Thursday, December 6, 2007

Markets ill-prepared for stagflation

Market insight: Markets ill-prepared for stagflation
The outlook for financial markets in 2008 is not encouraging. Although the past five years have seen the strongest global economy since the late 1960s, the expansion has now reached the cyclical juncture at which market returns are typically very weak or negative.

The US economy is leading the way, having already entered a stagflationary phase. Such an environment is poisonous for financial assets. Since 1929, the average real return from US equities, bonds and bills has been markedly negative during years of below trend growth and above trend inflation. Equities, by way of example, average a negative 1.9 per cent real return during such years.

MAB spoke of this article in the comment section of a previous article.


Anonymous said...


I need a flow of funds fix. Can you graph corporate profits v. gdp and corporate profits v. wages? I'm curious what todays ratios look like in comparison to the inflation and stagflation periods in the 70's and early 80's. With the huge run up in personal debt, eventually wage earners will demand more $. MEW appears to be dead. Wage earners have far less barganning power today than in the past, but they will either increase their wages or decrease their spending. Either way, corporate profits should suffer.

Anonymous said...

Another point, most of the other blogs I follow remain too fixated on housing. To their credit, they correctly forsaw a bad situation long before the "experts", but now that housing is a mainstream issue its time to move on. I positioned for the housing bust two years ago. Its time to focus more on the future.

Stagflationary Mark said...


I will be posting a lot of charts from the most recent Flow of Funds report in the coming days.

I'm being a somewhat lazy bum in the short-term though. I'm still reeling from the change in the I-Bond cap.

I can't take my eyes off the real yield situation either. Real yields are bouncing higher.

Then there's the employment report. Fewer people hired than the rate of population growth would require? Yet wages are up? That's EXACTLY how the productivity miracle worked in farming. Automate the jobs away (modern farming equipment) but those who remain will be paid more (combine harvesters require skilled labor).