A Stagflationary Storm Is Brewing, Warns Greg Weldon

Global Stagflation Coming

Weldon is warning that stagflation—high inflation combined with stagnant economic growth—is back on a global scale and that a number of markets and asset classes are going to be severely impacted.

The first place we are starting to see this, Weldon says, is in Europe, and with tariffs added to the mix, there is a greater impetus for higher inflation and stagnant growth.

“It's exacerbated and intensified everything,” Weldon said. “A trade war is just like a cold war, just like a nuclear war. It's mutually assured destruction. … The position here is that the US is the free trader. These other countries aren't. Something had to be done, and in this case, the approach taken by the administration here in the US is, if everybody's going to hurt, they're going to hurt more and more quickly to where they're going to be the ones crying uncle. It's a dangerous strategy.”

Perfect Storm of Inflationary Forces

Consumers are used to deflation in the form of falling prices for certain items, such as electronics, and we’re likely going to have higher prices for these things.

There’s no doubt inflation is headed higher, Weldon said. All of the statistics confirm this, as he notes in his report.

Additionally, the supply chain is experiencing disruptions with order backlogs and delivery times lengthening. Vendors are now bidding up the price of finished goods to make sure they can meet demand, Weldon noted. We haven't seen this embedded pipeline of back-loaded inflation in some time.

“This is almost a perfect storm of inflation dynamics,” he said. “If the Fed backs off here — and there are already indications that if the stock market cracks, the Fed might be willing to back off — that could stoke inflation to an extent we haven't seen in a long time. … This is where it all gets so interesting because there's going to be a lot of turbulence in the next 6 to 12 to 18 months. No matter how this plays out, it doesn't play out in a calm way.”

Trillion Dollar Deficits

We’re also headed back to trillion dollar budget deficits, and the overall debt picture is troubling. The amount of consumer credit that has been created in the last 34 months is unprecedented, Weldon noted, more than $200 million a month on average for over 30 months.

As interest rates go up and bonds mature, we’ll be paying more to service our debt, he said. It’s important to note that as debt matures with various coupon rates, this isn’t as immediate a problem as it might at first appear, but it’s still a huge issue we’ll have to face.

Referring to debt, Weldon said, “the numbers are off the charts. At some point this becomes a problem. When does it become a problem? Well, to me, it becomes a problem when the 30-year bond is above 3.5%.”

When the 30-year bond yield crosses (that threshold) … we could say the US bond market is already in the black hole. The amount of energy that the Fed’s going to have to expend to bring it out of a black hole, well, we know light doesn't escape a black hole. There's not enough energy in the universe to do it.