Anti-Goldilocks: The Return of 1970's Style Stagflation Risk is Growing

Founders

Counter-cyclical inflation makes the bond-equity correlation positive, as in the 1970s.

Counter-cyclical inflation is simply inflation during a recessionary environment. The unspoken magic word is “stagflation” —which no one wants to say apparently. But it even goes beyond stagflation in this decobalizing environment. But this is secular stagflation, the kind of risk we called Anti-Goldilocks in 2022

If Trump is serious about a large-scale reshoring of US manufacturing capacity, then the days of persistent goods deflation in the US are numbered and bond markets will have to take note.

If Bonds and Stocks are starting to act with positive correlations, then the global market place is somewhat worried about the thing we’ve brought up here (as did Hartnett last week). That was: if stocks drop, and bonds drop with them, then the flight to safety out of US stocks is no longer into US bonds. It would literally become out of the USD and into one of two things: