Game of Trades: A Once in a Financial Lifetime Event Is Here

Between 1968 and 1980, stocks traded flat. However, adjusted for the waves of inflation that occurred during the 1970s, real returns were close to -70%. So far this decade, we’ve seen one massive inflation wave higher.

That wave has largely, but not entirely, subsided. And conditions are in place for another potential wave higher that could mimic the 1970s. In that event, markets could see big losses in real terms, even if they head higher in dollar terms.

With the economy apparently heading towards a soft landing, today’s economy has been engineered. Government spending has remained massive since the pandemic. As a result, the U.S. debt alone is rising by nearly $1 trillion every 100 days.

This may not mean we’re at a crisis yet. But we could see trends take place over the next few months that sends inflation creeping higher.

For instance, supercore inflation this year has started to trend higher. That’s all items less food, housing, and energy. It’s given back some of those gains, but remains elevated.

The good news is that energy prices have been moderate. And food inflation has declined to its 20-year average close to 2%. That’s a good sign that inflation is coming down, but could still trend higher, especially if the Federal Reserve cuts interest rates.

If we get another wave higher, bonds could take another hit as interest rates rise. But commodities should hold up in real terms.

To understand how inflation could start to soar higher again, click here.