It’s Beginning to Look a Lot Like Christmas Stagflation

Stagflation Potential: J.P. Morgan’s Jamie Dimon Suggests a Future of High Rates, Low Output

Bullion.Directory precious metals analysis 29 September, 2023
By Isaac Nuriani
CEO at Augusta Precious Metals

To review, stagflation is a relatively rare phenomenon in the economic cycle where market energies that generate both inflation and low output manage to coexist. For the time being, all we’ve seen is the inflation part of that equation. But some analysts still are concerned the “downturn” portion is just a matter of time.

Since March 2022, the Federal Reserve has raised interest rates 11 times. It is the fastest pace of increases in the last four decades.[1] And so far, the headline data that informs us of the economy’s health seems to suggest it’s in tip-top shape.

For example, despite all of those rate increases, the unemployment rate remains near 50-year lows.[2] Consumer spending has remained plenty solid throughout 2023.[3] And we just learned this week that the third and final estimate for annualized GDP growth in the second quarter landed at 2.1%.[4]

Not exactly the picture of recession. But the current reality may be deceiving, as far as what could be waiting around the next economic corner.

That’s because – according to analysts and economists – the Federal Reserve’s interest rate hikes continue to work their way through the nation’s economic infrastructure. And eventually, in their estimation, the signs of recession will become plenty clear.

Economist David Rosenberg is one who believes the economy may not be out of the recession woods. According to Rosenberg, one key point that’s largely overlooked right now is the likelihood that the Fed’s rapid rate hikes simply have yet to make their presence fully felt just yet.

“Normally it takes two years, actually, after the first rate hike by the Fed and the start of the recession,” Rosenberg explained recently, adding, “We’re not getting out of this without a recession.”[5]

“The recession has been delayed; it’s not been derailed,” Rosenberg announced.[6]

As for why he feels that way, he points to a multitude of reasons, including clear signs of rising consumer-credit delinquencies.[7] Another reason Rosenberg believes consumer horsepower may be on borrowed time is that projections indicate the massive $2.1 trillion in excess savings accumulated during the global health crisis could be fully depleted by the end of the third quarter.[8]

The potential significance of information such as this is magnified by the fact that consumer spending is 70% of GDP.[9]

There also are the readings in the economy’s all-important manufacturing sector. Although numbers have improved slightly, the purchasing managers’ indexes of both the Institute for Supply Management and S&P Global remain in contraction territory.[10]

But stagflation isn’t merely the function of economic downturn. It’s also a function of inflation. And there are signs that the inflation which has been declining, overall, could, in fact, remain with us for some time to come.

Most recently, headline inflation, in the form of the August consumer price index, clocked in at 3.7% year over year, an acceleration from the 3.2% rate posted in July.

As for its more ornery “brother,” core inflation, that did slow down from July (4.3% vs. 4.7%), although it still remains solidly above 4%.[11]

The prospect of an economic downturn and higher inflation coming into contact over the next several months raises the possibility of stagflation. And according to a recent interview that J.P. Morgan CEO Jamie Dimon gave to the Times of India, what that could mean in terms of central bank policy is something few have considered.

Dimon: “Worst Case Is 7% With Stagflation”

Dimon’s principal worry: that central bankers are faced with having to go back in the game against inflation at what seems an especially dicey time for both the domestic and global economies.

Laying the groundwork for his concerns, Dimon makes what I think is a particularly good point about the early days of rate hikes in this cycle.

“First of all, interest rates went to zero,” Dimon noted. “Going from zero to 2% was almost no increase.”[12]

That’s hard to deny, particularly during what had officially become a period of high inflation. The Fed began raising rates in March 2022, a month in which the inflation rate was at 8.5%. And the size of that first rate increase? A whopping 25 basis points (that’s sarcasm).[13]

In other words, the challenges posed by rate hikes during those first several months were relatively inconsequential compared to the hardships posed by inflation.

“Going from zero to 5% caught some people off guard,” Dimon continued, “but no one would have taken 5% out of the realm of possibility.”[14]

“I am not sure if the world is prepared for 7%.”[15]

Did he say 7%?

