Unless you lived and worked back in the 1970s – or, like me, were at least old enough to see and process what was going on around you – you’re probably only marginally aware of an economic malady known as “stagflation.”
It’s an odd manifestation – a living contradiction – and a pretty miserable one, at that.
The term “stagflation” is an amalgamation of “stagnation” and “inflation” – and describes an environment where prices are zooming in the face of zero growth.
But before this time period I’m referring to, stagflation was little more than an academic theory that wasn’t believed possible in any real-world scenarios.
Just think about it: Inflation usually shows up in a sizzling economy, where vast numbers of consumers have scads of cash to throw around – and where the inventory of items on store shelves are dwarfed by the number of people seeking to buy them. But stagflation manifests itself as a nightmarish one-two punch: Soaring price levels when consumers can least afford them, thanks to stuck-in-neutral job growth, treading-water corporate profits – and no catalysts in sight that might jumpstart economic growth.
I was a teenager in the 1970s – and had yet to launch my investing career – when the First Edition of Stagflation showed up in the real world. Even so, I read about it, saw it on TV, and was frankly sick of it and miserable because of it. It impacted me, and my family, and my friends’ families, and most of America.
I want to show you how this nightmarish scenario got started – and for good reason: Many so-called “experts” believe the seeds of stagflation have been sown again here in the American economy. They see a reprise of that miserable, stagflationary decade we had to live through half a century ago. And they say it’s unstoppable.
To get us started, let’s go back to the “triggering event” of the malaise decade. Let’s look at what happened, the pain it caused, and how it was stopped.
Then I’ll compare it to what I see here today.
Shocker – Oil Shocker, That Is
The triggering event of this costly, stagnant economic mess was something called an “Oil Shock.” And I remember that very well, too.
Geopolitics led the Organization of Petroleum Exporting Countries (OPECs), to quadruple oil prices – practically overnight. Pump prices followed suit.
Prior to that “shock,” I can remember gassing up my parents’ car with “high-test” – at 25 cents a gallon. Just a few weeks later, after the OPEC cartel acted, that same gallon of gas had rocketed nearly fourfold to $1.
And it wasn’t just the cost; adding to that feeling of stagnation was the fact that we all had to wait in long “gas lines.” But instead of adding a few gallons, everyone filled up, a de facto form of hoarding that exacerbated the gas lines and had a massive spillover effect that reached far beyond transportation.
Oil is a key “ingredient” in about 6,000 products – things like plastic, fertilizer, photographic film, detergent, solvents and tires for cars, trucks and airplanes. And when the prices of a product’s “ingredients” increase, the overall cost of making that product surges, as well.
Some companies “ate” the increases, either by design or because they had to – which put the squeeze on their profit margins. Other firms raised the sticker prices of their wares. When that happened over and over again throughout the economy, overall price levels rose – and it suddenly got more expensive for workers to live. It cost more to gas up their station wagons, get new tires, buy groceries, furnish their homes. They want back to their bosses and demanded higher pay.
That further increased company costs, crimping profits even more.
Many companies that couldn’t afford higher input costs and couldn’t pay higher wages began losing money and went out of business. As a result, unemployment spiked frighteningly.
American now faced high unemployment, a stagnating economy, and rising prices for everything. That’s stagflation. That’s a picture of the stagflationary cycle. Things got so bad an economist came up with a measure of how miserable life was. The “misery index” was a simple tabulation of the combined inflation rate plus the unemployment rate.
A great “malaise,” as then-U.S. President Jimmy Carter described it, fell over the country.
He also referred to it as a “crisis of confidence.”
You get the miserable picture.
It took a gutsy, aggressive move to jump-start the economy out of its stagnant state. U.S. Federal Reserve Chairman Paul Volcker forced interest rates into the stratosphere, driving a wooden stake through the heart of inflation, and setting the table for an economic boom and falling rates in the decade to come.
But Volcker’s move, too, caused pain. One example: A mortgage loan, if you could get one, would cost you 20% at the peak.
So what are the parallels to what we’re seeing today.
We’re Calling “BS” on Stagflation
Just when you thought it was safe, on account of vaccines helping put the pandemic behind us, travel and restaurants and bars opening up, jobs being plentiful and wages rising, fearmongering pundits are now claiming that stagflation is the “new variant” that will trip up the economy’s reopening.
Investment banks, TV talking heads and now the mainstream media are dropping the “S-Word” as the next big threat normalcy.
My response: No way.
There’s no malaise spreading over the country, just this damned virus, and we’re dealing with it.
Unemployment soared during the pandemic. And while jobs have returned and employment has recovered, there are still about 5.3 million people who had jobs before COVID-19 struck who aren’t working now.
