Stagflation Toolbelt
No one knows what is around the corner. Today is just as uncertain as it was yesterday and will most likely be as uncertain as tomorrow. Covid-19 has unleashed forces that have never been seen before; never before has so much of the world economy been shuttered at once.
More than that, from the ashes of Covid-19, there will be change. We are all MMT'ers now. Helicopter money, ZIRP/NIRP, possible monetisation of debt... It's safe to say that unconventional monetary policy is the new normal, "whatever it takes" round II, it is all the new normal.
The best we can do is not worry about the market moves and the significant volatility that we have now, we must look ahead. Forecasting is useless, but we can construct plausible narratives about what could be ahead, and use the insight combined with flexibility to make better decisions.
People are losing their jobs left right and centre due to this virus. To keep the money/credit markets working the Fed, ECB, RBA etc are announcing an alphabet soup of initiatives (here's a list). Fiscal policy is being created to help get the economy back, and keep people employed.
How we recover, and whether it will be in "V" shape remains to be seen. A lot of commentators are worried about deflation or inflation. But, I think, this puts the cart before the horse. Inflation is generally considered to come from wage increases. With unemployment increasing, businesses closing, the current regime is deflationary... For the short-term.
It can be argued that the extra money put into the system is inflationary. But at the moment that money is going towards groups that would either be out of cash or need access to cash for their borrowings — probably more of a net neutral to inflation. Inflation could begin rising (much) later.
But in Australia, there will probably be a period of semi-austerity and higher taxes (anything for the deficit) perhaps helping to keep a lid on it.
The issue that the I foresee, with low-probability but it is useful to think about, is stagflation. Once businesses start getting confident, with the extra stimulus and the world is no longer practising physical distancing, could we see all that extra money being inflationary? What if consumer confidence doesn't increase in-hand with that inflation? It's useful to think of a plan if we see a repeat of the 1970s, something probably not many investors remember.
What performs well in stagflation, commodities and real-estate. Put it in your toolbelt. Just in case.