The Worst Possible Outcome

I believe the worst possible outcome for the equity market is stagflation and there is increasing evidence that is where we are heading. The best thing the bulls have going for them is that yields are so low everywhere else that in comparison the equity markets look much better. But how would those 2.5% dividend yields look in a world with inflation and little growth?

The CRB RIND index hit a new all time high yesterday, all the while we are seeing competitive currency devaluation. QEII would only exacerbate the situation. I would point out that the first time the Federal Reserve engaged in quantitative easing the dollar was strong. That is not currently the case and the results could differ this time around. To those that point to the wisdom of the bond markets I ask what was the bond market saying in 1982? Could it have been more wrong?

2 comments:

Anonymous said...

I'm betting on a Japan-like scenario, except stagnation with mild inflation instead of stagnation with mild deflation. For both Japan and US, the underlying problem was the hung debt overhang and the unwillingness to clean this overhang up quickly, which might cause social disruption, but rather to work it off slowly, even though that causes stagnation.

The bond market isn't wrong. It is simply forecasting extended monetary easing while the the debt overhang gets worked off.

Burstingn of housing bubbles in Britain, Australia, and China will tend to check any worldwide inflationary impusles. Who cares about commodities? They play a small role in a modern economy. How many bushels of wheat did you eat last year? What difference if the price doubles?

Tsachy Mishal said...

I think you underestimate the amount of commodities we consume. Additionally, the Chinese guys slaving away in the factories are what keep prices low. They need to be fed and kept warm.