Welch: Concerns about stagflation return | Opinion

Since June, I have been expecting stocks, bonds and the dollar to grind lower while commodities per se begin to head higher. I have been stating loudly the time is finally at hand for commodity prices to finally begin to gain ground on stocks, shares, equities and the Dow Jones.

My reasoning for such a scenario to emerge is simple: The spread difference between stocks and commodities is the widest in nearly 50 years in favor of stocks.

Of course, I am not suggesting that stocks have to crash and burn from here, but they certainly could. All I am suggesting is that commodities are historically cheap compared to stocks.

My work hints that sooner than later, stocks will either stop rising or actually move south while commodity values cease going down or move north. However, through and including this week, stocks continue to gain on commodities.

To my chagrin, the scenario I have been touting for two months has yet to unfold. Believe me, there are a host of other writers, analysts, market gurus and so on who believe the total opposite.

But there is one well-known, high-profile individual that came forth this week basically predicting what I have been saying. His name is Alan Greenspan, former Fed chairman.

From Bloomberg News, dated July 31, titled “Greenspan Sees Return of Stagflation Unseen Since 1970s,” the first line states: “Little to slow growth and rising inflation? That’s what’s in store for the U.S. economy, according to Alan Greenspan.”

The next two paragraphs read: “The former Federal Reserve chairman told Bloomberg the era of sluggish expansion without any meaningful increase in inflation is bound to end — not with an acceleration in growth, but with faster price gains. In other words, stagflation is on the horizon and that bodes poorly for the American economy.”

“We’ve been in a period of stagnation since 2008 as a consequence of the sharp decline of capital investment and productivity growth,” Greenspan said during a telephone interview. “But stagflation is about to emerge. We are moving into a different phase of the economy — to a stagflation not seen since the 1970s — that is not good for asset prices.”

“By any measure, real long-term interest rates are much too low and therefore unsustainable,” the former Federal Reserve chairman, 91, said in an interview. “When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”

What Greenspan did not mention is that down through history “as bonds go, so go stocks.” History shows clearly if bonds fall deep enough and interest rates rise high enough, it will impact the stock market in a negative manner.

And the one force that can send bond prices much lower than expected and interest rates higher than expected is rising commodity prices that spawn inflation. The greatest threat to bond prices always is inflation.

Needless to say, Greenspan’s comments about bonds being a “bubble” and inflation poised to rear its ugly head were widely scorned on Wall Street. After all, it was in December 1996, when the dot-com bubble was being watched carefully, that he used the phrase “irrational exuberance” to hint the market was vastly overvalued.

Supposedly, he thought of that particular phrase while in the bathtub writing a speech. Anyway, following the use of that phrase, stocks across the globe dropped sharply, but also recovered immediately. It was not for another three years and at far high levels before stocks, led by the Nasdaq, did a historic nosedive.

In 2016, hard assets as measured by the Bloomberg Commodity Index posted a gain, 11 percent, for the first time in six years. This year, the same index is down nearly 8 percent.

The index was in the penthouse in 2016, but thus far in the outhouse this year. Still, the year has another four months to go.

If my work is correct, as well as the words spilling from the lips of Alan Greenspan, inflation should begin to pick up in the final months of this year, leading to lower bond prices, higher interest rates and a lower or stagnant stock market.

And now that Greenspan is on the same page as yours truly, I feel more confident about what lies ahead. Unless, of course, we are both proven wrong.

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