“I ask people in business, ‘Are you prepared for something like 7%?’ The worst case is 7% with stagflation.”[16]

To be sure, stagflation is hardly out of the realm of possibility. As we just discussed, headline inflation accelerated last month. And while core continued to decelerate, it remains well above the Fed’s 2% target. And these inflation rates persist as projections also persist of a downturn – and possible recession.

I referenced economist David Rosenberg’s recession forecast earlier. Here’s another.

“US economic growth will buckle under mounting headwinds early next year,” writes Erik Lundh, principal economist at The Conference Board, “leading to a very short and shallow recession. This outlook is associated with numerous factors, including, elevated inflation, high interest rates, dissipating pandemic savings, mounting consumer debt, lower government spending, and the resumption of mandatory student loan repayments.”[17]

Lundh goes on to suggest these factors will prove debilitating to GDP next year, bringing it from a projected 2.2% in 2023 to just 0.8% in 2024.[18] And if inflation continues to hang tough as output declines, what you’re left with is stagflation in some measure.

“If they are going to have lower volumes and higher rates,” Dimon says, “there will be stress in the system.”[19]

The prospect of the U.S. economy finding itself in the midst of stagflationary environment raises the issue of what might retirement savers do to help mitigate its impact on their savings.

As it turns out, although the problem of higher inflation existing simultaneously with low output is a challenge to overcome, one of the world’s most prominent hedge funds suggests there’s an asset that could be of some help.

Let’s talk about that as we close out this week’s article.

World Gold Council: Stagflation Could Provide Further Support for Gold

Bridgewater Associates is the world’s largest hedge fund.[20] And one of the features that makes Bridgewater different from its peers – besides its dominance in terms of managed assets – is the demonstrated affinity that its decision-makers have for gold.

This includes the man who started Bridgewater, Ray Dalio, who historically hasn’t been shy about publicly expressing his affection for gold.[21]

Last year, Bridgewater’s chief investment strategist, Rebecca Patterson, had stagflation on her radar screen and highlighted the potential value that she says gold offers in diminishing its impact.

In an interview with Pensions & Investments, Patterson noted that she and the rest of her Bridgewater Team mined economic scenarios and asset performance going back a full century to see if they could determine which assets proved strongest during stagflationary conditions. As it happens, gold is one they dug up (puns fully intended).[22]

Also supporting the case for gold as a stagflation-fighter is analysis by the World Gold Council, which suggests stagflation and gold go together like peanut butter and jelly.

In a report, the council noted that a climate of stagflation “is the one that is most supportive for gold.” In fact, says the WGC, per its research, gold in U.S. dollars has been the single-best performer during periods of stagflation since 1973.[23]

“Should stagflation become widespread,” the WGC notes, “it could provide further support for gold as a diversifier and risk hedge.”[24]

Certainly one of the very best examples of gold’s potential to thrive during periods of stagflation was the 1970s and early 1980s, known as the era of the “Great Inflation.”

The years 1973 through 1982 saw inflation become a prominent challenge. During this period, the consumer price index even climbed to double digits on several occasions while rarely dropping beneath 6%.[25] The country found itself in a recession three times during those years, as well.[26]

Then there’s the unemployment rate, which, during that 10-year stretch, touched 11% and never fell below 4.6%.[27]

Also during those years, gold shone particularly bright, rising nearly 600%. Silver was no slouch either; it climbed 435%.[28]

Returning to the present day, I think we would have to conclude that the economic outlook is most uncertain, presently.

As I’ve noted, there are those who expect to see a recession.

There also are those who do not.[29] But there are very few who are envisioning what might be considered a “Goldilocks” kind of next-stop to this cycle, where there’s no real slowdown at all. It might not be a full-blown recession, in their view, but we likely will see a downturn in some measure.

Then there’s the matter of inflation. It’s still very persistent, of course, as we discussed a little earlier. And some very learned people expect that persistence to, well, persist.

“Headline inflation is going to prove much more complicated,” economist Mohamed El-Erian assessed recently on CNBC. “I think core inflation will be less well-behaved.”[30]

Given what we know about the Fed’s resolve in seeing inflation return to 2%, that could mean higher-for-longer rates. It might, in the view of J.P. Morgan’s Jamie Dimon, even mean higher rates.

