2023 in the United States, is it a recession or stagflation?
Today I simultaneously read the recent macroeconomic views of the elderly hedge fund managers Stanley Druckenmiller and Ray Dalio. It's interesting to see their perspectives side by side.
Here are my thoughts:
(1) The combination of high oil prices, high interest rates, and a strong US dollar generally indicates a poor economic outlook ahead.
(2) In history, once inflation exceeds 5%, it is difficult for the Federal Reserve to control it without raising interest rates above 5%.
(1) The post-pandemic "unlimited easing + zero interest rates" has led to excessive debt in the US economy, which cannot sustain high interest rates.
(2) For creditors, when the returns on holding debt cannot cover the level of inflation, selling off debt becomes a natural response. When companies struggle to obtain financing and private credit decreases, the economy weakens and unemployment rises.
Combining these two scenarios:
Given the current level of US debt, it is difficult to raise interest rates above 5% to match the level of inflation. As a result, inflation may be difficult to contain. The ultimate outcome could be suppressed demand due to high interest rates, leading to increased unemployment, while inflation remains high.
Between the pressure of debt repayment and credit collapse, and the threat of severe inflation, the Federal Reserve may ultimately resort to "stagflation."
The core reason for stagflation is that high interest rates can suppress demand but cannot control supply.
Within this wave of inflation, demand expansion (core inflation in May was 6%) can be reduced by adjusting the supply of credit (quantitative tightening) and supply prices (interest rates).
However, under the backdrop of the pandemic and global decarbonization, the shortage of supply caused by aggressive ESG policies (especially the lack of corresponding demand for green energy technology) and the Russia-Ukraine conflict is difficult to resolve quickly (overall CPI in May was 8%+).
Looking solely at energy prices: the energy component of the US PPI has increased by about 45% YoY, while energy in the CPI has increased by about 35% YoY. Retail sales of gasoline and fuel dealers have increased by over 40%.
Since oil is a raw material for various goods and services, sustained high oil prices will permeate into the pricing of many goods and services. Therefore, after interest rates rise, the inflationary factors driven by demand are likely to be suppressed. However, the inflationary factors caused by supply are difficult to resolve in the short term.
Therefore, the corresponding indicator to observe is commodities, especially the price of oil. After benchmark interest rates reach 3.5%-4%, we should observe whether the price of oil can truly decrease to the normal range of $60-80 per barrel. If it fails to decrease, 2023 may bring a stagflation situation that is more severe than a recession.
Mark: Currently, the market generally expects the US to enter a recession at some point next year. However, if it turns out to be a recession where prices remain relatively high, the situation may be even more bleak. In this grand scheme of things, if the energy policies in Europe and America do not undergo significant changes, it would be advisable to seek out the deflationary forces within the upward sectors of the market. Despite the decline in the US stock market, the new energy industry chain, particularly in the green energy sector (photovoltaic and wind power), is expected to continue advancing at an accelerated pace. The market downturn will present long-term buying opportunities.