Stagflation
Bill Gross pretty much knows what he’s talking about. In his latest piece, he’s both talking his book and giving some good advice.
He warns that we are headed toward inflation with the Fed asleep at the wheel. I’d only add two things:
1 – the Fed is not asleep, but wide awake and gunning for some level of inflation. I just think they are a bit over confident in their ability to control the monster, once it’s been unleashed. They are committed to this path, and perhaps with good reason, because they fear deflation more than they fear inflation. No one wants to end up like Japan in the last 15 years or the US in the 1930’s. In addition, it sounds a little melodramatic to compare the US to Zimbabwe or the Weimar Republic. So, given the choice, open the throttle.
2 – It looks like were headed toward a combination of inflation and slow growth called Stagflation. Today’s economic reports suggest employment and business activity are slowing again, but gold is trading up around $1500/oz. Also, 5 year TIP spreads are at 242 bps. This makes in increasingly difficult for the Fed to argue inflation expectations are well contained. Until their hand is forced, however, the Fed will keep on printing.
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