The Return of Stagflation

Below are some of the most interesting things I came across last week.

The return of 1970’s-style stagflation is a narrative that is starting to take hold in markets. Of that earlier time, Barron’s reports, “The roots of the problem are traced to the Revenue Act of 1964, which cut taxes even as the administration was increasing spending on both the Vietnam War and the Great Society social program.”

In recent years, we have been once again cutting taxes even as the cost of social programs soars. “If the U.S. government were required to report its finances under the same accounting rules as a publicly traded corporation, the debt-to-GDP ratio wouldn’t be the current level of 100%, which is bad enough. We’d be reporting a debt-to-GDP ratio closer to 300%,” reports Fortune.

Now we face what the IEA calls the greatest oil supply disruption in history. As The Information points out, “Higher oil prices can mean higher inflation, which typically means higher interest rates. Neither one is good for the debt-heavy AI build-out, which would face higher costs and higher interest payments.”

Already, many insiders are discussing what the bursting of the AI Bubble might look like. The Atlantic reports, “If AI comes crashing down, it will lead to ‘some spectacular failures,’ Taneja said—companies will go under and people will lose their jobs—but that’s a price worth paying for ‘enduring companies that change the world forever.’ His view is widespread in Silicon Valley.”

Like they did a quarter century ago, during the bursting of the DotCom Bubble, value stocks could make a strong comeback. GMO reports, “Deep value stocks are trading extraordinarily cheaply relative to broad markets and their own history. Conservatively, we believe that U.S. deep value is priced to outperform the rest of the market by more than 50%.”