Profiting from stagflation?

If you thought that much of the world would be facing stagflation, how would you position yourself to benefit? Can’t be bonds, as interest rates would need to rise, wouldn’t be equities as slowing economic growth would take care of that. Long Gold? Oil?Even going short oil (for instance) may not help as inflation would push up the oil price (and rising interest rates = a higher US$ oil price). Anyone have any ideas?


Yes very true. Not overly exciting, but they will do the job.

You mentioned commodities already, stagflation is a pretty rough scenario.

com’on man, what did you learn all this stuff for. get busy with options, trade vol. go international real estate be creative, there’s life outside stocks n bonds

Well you could just short the hell out of equities…

I would have just gone with commodities or short equity. Didn’t think of tips, not so sure about Real Estate during period of stagflation. Wheres the demand coming from – overseas?

No, assume it’s global (or wide enough to be considered global), so I can’t see Real Estate being the answer.

People generally say that Real Estate performs well in stagflation. In the US, there aren’t all that many periods to compare to, since the main stagflation was in the 1970s, so there may be some representativeness questions about that. However, real estate has commodity-like properties (the land is essentially a commodity, but the improvements on top of it are more like a kind of business). On the other hand, if we have stagflation in the near term, I would expect it to soften the fall of Real Estate rather than make real estate a good bet.

A prisoner of my own past so some random thoughts as I wake up. When I think stagalflation, I see Jimmy Carter, polyester leisure suits, and Ms. Horton, my history teacher. Commodities were a great investment prior to the stagflation of the '70’s (say until 74 or so) but then not so good during the peak 1976-1980 years. Land was a lousy investment in the medium term as real estate declined into the '80’s and bottomed in 1987, mostly due to very high real interest rates. “Go international” didn’t work because stagflation in the US goes global then and now. “get busy with options, trade vol” didn’t work in the '70’s because derivatives markets were nothing like as developed as they are now (you could get a CFA charter in the '70’s without knowing whaat a dervative was). Of course, now if you can trade better than everyone else, the macroeconomic environment doesn’t matter. That has nothing to do with stagaflation, however. The key is to figure out how we are going to get out of stagflation and when. In the 1970’s we developed really nasty inflation expectations (i.e., everyone expected their saalary to go up 10%/yr to keep up with inflation) and those took a serious ass-whumping to get rid of. That doesn’t seem to have happened yet, thankfully. The '70’s also had the nasty supply shock of the oil Embargo that started things off (or Peruvian fishes, maybe, but that’s just odd). Oil at $125 and going up seems similar enough to me. I was reading a car mag the other day and they had an artice about the new Challenger. Deja Vu. 35 years later, oil prices skyrocketing, the Mid-East in disarray, America involved in an unpopular and stupid war, and I’m lusting for the new Hemi Challenger. So 1) The US auto companies are f’ed by coming stagflation and the current world environment. A GM default would be 10 times as big as the next biggest default. What does that do to credit spreads? Jimmy Carter was elected as an anti-establishment champion - a young guy who would change the failed and corrupt policies of the previous 8 years. Deja Vu. 2) If Obama is elected (I’m voting for him btw), we may have a great man in office or we may have anti-establishment leading to gridlock and naive policy after naive policy. Naive gov’t is no help. Expect unusual governmental policies as “visionaries” struggle to resolve long-term problems within short political life-spans. The world worked it’s way out of stagflation by (among other things) improved efficiency of the information age. The computer pretty much came of age in the midst of the '70’s stagflation and you could haave made great fortunes by being there at the beginning (though many people were right there and didn’t make any money). If things are going to get better - and there is huge incentive for that to happen - we will need to make efficiency gains on that kind of scale. Economic turmoil is a really excellent catalyst for fixing up ingrained problems. 3) Look for movements that improve global productivity including a) Peace (well, I can always hope) b) Diminished reliance on fossil fuels. This happened in the '70’s and needs anther shot in the arm. Nobody should be driving the new Hemi Challenger (except me). Look for unexotic technologies that diminish it (Smart Cars not solar panels). c) Risk transference. That CDO crisis that whacked everyone was a bad stage in a good process. Tranching is a really good way of pooling and distributing risk and much of the world’s human capital sits at home every day doing nothing for want of smaall amounts of other capital thinking about whether or not it should be invested in GOOG. d) Decentralization. We mostly drive to work every day for face time and because our fathers did it and their fathers did it. We are currently fighting a multi-trillion dollar war as a decoy to distract terrorists from our big glass towers. That can’t go on forever and telecommunications means it doesn’t have to. Nobody wants to live in 1970’s NYC (exxcept my wife who fondly remembers days of debauchery in Studio 54). Buying Manhattan real estate seems deeply messed to me. Investing in Stamford, CT real estate seems much more reasonable. Investing in Nebraska real estate at 500/acre seems even better. e) Transformation from Wintel world. I hate the Spam, virus, malware-filled world of Windows as does everyone else. Most of the people I know use their computesr until they are so filled wth junk that the reformat time is more expensive than the repurchase . In the meantime, they make do with something that is not nearly as good as it’s supposed to be. The technological solutions to lots of this are simple but we have inherited an operating system that still runs original VisiCalc on a chip that still has an interrupt that starts the cassette tape deck. The information age is built on this nonsense and some economic disarray will cause people to rethink that reformat expense. MSFT doesn’t seem to recognize that and seems a lot like the auto industry of the 1960’s (read Halberstram’s The Reckoning and translate to the Wintel world). The abject failure of Vista - which is a really terrible OS, IMHO - should be pretty troubling to Ballmer and company. Look for technology that offers a way out and it’s not by adding anti-virus software, etc on top of an antiquated and failed OS. The world’s productivity goes up enormously by eliminating the dead weight loss of all this stuff and economic disarray makes eliminating dead-weight loss inevitable.

Thanks Joey - I’m going to cogitate that this weekend. Just one thing though: does that non-Wintel messiah machine you are typing on have a sticky ‘a’ key though? :wink: Repeat after me before you end up as a mac fanboy, “Jobs is not the answer. Jobs is not the answer. Jobs is not the answer.” If you think that life in an Apple dominated world will be any better, then the mess over the big “Safari push”, and Apple’s subsequent reaction should persuade you otherwise: And hacking: The solution to the rubbishness of antivirus and antispyware is not to use them. They are rubbish! If you intend on doing anything suspect, use a virtual machine and wipe it after. Job done.

joey, nice analysis and review. thanks for sharing.

Great post, Joey. I remember gas lines from the early 1970s and not much else. Thanks for the mental fill-up. :wink:

Joey, I honestly think this nation needs a president like Newt Gingrich (not necessarily Newt Gingrich himself, but a guy similar to him in either party). I’ve never seen anyone so rich in ideas that, ironically, aren’t particularly partisan. THIS is the visionary we need. I have no faith whatsoever in Obama because he appears to be nothing but a naive ideologue and John McCain is nothing short of an ignoramus. I think we’re f**cked with regard to executive leadership for the foreseeable future and I can’t get motivated to support either candidate.

more investment ideas for stagflation? growth - value market neutral longshort position currency trades

I’m still in Canada and was watching Obama talk policy on CBC. He knows his stuff fairly well, but I can see why he sticks to the big theme issues in public… he’s pretty dry and not too exciting (but clearly smart). Also I have been an Apple fan for a very long time (meaning their products, and sometimes their stock). I just bought a Time Capsule after a backup scare and have to say it is awesome (after that first very looong backup). Now, if it could stream my itunes library without my computer having to be on, that’d be even better.