Monday, May 1, 2023

The inflation - growth cycle - The problem is knowing where you are and where you are going



It is important to keep the core investment process simple with respect to growth and inflation. A simple case is the inflation growth circle cycle. If you are seeing growth weakness and inflation is starting to fall, we are in a stagflation environment. You want to hold cash, defensive stocks, and value. The industries include utilities, pharmaceuticals, and consumer staples. Investors may want to reduce oil and gas exposures. As you move through growth and inflation changes, the sector exposures should change to take advantage of changing risk and opportunities.


At the top of the circle is when inflation peaks and the bottom represent the inflation low. The right side of the circle is when output gap peaks while the lefthand side is when the output gap is at a low.

The problem is that the inflation growth circle is never clear. What is growth now? What will it be in six months? Will inflation fall quickly? These are expectational markets, so the inflation and growth of today does not matter as much as the expected growth and inflation. As usual, you must know where you are before you can say where you are going. Unfortunately, the consensus on each of these questions is constantly changing.


 

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