Gordian Perspectives for May 2020

Each month members of Gordian Group team pick articles, posts or current news events that we found interesting and worth sharing with Gordian clients and our growing network . We provide some commentary and context and where applicable how Gordian Group can help.

Apocalypse Soon? Part 1

Worldwide, governments are throwing trillions of dollars out of helicopters into the economy.  Yet low interest rates and fears of deflation persist.  And just like during the Great Recession, some people wonder why the opposite isn’t happening with rapid money supply growth fostering inflation.

I have heard many explanations for this phenomenon (or lack thereof).  Inflation is being measured in the wrong places, given the significant increases in asset values.  Or that the central banks have found the magic Modern Monetary Theory formula that allows them to print money with no adverse consequences.  And so forth.

Count me skeptical.  With this much liquidity being pumped into the system and with the significant increases in outstanding sovereign debts, I just cannot see it ending that benignly.

I read an interesting piece in the Financial Times [subscription required to read it] that addressed this concern, and layered the decoupling of Chinese supply chains into the mix: .  The author believes that this toxic stew will ultimately result in stagflation.

For those who were not around in the 1970s, stagflation can turn bonds into “Certificates of Confiscation”.  Investors would see the real value of their fixed income holdings dwindle rapidly.  The stock market may not keep pace with inflation either.  And playing commodities can become a crapshoot, as the world figures out how much oil vs clean energy it wants to consume.  Or whether cryptocurrencies are better than gold.

In the current environment, there clearly is nothing resembling certainty.  But I think the probability of seeing stagflation this decade is increasing.

Related: Globalization on the Rocks

Commentary by Gordian Group CEO Henry Owsley