The Case For Stagflation: A 1970s Economic Redux?

The Case For Stagflation: Prepare For Higher Interest Rates & Energy Prices

Note that this article was co-written with Larry Footer.

Understanding how trends begin and end is often considered an art – but at Market Inflections we prefer to use science. We employ algorithms which help to identify when trends are most likely to begin and end. Today we want to highlight the case for future stagflation in the US Economy.

We typically use these algorithms (which we have named “Euclid”) for portfolio analysis and trading, but there are times when they paint a bigger picture about the economy as a whole. As we are preparing to close the books on 2016, this is one of those times where Euclid has something to say about where the US economy may be headed in the months and years to come – and it’s not painting a very bright picture.

Stagflation is an economic phenomenon marked by the combination of stagnation and inflation: the economic growth rate slows (or goes negative) while the prices of goods and services rise.

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The term stagflation was coined in the 1960s in Great Britain but became well known in the 1970s when oil supply shocks simultaneously sent commodity prices higher as the US and much of Europe entered economic recessions.

Between 1970 (prior to the oil shocks) and 1980 (as Stagflation reached an extreme) Interest Rates rose from 5% to 20%, Crude Oil skyrocketed from $3 to $38, and the Dow Jones Industrial Average dropped 45% adjusted for inflation as three recessions devastated the US economy.

Since the early 1980s, Stagflation has not reared its ugly head – so what would lead us to conclude that a new wave of Stagflation may be on the horizon? This outlandish hypothesis is supported by the fact that Euclid has generated several signals in market areas that suggest this.

financial market uncertaintyHere is a sampling of of signals:

1.  Interest rates are bottoming and Euclid expects rates to trend higher over the next 10-20 years.   i.e. 10-Year Treasury Yield (INDEXCBOE:TNX)

2.  Energy prices are bottoming and Euclid expects them to trend higher over the next 4-5 years.   i.e. Energy Sector (NYSEARCA:XLE)

3.  The stock market is topping and Euclid expects equities to trend lower over the next 4-5 years.   i.e.  S&P 500  (NYSEARCA:SPY)


So, could we see a repeat of the 1970s over the next number of years? By no means are we suggesting that interest rates will rise 400%, oil will skyrocket by over 1000%, or stocks markets will lose half of their value. However, in our final report for the year we present the Case for Stagflation and explain how Euclid is suggesting that in the years to come interest rates and energy prices will rise while stocks and equity markets struggle.

If you would like to download a complimentary copy of this report, please visit this page of our website.  Thanks for reading.


Twitter:  @interestratearb     @larryfooter

The author may have positions in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.