Trends: Deflation, Stagflation, or Asian? – Blog Weekly #760

Fears of stagflation - a sluggish economy, unemployment, high energy prices, and rising inflation.

Torsten Asmus

Annoying data

Some baseball umpires call balls and strikes what they should be, how they see them, or what they are. Market and economic observers are like rulers. The majority tend to be in the first group, believing the major to be next The trend will be under control of inflation and rising stock prices. As a long-term investor and manager, I am stuck between the last two options – seeing the future as it is or as it is or will be.

I’m interested in what readers think the future is likely to be.

current data

Government economists see a pivot to the economy resulting from the only inflation tool available to them – interest rates to constrain demand. (Not a more beneficial approach to oversupply, i.e. more domestic capacity and less restrictive regulations.) Market bulls see a stock market led by DJIA Industrials, +17.48% from its bottom, as the beginning of a new bull market. The normal is the Nasdaq, with gains of just over 7%.

Problems forecasting current data

For most of this year, the interest rate spread between 2-year and 10-year US Treasury bonds has flipped, which is a historical indicator of recession. The current two-year yield is 4.51%, which is higher than the 10- and 30-year rates.

Weekend edition of Wall Street Journal Stock, commodity and currency prices showed extreme volatility, dropping by 65%. Moreover, the weekly release of the ECRI Price Index showed a year-on-year decline of -12.9%. Although these readings are not conclusive, they do indicate that when our inflation ends, it will begin a deflationary cycle that few would expect.

2023-2024 Views 14

As for the future, I’m not sure what to see. I respect the very smart people at Goldman Sachs. (Ownership in the Private Financial Services Fund and other calculations.) In their latest economic forecasts, they see US GDP producing only +1.0% increase in 2023, increasing to +1.6% in 2024.

When I see a drop of less than 3%, I’m reminded of all the times small wins didn’t happen for operational reasons, weather, and other unforeseen reasons. With larger winnings, there is room to absorb surprises.

Goldman’s second, and more dangerous, drop was the start of a frightening period of stagflation. In the United States, we experienced two periods of stagflation that lasted more than ten years. Stagflation is a period of high inflation with generally steady profits, which can be caused by higher effective federal, state, and local taxes. While it is probably too early to adopt a stagflation portfolio strategy, it is not too early, in my opinion, to start looking at forming such a portfolio to implement during this period.

Goldman Sachs thinks there is some good news for investors in 2023 and 2024. Economically, they see China’s growth picking up to +4.5% and +5.3% respectively. They also see the Indian economy growing +5.9% and +6.5% respectively. While we do have some exposure to India in our personal portfolios, it is less than our exposure to China. This is due to the difference in the level of competence and integrity, but we may be wrong. However, US funds invested in the China region were the best performers last week.

T. Rowe Price Stock is still teaching

In the latest blog edition, I wrote about T. Rowe (TROW) share price rising from $103.71 to $13,334 in a week. At the same time, the daily trading volume expanded from 1.7 million to 5.5 million shares. I commented that this indicates a lack of liquidity in the New York Stock Exchange. On Monday of this week, the stock opened at $131.02 and ended at $125.50, the same level it started in the previous week, $125.84. The big difference was the trading volume. The previous Friday was 5.5 million shares, followed by 3.2 million shares on Monday and 1.5 million shares on Friday.

The lesson is that if you are worried enough about the price going up, you can find liquidity. Trading liquidity disappears with the absence of demand. (Some liquidity is provided by the short sale.) It was clearly a week where patience and discipline paid off.

Be careful what you believe in

My sharp-eyed brother reminded me that the perception that half of startups don’t make it to five years was based on a Small Business Administration study based on data from phone companies. Many startups have been dissolved, acquired or transferred without keeping their phone number. We do not question the risks involved in both small businesses and startups. But we should always check the data source to make meaningful decisions.

What is your current view of the future?

original post

Editor’s note: The bullet summary for this article was selected by a search for Alpha Editors.

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