Why should a bull be afraid of Stagflation? Somebody bullish on life is someone who is a producer of a net overplus. Being bullish on the markets is a matter of finding the markets that are representing economies producing overpluses.
On one hand markets have been shaking off on fears of an extended form of reflation called recession and yet on another the all knowledgeable squakboxes say markets are afraid of stagflation! Something does not add up if negative is negative and positive too is also negative. This is the tell of the times that everything appears negative and thus the near future is likely to witness the dawn of a new cycle. Why cant a new cycle take over before the imagined troughs of the ongoing cycle are seen?
Inflation in pure and simple commonsense terms is a redistribution of income and or wealth. Those with a net positive wealth / income stand to gain and those with a net negative income and / or wealth lose when inflation persists. However when inflation goes down those with an overplus stop gaining and those with a deficit accelerate their losses. So, the trick is that manageable inflation is what is the vehicle of all progress in the organised economic world.
Today when Hang Seng sold off after a large upgap opening the moment it was announced that Hong Kong banks are not following lock-in-step with the US Fed one sat down wondering if efforts to contain a redistribution of income will not accentuate the redistribution of wealth. Like energy cannot be destroyed but only transformed it is likely that inflation of consumables being contained will transform into a higher inflation of assets. Maintain the rising interest rate differential and prepare to face a wall of cash gushing in. As the wall hits the larger packets of liquidity are grabbed first by hands that have an overplus and thus can afford to invest and speculate. Inflation morphses into expanding the asset pricing, thus.
So if stagflation is similarly in commonsense terms (by the way the word economics originates from Oikon Nomics — The study of household preferences — which cannot be confined to ivory towers and thinktanks alone) an apparent redistribution of wealth it is the perfect background for speculation to be a good business of several others. Then you have the squakboxes labelling that there is a fear of stagflation and we know fear is the aphrodisiac on which bulls will persist further, despite the recent flounder. It suits a speculation even if all / most economies are going to be running on treadmills and be actually reaching nowhere except where they are since it is far better than the talk of death and disease in economies that is near given in most minds now.
At the risk of repetition, I would like to bring to the table the striking mirror image that is what the Capitalistic Communists are doing in China today of what the Communist Capitalists in Russia did in the last century. The Party in Russia kept on selling the commodities down holding the value of its own money higher while the Party in China is driving the commodities higher holding the value of its own money lower. If what Russia did was dangerous it is easy to see that what China is doing is certainly more dangerous. Every accounting Shenanigan in the universe has had fiddled with managing the Income Statement with the Balance Sheet or vice versa.
America, to a neutral observer with a dispassionate view of what you are doing, you are doing fine. Facing the reality and not fiddling. By this count alone, ain't it clear that the Chinese decision makers find the American money more useful than their own, in the longer run?
Fear and greed are the extremes of the emotional pendulum and when observers see the extremes while the pendulum is just in equilibrium (if there is another commonsense meaning of stagflation it perhaps is the solitary variant of inflation with highest relative equilibrium) it is that zen moment which builds the business of speculation further. What has been correcting at a systemic level globally is the underpricing of risk. Risk getting dearer cannot necessarily imply that opportunities will get scarcer. Recent few years' correlation may be an aberration in the larger cycles of progress. If risk and returns are not to be seen as coexsting together on the same Mobius Strip of perceptions then the fortunes that were created by the forefathers at times of war, turbulence, mass immigrations, disease and famine cannot be explained. Don't worry Wall Street you are doing fine too, since stagflation is going to be round soon, speculators will do well. Risk itself is the opportunity, always and very much today.

Jim Sogi adds:

"Most economies are going to be running on treadmills and be actually reaching nowhere"

Like SP this week and last, a treadmill with 30 point range. Reminiscent of the 70's stagflation scenario and its market 40% range. This scenario is a good middle ground between the bear's crash scenario and the bull's ever higher call. I guess you could call it the Rancher scenario: works the range between the bulls and bears.


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