And while job growth is continuing, the 235,000 added in August were only about a third of the 730,000 that had been forecast. And economists aren’t seeing big job-growth gains and aren’t forecasting substantive drops in the unemployment rate. They’re worrying that a slowdown in job growth or spike in joblessness will boost stagflationary risks.
What these “experts” should be talking about is the end of the end of the stimulus checks – which means workers just go out and find new jobs.
What they should be talking about is how many more jobs are suddenly there for the taking.
What they should be talking about is how Walmart and Target and Amazon – the Big Three of U.S. retailing – are suddenly looking to hire a combined 350,000 people. And most of those are permanent (not temp) positions.
These “experts” should be talking about the training and tuition and benefits packages these companies are dangling as incentives.
They should be talking about all of these bullish developments.
But they’re not.
In the meantime, prices are rising – for just about everything – which signals “inflation” for sure.
But “inflation” is not “stagflation.”
Auto sales have been through the roof, especially for used cars. And that demand has driven sales prices higher as supplies dwindles and new car manufacturers can’t get the semiconductors needed to finish production.
Name a product that uses microchips and you’ll find that they’re in short supply – and that their prices have spiked.
Food inflation is rampant. Drought conditions across most of the world’s growing areas, and floods in others, means rising food prices aren’t “‘transitory” (temporary). These price hikes are “structural,” meaning higher prices are part of the structure of the economy.
Commodity prices are rising, and will likely keep rising as economists tell us they’re beginning a commodity “super-cycle” of long-lasting price appreciation.
U.S. inflation for August rose at a year-over-year pace of 5.3% — more than double the central bank’s 2% target. If the new consumer price index (CPI) report says inflation is anywhere near 5% when it comes out next week, the stagflation experts will be bellowing anew.
But the Big Picture here is one of “inflation,” not “stagflation.”
The Move to Make Now
Rising prices aren’t necessarily bad.
If they’re rising because of robust economic growth and demand that’s healthy because there are lots of good-paying jobs, that’s a good thing.
Rising prices are imbalances that eventually get knocked aside by new investments in factories and production equipment – something we’ll get to see in the semiconductor market.
Demand and supply will balance out and price increases will moderate and then fall with more robust competition. That’s where we’re headed, and yes, some goods and services inflation will come along for a longer ride than we’d all like.
But that’s not stagflation.
Because there’s growth.
In the second quarter, U.S. economic output as measured by gross domestic product (GDP) came in at 6.3%. That’s a big less than the first quarter’s rate of 6.4% — but still represents tremendous growth.
The New York Federal Reserve Bank’s GDP Nowcast calls for third-quarter growth of 3.8%. The Atlanta Fed’s GDPNow forecast, based on recent releases by the Bureau of Economic Analysis (BEA), U.S. Consensus Bureau, and ISM reports, calls for third-quarter growth of 2.3%.
Both estimates represent big declines from the second quarter.
Other forecasts are all over the place. The Philadelphia Fed’s Survey of Professional Forecasters consensus estimate is for growth of 6.8%. The Conference Board’s forecast is for 5.5% GDP growth.
On Oct. 28, when the BEA releases its “advance estimate” of third-quarter GDP growth, anything less than an 6% will trigger pundit predictions of stagflation.
That would be pure fearmongering.
Slow growth is still growth.
Of course, GDP growth is going to slow down. For heaven’s sake, the U.S. economy was growing at a 33.8% pace in the third quarter of last year – and no economic system in the universe could maintain a pace like that.
There’s pent-up demand and supply disruptions and other imbalances that will come back into balance. Growth is continuing. Corporate profits remain strong. And wages are growing at their fastest pace in more than three decades.
That’s not stagflation.
Stocks and bonds don’t do well when stagflation rules the roost, everyone should know that. Bonds get hit by rising rates, whether those rising rates are from rising inflation or the Fed raising rates to combat inflation. Stocks don’t do well if companies have to pay more for labor and see their profit margins eroded by increasing input costs and a slowing economy where there’s less demand for what they sell.
But we’re not in a stagflation environment.
So I’m going to tell you about a giant company that’s on sale right now – a company that will do well if there’s no stagflation, but could do even better if it turns out that there is stagflation down the road.
That company is Rio Tinto Group (NYSE: RIO), one of the biggest mining companies in the world – and one that happens to be the most-profitable, as well.
At a recent price near $68, Rio is nearly 40% below its 52-week high of $95.97 – a price reached in mid-May.
You want commodities? Rio’s got ’em.
You want to be on the “commodities supercycle?” Rio’s your stock.
You want to see the economy grow like gangbusters and global growth explode when COVID-19 is fully controlled? Rio is your homerun.
Are you afraid of the stagflationary headlines – despite what I’ve detailed here today? Rio is your way to play your way out.
It will let you make your best play.
That’s what we bring you here.