Stagflation strategies

There are three major components to an economy. These are “economic growth” or the amount of increase or decrease in output and production/consumption. The second is “inflation” or the amount of change in the prices of goods and services,
again higher or lower. Finally, the amount of “employment/unemployment” as the number of workers that create the economic growth.

Each of these factors can stand independent of the others in that, for example, you might have “favorable” economic growth numbers and still have high unemployment and high inflation. “Retail sales rise faster than expected, as sales rose 1.7 percent in October. So much for soft consumer confidence signaling slower growth; what people do is much more important than what they say,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics”.

However, Pantheon Macroeconomics does have a “slight” tendency towards political bias. Pantheon has some firm “macroeconomic” views as to who should be the next Philippine president.

What they failed to mention is that “retail sales” is a “dollar-amount” and “monthly consumer inflation surged 0.9 percent in October”. So, more than half of the sales increase was because of higher prices not higher volume.

And then this happens. “Retail sales dropped 1.9 percent in December as higher prices caused consumers to curb spending.” Economists and their models are rarely reliable over time.

“Stagflation” refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output [and perhaps high unemployment] such as retail sales are up because of high prices not increased consumption.

It was first recognized during the 1970s when developed economies experienced rapid inflation and high unemployment. As expected, prevailing economic theory at the time could not explain how stagflation could even occur, believing it to be impossible because their models said so. Reality is always a cruel mistress.

Because economics is more of a religion with beliefs rather than a science with enduring truths, the rules change as needed. Maybe the biblical book of Genesis did not mean that the universe was formed during actual 24-hour days after all.

So now there is “Nominal GDP Growth” and “Real Economic Growth,” which factors the “GDP deflator” or inflation. “Nominal” or “Real?” Who cares? Economists are always correct.

Making money during inflationary times is simple and easy. Just “BUY” and “BORROW.” But do not be the last one to leave the party or you will pay the bill.

Stagflation requires being cleverer and more selective. Note initially, the Philippines is not and will not experience stagflation. We will know more on January 27th with the release of fourth quarter GDP, expected at 7 percent.

However, with slow and slightly increasing economic growth and flat to declining inflation, there is a particular strategy.

As a personal business, consider borrowing judiciously to invest in company expansion. Interest rates will be higher 12 months from now. Note this for personal and for listed companies. You will not regain market share/profitability doing what you did in 2019. I want to see two things: companies expanding on what was successful during pandemic and companies finding new ways to do what they did pre-pandemic.

For example, Grab food/product delivery was great back then. Now the space is super crowded and super-less profitable. AllDay Marts will deliver “1kg Pork Mechado Cut” and a “Multi-Purpose Aluminum Ladder” in one order.

Listed companies with a low Price/Earnings and paying a cash dividend make a long list. I want a high cash flow and also dividends. Avoid “growth stocks” for now. Earnings will come later. Also, check out those companies that preserved and even increased Current and Total Assets during the past 12 months. Ignore the laggards. Find the leaders.

E-mail me at mangun@gmail.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis provided by AAA Southeast Equities Inc.

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