Det er sandsynligt, at USA står over for en stagflation i år og næste år – for første gang i 40 år – altså med økonomisk stagnation og en høj inflation. Advarslen har i lang tid været ført frem af professor Larry Summers, og Merrill forklarer i en analyse indgående om argumentationen, og hvad der menes med stagflation. Det er særdeles svært for en centralbank at afværge en økonomisk nedtur, når priserne får lov til at stige i en længere periode. Den amerikanske centralbank har i lang tid nægtet at tage de stigende priser alvorligt. For investorerne betyder det, at value-aktier vil klare sig bedre end vækstaktier, fordi value-aktierne bedre kan klare det nye, barske miljø, netop fordi det er virksomheder, som har en mere solid indtjening. Value-indeksene har i år klaret sig langt bedre end vækst-indeksene med en forskel på mere end 10 procentpoint.
Stagflation Ahead
For the first time in over 40 years, the U.S. economy is facing stagflation in 2023 and 2024 as the Fed tries to get a handle on inflation, which keeps surprising it and the consensus to the upside.
In a March 15, 2022, Washington Post article, Harvard Professor Larry Summers described the situation as follows: “The Fed’s current policy trajectory is likely to lead to stagflation, with average unemployment and inflation both averaging over 5% over the next few years—and ultimately a major recession.”
As Professor Summers notes, (1) a year ago they expected inflation around 2% for the next year; (2) six months ago they were sure it was transitory; (3) well into the winter, the Fed was still buying mortgage-backed securities after home prices had risen by 20%. Importantly, he notes, “no explanation has been offered for these rather momentous errors,” which raises questions about the Fed’s understanding of the inflation process.
Stagflation arose in the 1970s under similar circumstances, which the famed economist Milton Friedman had predicted in his December 1967 Presidential Address to the American Economic Association. According to the conventional wisdom at the time, economic policy could maintain a lower unemployment rate by tolerating a higher rate of inflation. Professor Friedman explained how this provided only a temporary benefit that would ultimately be reversed and even worsened by the need to eventually stop inflation expectations from continually rising.
The process of reducing inflation and inflation expectations would ultimately raise unemployment even as the lagged response of inflation to prior excessive demand stimulation would be pushing prices higher. Higher unemployment with rising inflation was dubbed “stagflation” a decade later, when the spiraling uptrend in inflation expectations eventually forced the Fed to respond, causing the biggest sustained rise in unemployment since the 1930s.
As Professor Summers notes, the most important change in the latest Monetary Policy Report to Congress “was in the wrong direction—the removal of the discussion of various monetary policy rules that had suggested policy was dangerously loose.” As we noted in past reports, economic research over the last century has documented that inflation is always and everywhere a monetary phenomenon. In particular, high inflation requires rapid money-supply growth, which has been true across countries and historical time frames.
High inflation like that in the 1970s is associated with much higher money-supply growth and, conversely, decades of low inflation are associated with below-average money-supply growth, as during the decade after the Great Financial Crisis (GFC) of 2008-2009. Currently, the Consumer Price Index (CPI) shows inflation up 8.5% over the 12 months through March 2022, which ranks with the highest rates of the past century, as does the growth rate of the M2 money-supply over the past two years.
The Fed’s refusal to acknowledge this primary source of inflation is similar to its policy failure in the late 1970s, when it kept raising interest rates but kept them below the rapidly accelerating inflation rate as money-supply growth was allowed to remain excessive. Eventually, Fed Chairman Paul Volcker had to raise interest rates far above inflation to slow the money-supply growth rate and bring down inflation. He explicitly set a money-supply target that did the trick. Just as the easy money policies of the late 60s and 70s helped finance the “guns and butter” fiscal deficits of that era, Mr. Powell’s extremely easy money policy has financed the biggest deficit since World War II, with similar results.
For investors, it is also important to recognize the implications of this new volatile inflation environment. Bringing down inflation without a recession is very difficult given how far behind the curve the Fed has fallen. Also, in the current environment, risk-parity strategies don’t work. In the old, low-inflation environment, Treasurys offered positive returns when equity returns went south. However, historical data show that in high-inflation environments, bond and stock returns are positively correlated. It is thus not surprising to see both broad stock and bond indexes down by mid-single digits in Q1.
The massive outperformance of Value stocks and severe bear market in long-duration Growth stocks is another implication of this new environment. Year-to-date, MSCI World Index Value (+6.3%) has outperformed Growth (-5.6%) by over 10 percentage points, according to BofA Global Research. Growth stocks benefited from the low interest rate/slow growth environment after the GFC, and investors crowded into the Growth theme and avoided Value stocks. The new environment has caught them by surprise.
This research finds that “the majority of funds do not appear well positioned for the current environment of slowing growth and high inflation…Funds are underweight Energy in all regions and underweight Materials in most regions, so do not
appear positioned for continued inflation.”
Q1 earnings reports to date show why Value is outperforming. While Value and Growth stocks are delivering similar revenue growth of just over 10%, Value is delivering stronger earnings per share (EPS) growth of about 8% versus 4% for Growth, according to Credit Suisse tally of Q1 earnings reported through mid-April.
In the early stage of the inflation breakout last year, most companies could pass on price increases, and margins were maintained pretty much across the board. A year later, with real incomes declining as inflation outpaced wage gains, consumers are becoming more price conscious, and more companies are having difficulty passing on higher costs, squeezing
margins.
Value stocks are winning, as they are better able to maintain margins. Forward-looking indicators of profits, like earnings revisions ratios (ERR) find that while overall downward revisions have begun to outnumber upward revisions, Value sectors, such as Energy, Financials and Materials, continue to see relative strength in their earnings outlook, with more upward revisions than downward revisions. As growth slows over the next year or two, this pattern is likely to continue, in
our view. In addition, rising rates are likely to continue shrinking the big relative valuation difference between Growth and Value stocks. Slower revenue and earnings growth along with higher interest rates are headwinds for Equities, especially Growth stocks.
