The last time the U.S. faced “stagflation” was 44 years ago under Jimmy Carter. I should know because I was there. In fact, I was 19 years old when it arrived and I had a summer job standing in lines at gas stations all day long for an advertising agency owner who tried to keep his car full of gas so that he could go to meetings. It was during a period of gas rationing which was just one part of the complete collapse of society as we knew it. The general tenor of the period was desperation and disbelief and we all knew that Carter was so bad at his job that it would be a miracle if we survived until his term ended. Fortunately, Reagan stepped in and saved America. Sound familiar? History has literally repeated itself as discussed in this article.
I learned a lot from living through “stagflation” and here is my short guide on how to not only survive it but to prosper from it.
What is “stagflation”?
“Stagflation” is a period in which there is high inflation coupled with a recession. The worst of both worlds. Typically, high inflation collapses when the economy declines, but in this unique scenario the destruction of the U.S. economy has no impact on higher prices. “Stagflation” has typically been brought on by stifling energy regulation coupled with terrible U.S. fiscal policy. Here’s one academic’s assessment:
Inflation seemed to feed on itself. People began to expect continued increases in the price of goods, so they bought more. This increased demand pushed up prices, leading to demands for higher wages, which pushed prices higher still in a continuing upward spiral. Labor contracts increasingly came to include automatic cost-of-living clauses, and the government began to peg some payments, such as those for Social Security, to the Consumer Price Index, the best-known gauge of inflation. While these practices helped workers and retirees cope with inflation, they perpetuated inflation. The government's ever-rising need for funds swelled the budget deficit and led to greater government borrowing, which in turn pushed up interest rates and increased costs for businesses and consumers even further. With energy costs and interest rates high, business investment languished and unemployment rose to uncomfortable levels.
Basically, Biden has steered us to the exact same position we were in under Carter nearly fifty years ago.
What investments get destroyed during it?
Pretty much every normal type of investment that you can buy at your local financial services group gets ruined. Stocks and bonds collapse. Businesses crash. While recession guts the revenues of all goods and services, inflation makes the few dollars remaining have less purchasing power every day. It’s important to note that the stock market fell around 50% during the 1970s. Millions of Americans were financially ruined by the aftermath.
What investment do well during it?
To do well in “stagflation” an investment has to have three components: 1) a limitless demand 2) the ability to push prices in keeping with inflation and 3) a hard asset base that inflates with the CPI. There are only two types of investments that meet these criteria: 1) lower-end apartments and 2) mobile home parks. Of these two sectors, mobile home parks are in the better position to excel as they have more room to push rents and much higher demand as they serve as the lowest-cost form of affordable housing in the U.S. Both apartments and mobile home parks benefit from being real estate niches which means they have inflation protection built into their hard-asset ownership. In fact, real estate was one of the big winners during the “stagflation” era as interest rates pushed down the real-dollar values of mortgages on property.
Other things to watch out for
In the “stagflation” recession, you see some shifts in employment, with the middle class getting ruined and the “necessity” jobs becoming the only stable sector. This is actually very similar to what we saw during the Covid-19 crisis, where “essential” workers (transportation, food production, etc.) got paid and the “non-essential” workers got sent home. Since most mobile home park residents are either retired or in “essential” jobs, the typical mobile home park customer base will be much less impacted than that of the apartment sector which have rents three times larger and require customers that are in more “white collar” jobs that are not really “essential”.
Conclusion
“Stagflation” looks like a very possible outcome of the current administration. You need to prepare for this very difficult investment horizon. Once everyone figures it out it will be too late to make the best buys.