Stagflation is not transitory

Alexander Roznowski
3 min readMar 2, 2023

The stagflationary crash might surprise everyone.

Since January:

  1. Dec. CPI revised higher by 0.2%
  2. Nov. CPI revised higher by 0.1%
  3. Jan. jobs report 200% above expectations
  4. Jan. PPI revised higher by 0.3%
  5. Fed futures added 3 rate hikes

Meanwhile, stocks are are in general up YTD. If this can’t break the market, what will?

I would argue that we are at the peak of the business cycle:

GDP is still rising, the labor market is extremly robust and unemployment is at a record low. The soft-landing narrative, optimism about inflation falling, better-than-expected earnings, and China’s reopening are also playing a part in the surge in the stock market.

Everything you don’t see when you’re in a recession but at the peak of the business cycle. Goldman Sachs Jan Hatzius recently cut the probability that the US economy will enter a recession in the next 12 months from 35% to 25%. CNBC reporter Jim Cramer calls for a soft landing. Furthermore, President Biden says the risk of a recession is “still very low”.

I’m more skeptical about the soft landing narrative and would argue that the current Federals Fund Rate at around 4.5% rate, set up by the FED, is not restrictive enough.

Consumers still spend more than they save because the yields of 2–4% on their savings accounts are still too low to be motivated to save. While inflation is still going up, it makes more sense for most people to spend than to save. That’s the dire truth concerning consumer habits.

The only tool that the FED has is to increase the Federal Funds rate to a restrictive level. A level that will probably cause some form of pain in the equities and bond market.

No one can predict the future, but you have to admit that there is a higher percentage chance of a recession than ever.

But first, let us look at a few factors that could still hold stocks back:

  • Valuations are not cheap compared to the past — and that means the interest rate could keep a lid on how much stocks grow.
  • It’s very unlikely earnings will grow by much in 2023, but it could hamper stocks even more if companies guide more negatively about 2024 earnings.
  • Goldman believes that markets have already priced in a soft-landing and above-trend growth — so if that doesn’t pan out, we could well see a sell-off.
  • Economists at the bank believe that inflation has peaked in Europe and the U.S. — so we could see a pullback if they’re wrong.

It’s quite likely that the Fed eventually breaks something big enough that they have to pivot. But that also means that we probably see a relatively sizable financial dislocation on the way to that eventual turning point.

Some of us have been predicting a long and severe recession and made a detailed case for why we are headed towards a Great Stagflationary Debt Crisis, NYU Stern economist Nouriel Roubini tweeted to Burry on Wednesday.

In addition, Elon Musk has warned about a likely recession:

“We’ll probably have a pretty difficult recession this year,” he said. “When there’s a recession and people panic in the stock market, then the value of stocks can drop sometimes to surprisingly low levels.”

“In 2017, we had $20 trillion of national debt, five years later we’re knocking the door 32 trillion. That’s a growth rate for an excellent growth for the economy.” — Leon Cooperman

Paul Tudor Jones says that the financial conditions will be so dire that the American government will have to fiscally retrench in 2024.

Nassim Taleb also added: “It doesn’t rain money anymore. Disneyland is over.”

On top of that, Michael Burry said:

“What strategy will pull us out of this real recession?” he said in a now-deleted tweet on Tuesday. “What forces could pull us so? There are none. So we are really looking at an extended multi-year recession.”

“Difference between now and 2000 is the passive investing bubble that inflated steadily over the last decade,” he wrote. “All theaters are overcrowded and the only way anyone can get out is by trampling each other. And still the door is only so big.”