6 Comments

Stagflation on the way?

Expand full comment

Possibly.

If you just look at the U3 unemployment figures, you would not think stagflation is on the table.

But if you look at the broader U5 and U6 data, it's a real possibility.

Based on the rise of people 16-64 not in the labor force, and the declining employment population ratio, one could even argue that stagflation is here.

I tend to view stagflation as a confluence of inflationary and deflationary forces. As such, any scenario where there is pronounced deflation in some sectors and inflation in other sectors is arguably a stagflation scenario.

The goods deflation and services inflation arguably fits that description, which again means we're dealing with stagflation.

The hard part is figuring out what the future holds for energy prices. There have been signs that energy price deflation is coming to an end, and then oil prices punch through resistance levels.

Expand full comment

With the last 4 years of underinvestment/ disinvestment and emptying the reserve by 50%

Energy prices should not see any further SUSTAINABLE lower prices.

Economy in general is in for a severe down turn which may cap any serious increases until they start printing again.

Everything one needs to live will see major increases while the opposite is true os discretionary spending collapses. Late 1970s on steroids.

Expand full comment

Part of me wants to agree with you on energy prices.

However, I've been anticipating higher energy prices every month since the summer and the markets have proved me wrong pretty much every time.

I will say that both OPEC and IEA are forecasting less demand going forward than they have previously, and the anticipation of reduced demand does appear to be exerting significant downward pressure on prices.

So long as that holds true, and especially if the US can maintain energy independence, then oil prices could go a bit further down yet.

Certainly goods prices have been broadly in decline in the US for most of the year, although import prices have been generally on the increase.

While the US could be heading into a "lost decade" scenario vis-a-vis Japan in the late 90s, the economic stars are not at present lining up for a repeat of the 1970s hyperinflation/stagflation scenario. That could happen, but I don't think the precursors for that sort of event have appeared at this time.

Expand full comment

You would think that with all the talk about WW3 looming, energy prices would be trending upward. Peter, do you think that the markets are showing confidence in Trump being able to end the Ukrainian war? Or are other factors more significant?

Expand full comment

I think fears of WW3 are largely exaggerated.

Yes, there is a concern that Ukraine metastasizes into a wider war, or that the Israeli-Hamas-Hezbollah conflict does likewise (or both).

However, Putin's IRBM demonstration has so far been little more than that, and ATACMS has not reshaped the battlefields of Ukraine. Iran is not engaging at the moment in tit-for-tat escalations with Israel.

In other words, most of the "escalations" are proving to be somewhat less than escalatory.

WW3 becomes a real probability if Putin doesn't make peace with Ukraine when Trump reaches out to put together a peace deal. WW3 becomes a real possibility if Iran tries to assassinate Donald Trump.

In the meantime, the global economy is continuing to "deglobalize" and decouple from China, which carries some significant stagflationary concerns (and we are starting to see several of those appear in multiple economies).

To borrow from Robert Frost, the end of the world is looking more like ice rather than fire.

Expand full comment