Are we Heading for Stagflation in H2-2014?

China US Fedstagflation

Dear PGM Capital Blog readers,

Today, June 30, 2014, marks the end of H1-2014. Markets in the USA are near all-time high, although, the fundamental economic figures aren’t that rosy.

Due to this most investors are asking themselves, “What can we expect for the world Economy and the markets in H2-2014”

  • Will the markets correct in order to be in-line with the bad economic figures of H1-2014?
    or
  • Are the Economic figures of H1-2014 just “Noise” in a rosy global economy picture?

In this article we’ll try to find an answer for what is next for the world economy in general and the USA economy in particular.

LATEST USA ECONOMIC DATA:

Q1-GDP adjusted to -2.9%
On Wednesday, June 25, 2014, the USA Economic Department reported, that the country has turned in its worst quarter in five years during the first three months of 2014, shrinking more sharply than previously estimated.

The nation’s gross domestic product in the first quarter fell at a 2.9% annual rate, vs. the 1% contraction previously believed as can be seen from below chart.

USA Inflation rise to 2.1%:

On Tuesday, June 17, the USA Labor Department reported that annual inflation in the country rose above 2 percent for the first time since late 2012 as a surge in energy prices added to broad-based inflation in other categories of consumer goods and services.

Overall prices jumped 0.4 percent in May, the biggest gain in almost two years, and are now 2.1 percent higher than a year ago as can be seen from below chart.

14-06-17-cpi

PGM CAPITAL COMMENTS:

The above figures may be the first signs that the USA and the world appear to be heading into a stagflation period. We were therefore amazed to hear, that the USA FED Chairlady, Ms. Janet Yellen, is telling us that recent inflation data is “noise” and that they expect economic growth to rebound from the first quarter’s miserable performance.

However, what if  Ms. Yellen and her colleagues at the FED are wrong and these figures are indeed the first signs that the USA and the world may be heading for stagflation?

Stagflation is defined as a condition of slow economic growth and relatively high unemployment – a time of stagnation – accompanied by a rise in prices, or inflation.

Could we be looking at such a scenario today and, if so, what are the early warning signs?

  • Slowing Global Economic Growth:
    • The revised GDP number indicates that the U.S. economy contracted by -2.9% in Q1-2014.
    • The World Bank recently dropped global-growth projections to 2.8%.
    • The ECB set negative interest rates to fight deflation in Europe.
    • Economic growth in China seems to be slowing.
  • Rising Commodity Prices and Inflation:
    • Oil increased with 3.07% during the last 6 months as can be seen from below chart.
      Crude Oil Monthly Price =Nov 2013 - May 2014: 3.150 (3.07 %)=
    • Food and especially Coffee prices are rising,  for which the latter one rose approx. 75 percent during the last six months, as can be seen from below chart.
      Coffee, Monthly Price =Nov 2013 - May 2014: 92.490 (75.37%)=
    • Gold and Silver as the inflation hedge rose respectively with 10.37% and 8% during the first half of this year.

Rising commodity prices are bad news for consumers who make up 70% of the U.S. economy.

  • Persistently high unemployment and decreasing labor force participation rate
    • The USA labor force participation rate declined in May to 62.8 percent, its lowest level since 1977 as can be seen from below chart.
      Screen Shot 2014-06-30 at 3.19.08 PM
    • The unemployment rate in the European Union lies currently at 10.6 percent.

As the old saying goes

“it’s a recession when your neighbour is out of work but it’s a depression when you’re out of work.”

Stagflation puts the Central Banks like the FED and the ECB between a rock and a hard place because interest rates need to climb to control inflation, which, in turn, slows economic growth.

Keep in mind that Central Banks have been attempting to stimulate their respective economies with low interest rates and money printing, but in a period of rising inflation, interest rates will climb, and those Central Banks will be forced to turn away from its easy-money policies.

Money that comes “out of thin air” may someday go back from whence it came, with the consequence that fiat currencies will fall against the goods and services it is called up to buy.

On the other hand, the stagflation period of the late 70’s has proven, that the price of Gold, Silver and other precious metals as a hedge against inflation have gone through the roof.

During the first half of 2014, precious metals out performed all major indexes.

Can this be a sign that investors that are looking ahead already are fleeing to precious metals as the ultimate safe haven?

Until Next time

Yours sincerely,

Suriname Times foto

Eric Panneflek

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