Commodity Insight: Stagflation to sizzle while higher rates fizzle

The Federal Open Market Committee meeting minutes are nothing more than a detailed record of the committee’s voting and opinions about monetary policy held two weeks earlier. Most dub the information as simply the “Fed’s minutes.”

Investors and traders carefully examine and pick apart the wording in minutes for clues regarding interest rate decisions in the future.

Early in the week, the Fed minutes were released and they proved to be market moving, suggesting a major shift in policy is at hand.

With a headline that blared, “Fed officials see smaller rate hikes coming ‘soon,’ minutes show,” CNBC reported: “Federal Reserve officials earlier this month agreed that smaller interest rate increases should happen soon as they evaluate the impact policy is having on the economy, meeting minutes released Wednesday indicated.”

In other words, the Fed is willing to slow the pace of further rate hikes. The Fed and other world central banks have been under intense criticism that the aggressive rate hikes since last spring would bring forth a global recession.

The headlines have screamed loudly that the Fed is pushing interest rates too high too fast and the result will be a recession.

However, many of those fears — not mine — have been put to rest based on the minutes of the last Fed meeting released this week.

But here’s the rub: The Fed is comfortable with the idea that inflation has peaked and no longer a worry to them. What they are concerned about now is a looming recession.

Moving forward, the Fed, Wall Street, Main Street, investors, traders, farmers and ranchers will focus on any coming recession as being a hard one or a soft one. And only based on hindsight will we know the severity of any recession that unfolds.

From the New York Post: “Nearly two-thirds of business economists believe the U.S. economy is already in a recession or likely to fall into one within the next 12 months, according to October survey results published Monday.

“Of the 55 economists surveyed by the National Association of Business Economics, 53% responded they saw a ‘more-than-even likelihood’ of a recession in the next year. Meanwhile, 11% of respondents said the recession was already underway.”

The economists above did not rate the coming recession as being a hard or soft landing. What they agreed upon was the fact a recession is inevitable.

But not all economists were so restrained. Mohamed El-Erian is an Egyptian-American economist and businessman.

He is president of Queens’ College, Cambridge, and chief economic adviser at Allianz, the corporate parent of PIMCO, where he was CEO and co-chief investment officer.

He stated this week in Fortune that “we’re not just headed for another recession, but a profound economic and financial shift.”

“The U.S. is staring down the barrel of 1970s-style stagflation as economic growth slows and inflation remains elevated,” said El-Erian in the magazine.

Few economists in the world are held in such high esteem as El-Erian. His words and thoughts carry a great deal of clout because he is more often right than wrong — and his sobering forecast is no surprise to me.

In my column for this newspaper a few weeks ago, entitled “Whistling in the dark,” I wrote: “I am guessing the economic scenario staring at investors, traders and producers of agricultural products in the years ahead will be one of slow economic growth, rising unemployment and historically high prices. Such a scenario is called ‘stagflation.’

“The last bout of stagflation lasted through all the ‘70s and into the early ‘80s before it ended. It was a very challenging economic environment for investors, farmers and ranchers.”

And a very profitable one, as well.

From Fox News earlier in the week: “The stock market could face further volatility next year as it has not yet priced in the likelihood of a recession, according to Goldman Sachs strategists.”

“The bear market is not over, in our view,” they went on to state. “The conditions that are typically consistent with an equity trough have not yet been reached. We would expect lower valuations (consistent with recessionary outcomes), a trough in the momentum of growth deterioration and a peak in interest rates before a sustained recovery begins.”

It appears a mild recession will weigh on the economy in the new year. It also appears that fears of higher interest rates are fizzling out, but stagflation is about to sizzle.

And a stagflation economy creates numerous bull markets, as it did in the entire 1970s and into the early 1980s.

Let the good times roll, I say.