Is stagflation looming?

On Thursday, the unemployment rate in Massachusetts hit a 15-year-low. The 3.6% MA unemployment rate is at its lowest since June 2001, while the national unemployment rate is hovering above 5%. The 3% real GDP in Massachusetts is much higher than the national real GDP of 1.2%. The US and MA labor markets have many structural differences. A greater percentage of jobs in MA are participating in the high growth engines of the economy areas such as health care, finance, and education.

Massachusetts has benefited from the explosion in the rising cost of health insurance, higher drug prices, technology advances, and rising cost of college tuition payments. In September, the prices for medicine, doctor appointments, and health insurance rose the most since 1984.  Pharma prices have increased on average by 5% in 2016.

On Wednesday, Kyle Bass, a hedge fund manager who predicted the subprime mortgage crisis in 2008, told CNBC that  higher prices and wages, combined with an overall sluggish economy are the ingredients for stagflation. I agree with his assessment that the current economic backdrop is beginning to look a lot like “stagflation”.  It is becoming much more difficult to attract qualified workers and employers are starting to feel the pressure of wage growth. These are all signs that higher inflation is on the horizon.

This economic outcome could become a burden for those in retirement or close to retirement. With interest rates near all-time lows and markets slightly off highs, Bass believes investors will have a hard time generating positive returns over the next few years. Growth may continue to stall if taxes increase, oil prices continue to rise, and the health care system is not fixed.

Other contributing factors to slower growth are changing workplace demographics and a smaller middle class. The workplace demographics is being impacted by the 10,000 baby boomers exiting the workforce each day between now and the end of the next decade. The middle class is shrinking due to rising inequality, where the top 20% of Americans own 85% of the country’s wealth.

CGF Advisor portfolio positioning:

  • Long-term bonds are vulnerable if inflation increases
  • Commodities and real estate have historically been a good hedge
  • Securities with higher dividend yields help to provide downside protection
  • Diversify dividends payouts through multiple types of securities – bonds, stocks, preferreds
  • Floating rate bonds can hedge interest rate risk
  • Increase credit risk with higher yielding bonds

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Advisory services offered through Constant Guidance Financial LLC, a registered investment

 

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