And if we’re left dealing with higher inflation, higher interest rates and an anemic economy, we have stagflation, as Dimon thinks we could see.

If that comes to pass, then an already complicated savings environment could grow more complicated still.

[1] Jeanna Smialek, New York Times, “Fed Leaves Rates Steady but Forecasts More Moves” (June 14, 2023, accessed 9/28/23).
[2] Bureau of Labor Statistics, “The Employment Situation – August 2023” (September 1, 2023, accessed 9/28/23).
[3] Bureau of Economic Analysis, “Personal Income and Outlays, August 2023” (September 29, 2023, accessed 9/29/23).
[4] Bureau of Economic Analysis, “Gross Domestic Product” (September 28, 2023, accessed 9/28/23).
[5] Bloomberg Television, “Rosenberg: The Recession Has Been Delayed, Not Derailed,” YouTube video, 2:24 (August 18, 2023, accessed 9/28/23).
[6] Ibid.
[7] CNBC, “Macro equation setting up for recession, warns David Rosenberg,” YouTube video, 5:53 (August 31, 2023, accessed 9/28/23); Tory Newmyer, Aaron Gregg and Jaclyn Peiser, Washington Post, “Delinquencies rise for credit cards and auto loans, and it could get worse” (August 30, 2023, accessed 9/28/23).
[8] Hamza Abdelrahman and Luiz E. Oliveira, Federal Reserve Bank of San Francisco, “Excess No More? Dwindling Pandemic Savings” (August 16, 2023, accessed 9/28/23).
[9] Marc Davis, Investopedia, “The Spending Habits Of Americans” (September 1, 2023, accessed 9/28/23).
[10] Institute for Supply Management, PR Newswire, “Manufacturing PMI® at 47.6%; August 2023 Manufacturing ISM® Report On Business®” (September 1, 2023, accessed 9/28/23); S&P Global, “S&P Global Flash US Composite PMI™” (September 22, 2023, accessed 9/28/23).
[11] Bureau of Labor Statistics, “Consumer Price Index Archived News Releases” (accessed 9/28/23).
[12] Mayur Shetty, Times of India, “‘Index inclusion to bring $25 billion foreign inflows’” (September 26, 2023, accessed 9/28/23).
[13] FederalReserve.gov, “Open Market Operations” (accessed 9/28/23).
[14] Shetty, Times of India, “‘Index inclusion to bring $25 billion.’”
[15] Ibid.
[16] Ibid.
[17] The Conference Board, “Economic Forecast for the U.S. Economy” (accessed 9/28/23).
[18] Ibid.
[19] Shetty, Times of India, “‘Index inclusion to bring $25 billion.’”
[20] Rebecca Baldridge, Forbes.com, “Top 10 U.S. Hedge Funds Of 2023” (September 1, 2023, accessed 9/28/23).
[21] Ray Dalio, LinkedIn, “Paradigm Shifts” (July 17, 2019, accessed 9/28/23).
[22] Jennifer Ablan, Pensions & Investments, “Bridgewater’s Rebecca Patterson: Fed risks credibility in inflation fight” (August 25, 2022, accessed 9/28/23).
[23] Johan Palmberg and Krishan Gopaul, World Gold Council, “Stagflation strikes back” (March 25, 2022, accessed 9/28/23).
[24] Ibid.
[25] U.S. Inflation Calculator, “Historical Inflation Rates: 1914-2022” (accessed 9/28/23).
[26] NBER.org, “US Business Cycle Expansions and Contractions” (accessed 9/28/23).
[27] Bureau of Labor Statistics, “Labor Force Statistics from the Current Population Survey” (accessed 9/28/23).
[28] London Bullion Market Association, “Precious Metal Tables, Gold, Silver: 01/02/73-12/31/82” (accessed 9/28/23).
[29] Paul Davidson, USA Today, “Recession in U.S. becomes increasingly less likely, but odds are highest in West, South” (September 12, 2023, accessed 9/28/23).
[30] CNBC, “Headline inflation will prove ‘much more’ complicated to fight, says Mohamed El-Erian” (September 12, 2023, accessed 9/28/23).

This article was originally published here

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