Personal Wealth Management / Market Analysis

What Is Stagflation? Fisher Investments' Founder Ken Fisher Explains.

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher reveals why stagflation—a term coined in the 1970’s to describe a period of high inflation and low economic growth—isn’t likely present in today’s economy.

Ken believes stagflation occurs when the real quantity of money increases at an accelerated rate and causes inflation to stick. He doesn’t see the real quantity of money—most appropriately measured by net bank lending—trending in an inflationary direction. He thinks inflation may linger longer than most hoped, but should eventually abate. While he acknowledges economic growth isn’t overly robust, he says the global economy is growing enough to escape stagflation. Ken also notes how the fear of stagflation could be a positive tailwind for markets if economic reality proves to be better than most expect.

Transcript

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Ken Fisher: I get asked pretty repetitively if we're entering another era of stagflation. Now, stagflation is a phrase that basically got coined in the 1970s, and so an awful lot of people who were young like I was in the 1970s, young in business. Now I'm in my seventies, and a lot of investors in their seventies and the investor class, think back to that time period quite readily and they think of stagflation. And a lot of young people have heard the phrase stagflation, never really lived through it and think, oh my gosh, that must be just terrible, and what have you.

Ken Fisher: Now the reality is, it could be terrible. Could be we're about to enter it. Do I really know? No, I don't. Do I think we are likely to be in an era of stagflation? No, I do not. Can I be certain of that? No, I cannot. The reality of stagflation is it comes from a world that, not just in America, but around the world, because prices are set globally they're not just set in one country in a world of free trade. But stagflation comes from a world where at every phase of expectation of future problem, central banks move to increase the quantity of money a little more, and a little more, and a little more at a slightly accelerating rate. So, you get rising inflation that won't go away, and there's more fear of downside in the economy than there is of inflation.

Ken Fisher: The governments of the world tied to COVID made some wrongheaded mistakes, not terribly surprising in a chaotic period like COVID that that would be true. And that has created inflationary problems. The Ukraine war adds to that. But we do have a lot of fear right now of inflation. And central bank lending as we speak is not actually highly inflationary oriented. My suspicion, because that's true and the right way to see that is that the real quantity of money—and I've talked about this many times in the past, and I'm not going to belabor the point now—but the measurements of the quantity of money are actually not very accurate today. They're less accurate than they used to be because of the ways money is actually used.

Ken Fisher: Money is, and only is, whatever it is that we use to actually buy and sell stuff and services. Stuff, whether it's consumer goods or industrial goods or securities or buying crypto or whatever it is we might buy—goods, services, stuff—money is what we use for that. What's thought of as money often that isn't used for that isn't really money. And money is created in a system, a Western system like ours, by the net banking system increasing outstanding loans. So what you really do is look to net lending to see what's going on with the creation of money. It's a pretty tight measure. It's the best measure. And that's actually growing at a fairly okay rate. It was growing at about 4%--which is not inflationary—earlier this year, and has accelerated in the last couple of months as the short end of the yield curve has gotten steeper, a point no one has noticed, incenting banks to lend to a little over 5%, was 5% in the first quarter.

Ken Fisher: And that's consistent with a little inflation, but it's not consistent with a lot of inflation. If the economy's grown at a couple of percent and you increase the real quantity of money by about 5%, maybe you got about 3% inflation, which is of course real consistent with the long-term bond rate. Is that stagflation? 3% inflation? I don't think so. It's a little above the Fed's long-term target of 2%.

Ken Fisher: So, the reality is I don't think we are going to have stagflation. I think we have a lot of fear of high inflation rates. That's why you see it so much in the media as it's spiked tied to the aftermath of all the COVID in and outs and rules and funny, strange things that governments around the world have done from every part of the world, as well as dislocations created by the sanctions tied to the Ukraine War and other features tied to the Ukraine war. But all those will pass, and I think we will see this inflation spike go away. I think it'll take a little longer than anyone would like, but that's not stagflation, that's a spike in inflation. And it should be, with time, patiently transitory and go away and revert to lower levels.

Ken Fisher: Do I think the economy is stagnated? No, the economy is growing around the world. It's not growing robustly, but it's growing around the world. And that's also not stag part of stagflation. So, I don't think we're going to have that. We're not in that. The fear of it is actually a healthy sign because fear of false factors is always bullish. And I want to thank you for listening to me on this.

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A series of disclosures appears on screen: “Investing is Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of fisher investment or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.

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