Investing For An Era Of Stagflation

A stagnant economy, high unemployment and rising inflation. The word for this combination of events is called stagflation.

Last seen in the 1970's, economic stagflation began with a huge rise in oil prices, and continued as central banks used an excess of stimulative monetary policy to counteract the resulting recession.

Stagflation was the economic buzzword during the Presidency of the last liberal Democrat with a majority in Congress. Jimmy Carter was also going to bring change to the nefarious practices of government inside the belt way of Washington D.C.. He campaigned on the slogan "A Leader, For A Change" and won.

Four years later, there was eighteen percent inflation and interest rates around twenty per cent. National unemployment was over twelve percent and Americans were waiting for gas in long lines of cars. Every night on evening television, the national news media would add another day to the ongoing count of inaction in a long hostage crisis with Iran.

It looks like America is about to take a trip back to the future. Today, like in the 1970's, Iran is an international concern, as the country ignores years of United Nations sanctions and races to build a nuclear bomb.

Meanwhile, the recent real unemployment rate in the United States exceeds 17%. The Fed has been stimulating the economy for the last two years to counteract the worst recession since the great depression and is now looking for an exit strategy.

The huge United States budget deficit has become a national crisis. Meanwhile, a liberal Democrat (Barack Obama) is the current President of the United States and has a Congressional majority. Obama won the election last year on the themes of hope and change but everything inside the Washington belt way still remains the same.

It looks like a return to the United States economy of the late 1970's and it all adds up to economic stagflation for the next several years. Our economic future reality is high unemployment, slow domestic growth and rising price inflation.

So, how do we invest for this new era of stagflation?  Lets first review two things that we should not do.

1. Do not buy long term bonds or Treasuries.

Inflation eats into the total return of bonds and bond prices do not do well in this type of economic environment. Bond rates will rise as bond prices fall and investment principal will be lost. The longer the duration of the bond, the worst the overall result. 

2. Stay Away From Slow Growth Utility Stocks.

Interest rates are sure to rise and those attractive returns on utility stocks will not look so attractive after the stock price falls. Invest in stocks that have a catalyst for earnings growth that provides a good dividend.   Relatively risk free and growing money market fund returns will look much better than slow growth utility stocks or long term bonds in the years ahead.

Investments should be made in the stock of companies positioned for growth in an era of rising inflation. Companies that are global in nature and can take advantage of rapidly growing emerging markets outside of the United States.

Invest in companies in gold, silver and copper that are leveraged to the increasing price of the underlying commodity. Invest in oil and gas where future demand will surely exceed supply. Finally, consider Treasury Inflation Protected Securities (TIPS) as a hedge against future inflation and invest free cash in money market funds as yields rise. 

We have already recommended several equities and an exchange traded fund that meet our investment criteria for the era of stagflation ahead.  Pepsi has a global brand and will sell much of its products to emerging markets in the years ahead.  SIVR is an Exchange Traded Fund (ETF) that holds silver bars and is perfect for the rising inflationary environment to come.

British Petroleum (BP) is a global leader in developing alternative energy, oil and gas.  Peabody Energy (BTU) is an international leader in the mining of coal. In addition, Flour has a construction business tied directly to the developing areas of the world and has extensive exposure to oil and gas. 

The demographics behind an aging population provide health care with an exceptional long term growth story.  Our recommendations include Abbott Labs, a diversified leader in medical equipment and pharmaceuticals and Biotechnology leader Celgene.

Low economic growth, high unemployment and rising inflation. Investing for an era of stagflation will be a real financial challenge for America in the years directly ahead.

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