Welcome to the new financial year. But do recent events herald an environment where deflation makes way for stagflation?

The US authorities have been doing their utmost to create some inflation, and they may be finally getting some traction.

The chart below shows the US 10 year Government Bond rate has risen from 1.6% to 2.6%.

StagflationChart1
This is an increase of 62.5% and is an excellent indicator of what may be to come globally.

This may mean that we move from deflation to stagflation, stagflation is not a very happy place to be, it means “A condition of slow economic growth and relatively high unemployment – a time of stagnation – accompanied by a rise in prices, or inflation”.

Given that an economy has the same level of the supply of products, demand creation programs from the Governments (i.e. an expansion of fiscal and/or monetary policy) could temporarily increase people’s purchasing power. In this case, people would buy more but businesses could not increase their production (so people compete to buy limited products, prices then go up).

With the Australian dollar falling like a stone from $1.10 US to it’s current level of 91.5 cents (a fall of 16.3%) it is easy to see that price increases are on the horizon. The next fleet of container ships will likely be carrying goods that will cost more when they reach their final destination.

Company downgrades compared to upgrades are currently running at 6.5 to 1.

Job losses continue, motor vehicles sales in Europe are at a 20 year low.

I struggle to understand why the German market has continually hit new highs when the economic fundamentals have been deteriorating on an ongoing basis.

The Australian markets has failed to fire like the US and others simply because we have not been printing money like they have. Consumers continue to keep their hands firmly in their pockets and retailers have been “on sale” almost on a permanent basis. In order to fire up some spending you need to have a sale on a sale, however with imports looking to become more expensive as each new shipment arrives the situation will become more challenging.

Your trip to Asia, Europe or the US just went up by 10% minimum so if you haven’t paid for your booking by now be prepared to shell out some more just to have the same seat. That empty bag that you are talking to fill with cheap clothes and other bling may just have a little less in it on your return.

As a person who loves buying companies based on the fundamentals, volatility like we have witnessed drives me crazy. This is not a stock picker’s market – at least not for the next couple of months. This is not the environment where one can simply look at good companies and say, this looks underpriced”, buy in, and then wait for it to rebound.

No, we’re now in a macro environment and we all just have to deal with political uncertainty, other left field events and global headwinds for at least a few months.