Let Us Speak About Stagflation

Good Morning Ladies and Gentlemen

”It’s never stupid to be afraid of shit that can kill you.”

Anna Windsor, from Bound by Light (a book I have not read)

Stagflation is a challenging economic phenomenon characterised by high inflation, low growth, and elevated unemployment rates. In this week’s edition of „Stefan’s Weekly,“ I wish to focus on this topic. As I observe the events unfolding in the world’s largest economy, I struggle to identify any sensible processes or coherent implementation of effective strategies to address the current situation. While it may still be early in the unfolding events, it seems prudent to prepare for the worst while hoping for the best, rather than the inverse.

Stagflation a Definition

Stagflation is a difficult economic situation characterised by high inflation, low growth, and high unemployment. It can result from a negative supply shock that reduces an economy’s production capacity and increases costs or a mismatch between aggregate demand and supply.

Why Is Stagflation Challanging

Stagflation poses several challenges for policymakers, businesses, and consumers. It can lead to lower living standards and higher poverty rates for consumers, lower profits and uncertainty for businesses, lower tax revenues and deficits for governments, and higher interest rates and lower bond prices for investors.

How To Overcome Stagflation

Overcoming stagflation is problematic because it requires a delicate balance between monetary and fiscal policy, both of which can have unintended consequences. Monetary policy can curb inflation by raising interest rates and reducing the money supply, exacerbating the economic downturn and increasing unemployment. Fiscal policy can boost growth by increasing government spending and lowering taxes, but it can also fuel inflation and increase government debt.

Stagfaltion Protection

Defensive stocks deliver stable earnings and reliable dividends. These stocks are generally less affected by economic cycles, making them solid investments during challenging economic times due to their consistent demand. Real estate represents another valuable asset class. It offers protection against inflation and economic downturns while generating rental income. Investing in commodities, including energy, metals, and agricultural products, can be rewarding during stagflation, as they may benefit from rising prices due to inflation and supply shortages. However, this approach carries risks, including price volatility and potential regulatory changes. Gold is another dependable asset that safeguards against inflation and currency devaluation, maintaining its value over time. Its scarcity and durability make it less susceptible to fluctuations in supply and demand, usually providing solid performance during periods of stagflation. Last, Treasury Inflation-Protected Securities (TIPS) are government bonds that hedge against inflation by adjusting their principal value by the Consumer Price Index (CPI). They provide fixed interest payments every six months, making them an attractive investment choice during stagflation.

Conclusion

While stagflation presents a significant economic challenge, it doesn’t necessarily mean disaster for your investments. You can effectively navigate these turbulent times by grasping the intricacies of this rare economic phenomenon and adopting appropriate investment strategies. The resilience of defensive stocks and the lasting appeal of real estate, gold, TIPS, and commodities can partially safeguard your wealth and potentially even flourish in a stagflationary environment.

Finally

Ladies and Gentlemen, my last week’s “Stefan’s Weekly” led to some very positive feedback. Many thanks! Some of you asked for my opinion regarding a perceived change in the political landscape. Let me share the following with you. I firmly believe that any political landscape is, by definition, dynamic, and thus stability, even if perceived, is not guaranteed at all. Furthermore, I feel that humans often suffer from cognitive dissonance, which can create confusion regarding beliefs, ideologies, and worldviews. Consequently, many find it challenging to think abstractly and prefer to seek guidance from a rigid ideological framework. The drawback of this tendency is that many individuals lean towards one of the simplified dichotomies, as concepts such as good and evil and binary distinctions provide readily accessible answers and a sense of emotional certainty. This, of course, allows one to avoid grappling with the complexities and contradictions inherent in a complex reality. But is this really the right approach? Please think about it!

Ladies and Gentlemen

As always, please share your opinion with me. Feel free to send your messages to smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 153
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li