Is Trump Leading U.S. Economy to Stagflation in 2017 .pdf
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Is Trump Leading U.S. Economy to Stagflation in 2017?
In the 1970’s, the U.S. economy (and by extension, the gold market) saw conditions that let to a relatively rare
series of events, collectively known as “stagflation.” The term describes an investment regime comprised
of inflation and economic stagnation.
The surge of oil prices in the 1970’s proved to be the major contributing factor to stagflation, and saw a period
of years where gold was one of the only investments that appreciated in any meaningful way.
Most would like to say it’s as simple as “buy low, sell high,” but our world is obviously more complicated than
that. We’ve mentioned before that markets go through season-esque changes like the weather does. The best
principles by which to invest change with the markets, and there are (broadly speaking) four environments or
regimes we’re used to seeing in modern investing.
In other words, when market conditions change, so do the rules for surviving that market.
There’s high growth/high inflation — that’s real estate and natural resources. Then there’s high growth/low
inflation, which is where stocks are most comfortable. Low growth/low inflation is when bonds become the
hot commodity, and low growth/high inflation is what we in the gold market prefer to see.
Knowing where our economy is regime-wise is never particularly hard. Playing by the rules of the day and
investing the right way at the right time is trickier. When one regime, or season, changes, and another rolls in,
you’ve got to adjust your portfolio accordingly.
Think of it this way — we’ll call high growth/high inflation conditions “regime 1.” When the market is in
regime 1, history and mathematics dictate real estate to be a likely performer. It would be time, in that
situation, for any stocks and bonds folks to consider adjusting to a more real estate-heavy portfolio. When that
regime changed, you’d ditch real estate to some degree.
Not too hard, right? When the light is green, go.
At present, the market’s performance is indicative of high growth/low inflation. We’re steadily paced, it would
appear, to enter a phase of low growth/high inflation, which is knocking on the door of stagflation.
We may be saved from those conditions by a fourth quarter touchdown pass from certain would-be newlyrevived sectors of the economy, but evidence is piling up that suggests we may be headed toward a repeat of
Europe and China are both slowing down economically. Copper, iron, most of the metals, and oil have all
taken a bit of a dive thanks to Brexit, numerous independance memorandums, and a worldwide surge of
nationalistic values, among other things.
Unemployment is down, but GDP isn’t soaring at a commensurate rate. This is a very good environment for
gold and physical commodities, because there’s really only one place to go from here — up.
Recently, the Fed raised their interest rates. This signals their alleged confidence in the growing U.S. economy,
and it certainly signaled a regime change.
With the rates adjusted and high inflation on the horizon, bonds may not fare so well (for the time being).
That’s all to say gold is positioned to make its move into the spotlight once again very soon. The conditions
we’re about to take on are, historically, some of gold’s favorite. There will of course be fluctuations, but the
overall direction for gold over the next few years is up.
If you need to buy gold for your portfolio, do so now. If you want to sell, it’s best you hang onto your wares
for a few more years. It’ll be worth a lot more then.
Bullion Trading, LLC.
Check out our previous article about Recent Higher Interest Rates and What it Means to Investors