade to 1.7%, the highest since the fright over China last summer.


Unfortunately, this rise in what is known as the 10-year inflation “break-even”—the difference between ordinary Treasury bond yields and inflation-linked yields—was not all good news.


Treasury yields reversed at the same time as inflation expectations turned in mid-February, but inflation-linked yields have continued to fall.


This matters. Buyers of Treasury inflation-protected securities, or TIPS, are chasing the safest, most boring return there is: currently 0.27% above inflation, locked in for 10 years. These appeal to people who really can’t find anything better to do with their money; the drop in yield (and rise in price) suggests weaker belief in the economic growth which should make riskier assets more appealing.


One interpretation: the market is worried that growth will remain so-so while rising oil prices and incipient wage pressure force the U.S. Federal Reserve to tighten policy. Not exactly the stagflation of the 1970s, which ended in 1980 with inflation hitting 15% amid a recession. But a sort of stagflation-lite: weak growth and accelerating price rises.


“I think we are in a situation where [the Fed] might be forced to normalize rates because of inflation while the underlying economic momentum is slowing down and not capable of digesting higher rates,” said Jean Medecin, a member of the investment committee at Carmignac, a French fund manager.


The problem with this thesis is that the rebound in markets has been widespread, encompassing equities, credit and commodities. If TIPS investors are really worried about weak growth, why aren’t other markets, too?


Dig beneath the surface, and perhaps they are. The S&P 500 may be up​slightly this year, but at a sector level the story is mixed, at best. The U.S. economy has been driven by the consumer for the past five years, and the message from consumer stocks is that caution reigns.


The story from most other sectors is too closely related to other markets to be properly interpreted. Energy and material stocks are up, but this is just a reflection of higher oil and commodity prices. The two best-performing sectors are the bond-like utilities and telecoms, up 12% and 13% respectively by Tuesday’s close, but this is mostly a reflection of the lower Treasury yields, to which they are often seen as an alternative. Restating the puzzle does not explain it.


The same goes for the recovery in credit. According to Bank of America Merrill Lynch, the extra yield available from U.S. junk bonds compared with Treasurys has dropped to 6.7 percentage points from 7 at the start of the year, and a peak of 8.9 percentage points in mid-February. But the junk bond market was engulfed in fear about widespread defaults by energy companies, so again this may merely reflect higher oil prices.


In the other direction, the rise in demand for gold does not help the case for concern as much as it might seem. Gold is the ultimate in inflation protection, but has no income—so it tends to move in the opposite direction to TIPS yields, which can be seen as the income which has to be given up to hold gold. As TIPS yields fell, it is only natural that gold should have risen.


All this brings us back to the original story. Rising oil prices are the wrong sort of inflation for growth. Some asset prices may be pushed up as more expensive oil removes the risk of defaults and knock-on financial dislocations. But this is just noise around an underlying market signal which is negative about the economy.

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