Are the US and global economies headed for a period of inflation or deflation? It’s a question that puts analysts at loggerheads. Although both sides have merit.
The recent slide in crude oil prices — to levels not seen since 1972 — would support the argument for deflation, reflecting not only a glut of supply, but also low demand.
The same, although far less extreme, is true for many soft and agricultural commodities (think sugar, wheat, corn and soybeans), which are sitting at 10- to 12-year lows.
Then, there’s the 11-year low in the manufacturing PMI. As businesses shut their doors, new orders and output has fallen below the nadir of the 2008 financial crisis.
It all points to a deepening global recession, and adding fuel to the fire are the now 38 million people who have filed for unemployment benefits in the US.
The final nail in the coffin? The US dollar has gone up, thanks to recent demand and limited supply.
“The final nail in the coffin? The US dollar has gone up, thanks to recent demand and limited supply”
I could stop right here with all of you nodding your heads in agreement with the deflation argument — but not so fast.
Look back to 1972, when oil traded as low as it has this past week. Within a year, prices were skyrocketing, following the Yom Kippur War and the OPEC oil embargo that followed.
Further the US Federal Reserve’s easing of rates to help boost the economy (still suffering from the Watergate scandal and the extremely unpopular Vietnam War) the consumer price index began to rise.
The mid-70s saw a period of stagflation, which quickly led to hyperinflation. In the early 80s, this came to an end as the Fed raised interest rates to over 20%, which is what triggered a recession.
Today, we see some comparisons. We don’t have a war, but we do have a US president threatening to blow up Iranian vessels.
Secondly, food shortages are beginning to appear. Egypt for example, is starting to stockpile wheat as they voice concerns about food supplies due to the pandemic. With the labour force greatly diminished, the atmosphere is one spark away from a hoarding frenzy.
Perhaps investors should prepare themselves for the 1970’s déjà vu.
“Perhaps investors should prepare themselves for the 1970’s déjà vu”
Michele Schneider is director of trading education at marketgauge.com. With more than 40 years’ experience, she is an expert on swing trading, making returns of up to 50% per year. Her book, Plant Your Money Tree: A Guide to Growing Your Wealth, was published last year.