Stocks and bonds hit similarly under stagflation

The return on U.S. stocks and Treasury bonds has been material and At the same time Negative so far this year, recording losses of 19.0 per cent and 22.5 per cent, respectively This is an inconsistency to be tested. In general, the sharp fall in risky equity is matched by solid gains in secured bonds.

A diversified portfolio – part stocks, partial bonds – resists investors at least somewhat during bad economic times. If the stock sinks, at least the bond boom. But not this time. Why could it be?

Figure one shows that recent investment performance has been compared with four previous episodes between 2007 and 2021. ) The price of the bond goes inversely with the yield of the bond; The yield on a 10-year T-bond is higher than that Double In the last half year, it has averaged 3.15 percent so far this month from 1.47 percent last December.

Figure One also notes that in the previous four seasons (2019-20, 2018-19, 2011, and 2007-08), when the S&P 500 sank (average -25.2 percent), T-Bonds gained quickly (with an average return + 14.7 percent). In these four episodes Bond always gains and Exceeded Stocks by about 40 percentage points on average; In contrast, bond prices have lost and have in the last half year Perform less Stocks by -3.5 percentage points.

Benchmark US T-bond yields have doubled in the last half year as the Federal Reserve shifted its policy to rate-hiking. But the shift was a reaction to the high rate of inflation caused by the Fed itself establishing large increases earlier in the money supply. The CPI rate is now 8.6 percent (last year’s change in May), 4.9 percent compared to the previous year and only 0.2 percent from the previous year (as of May 2020). Before inflation accelerated, the Fed increased its monetary base by 87 percent from the end of 2019 to the end of 2021 (after reducing it to 11 percent in the previous two years); The Fed also increased M-2 by 40 percent in the two years ending 2021 (compared to just 10 percent growth in the previous two years).

Radically excessive money supply expansion has fueled the recent accelerated inflation in the United States initially, while demand for money has also increased significantly (like cash reserves) money supply expansion has not immediately manifested itself at a materially higher general price level. But in recent quarters the demand for money has begun to rise and even decline somewhat – a common occurrence when people begin to see materially high inflation and expect more from it; They try to balance the money more quickly to “beat” the rapidly rising prices. Low demand for money (high money velocity) only exacerbates inflation (or prevents it from declining rapidly).

When bonds and stocks go down a lot and at the same time it suggests that inflation is rising fast Even after the economy has stagnated or shrunk (Or will soon). For most economists today, this adjustment is almost-impossible. Trained in Keynesian demand-side models – and taught to ignore or ridicule supply-side models – they deny that high inflation can occur as soon as it weakens, let alone a stagnant or shrinking economy. This is why they did not predict the recent inflation boom. First, they denied that it would happen. Then, when it happened, they blew it away, calling it “fleeting.” Now as it continues, they point the finger at countless, irrelevant factors – leaving the Fed innocent. Real GDP has shrunk as inflation has risen lately; It was 1.5 percent lower at 1Q2022 and still flat at 2Q2022 Yet Biden is also a mixture of principles Does not give priority Economic growth.

We now have “Stagflation,” which first appeared in the United States in the 1960s and 1970s, before the supply-like cure of “Reganomix”. Keynesian policies were influential in the 1960s and 1970s. If any group today could learn about stagflation – how to do it and make predictions – it would be a group of Kinsians. They were shocked by the previous stability and demanded price control. Monetarists were also confused. Like the Keynesians, they have long opposed the value of gold, preferring to fluctuate at a fixed exchange rate. The monetarists got their will in 1971 – and the situation worsened over the next decade. Both “parties” have created that stalemate.

The term “stagflation” was coined in 1965 by Ian McLeod, a British conservative politician. He wanted to describe a rare situation where inflation was high even though the economy was not growing (or worse, was in recession). Keynesian modelers – who deny that inflation is a devaluation of money and reject the principle that inflation is only a financial phenomenon – blame the rapidly rising global prices for the real reasons: “supply push” and / or an economy that has “grown too fast,” and / Or an unemployment rate that is “too low.” After its currency in 1965, the use of “stagflation” spread beyond the United Kingdom to the United States and into the 1970s, mainly due to the abandonment of the gold exchange value (in August 1971). The stagnation was eliminated for more than two decades after supply-side policies were adopted in the early 1980s.

Table One refers to the huge difference in economic-financial results that is responsible for the demand-side Keynesian policy (1970s) versus the supply-side science policy (1980s). Literally both stocks and bonds lost ground in the 1970s, but both Acquired Ground in 1980; In the latter case it is that inflation has helped Eroded From the previous decade. The rate of economic growth between the two decades was not so different (due to the recession of 1981-1982), but the rate of growth Accelerated Throughout the 1980s, later Decreasing In the 1970s. Displacement of energy discomfort.

Today we see a decline in economic power again, unlike in the 1970s. Plenty of evidence over the years proves that prosperity inevitably slows down as the U.S. government grows. But it is also true that so far there are many intellectuals, policy makers, politicians and voters Likes Low economic growth, a low “human footprint”, the amount of growth that goes hand in hand with unequal rewards and climate change. These have always been with us, but many people now prefer to have them closed.

Beyond the hatred for economic growth and its inevitable, innocuous by-products (income inequality, climate change), we have noticed in recent years that a marginal bloc of economists is pushing “modern monetary theory” and convincing innocent policymakers and pundits that governments can limit (Or reliance on higher taxes), that central banks can raise money without limits (or higher inflation rates), and that finance ministers can issue to the public without limits (or higher interest rates). Only lately has this kind of myth been suspected, albeit a little bit.

Table two stocks and bonds together provide a broad and long-term perspective on the phenomenon of poor performance – and because of this Inflation. I have divided history since 1952 into three periods: 1) when both stocks and bonds record losses (9 cases), 2) when both stocks and bonds record profits (30 cases), and 3) when stocks and bonds mixed results Records (30) cases). The first combination is rare, because inflation is much higher and economic growth is much slower than the other two periods. The setting, of course, is the essence of stagflation.

Figure two further clarifies that the initial yield curve is a good predictor of the combined performance of spread stocks and bonds. The yield is spread Narrow (Average only 33 basis points) before the field when both assets register losses; On the contrary, Spread When both assets register a profit, the case is even broader (average 174 basis points). Historically, the yield curve has narrowed the most since the Fed raised its short-term policy rate (“fighting inflation”); And a Negative The spread (opposite the yield curve) has been eight recessions since 1968.

With excessive government spending, fiat money and public debt flooding the system in recent years, U.S. policymakers have made the next high inflation almost inevitable. Now, as the Fed tries to “fix” what’s broken, it wants to put one Break On the growth rate of the economy; So far, it has been “successful” because the US economy has stagnated. Over time, the Fed’s rate-hike could again reverse the Treasury yield curve and start a recession. That’s the only way a Keynes-led Fed knows how to “fight inflation.” It is useless, because relatively low production alone cannot reduce the price of the product.

I don’t expect modern monetary theorists to apologize for giving such bad advice in recent years. They are not necessarily done with advice. Their ideal prescription for high inflation is a high tax rate, a Hoover-like policy mix that, if adopted, can easily transform a mild and short recession into long-term and deep depression.

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