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Unless you lived and worked back in the 1970s - or, like me, were at least old enough to see and process what was going on around you - you're probably only marginally aware of an economic malady known as "stagflation."
The term "stagflation" is an amalgamation of "stagnation" and "inflation" - and describes an environment where prices are zooming in the face of zero growth. But before this time period I'm referring to, stagflation was little more than an academic theory that wasn't believed possible in any real-world scenarios.
Think about it: Inflation usually shows up in a sizzling economy, where vast numbers of consumers have scads of cash to throw around - and where the inventory of items on store shelves is dwarfed by the number of people seeking to buy them.
Stagflation, on the other hand, manifests itself as a nightmarish one-two punch: soaring price levels when consumers can least afford them, thanks to stuck-in-neutral job growth, treading-water corporate profits - and no catalysts in sight that might jumpstart economic growth.
But I'm here today to tell you the real story. With facts, not fear. And I'll show you where you can indeed find profit catalysts and growth even in this environment. Better yet, I'm going to share the single best stock I see that'll help you do just that...
Shocker - Oil Shocker, That Is
For a little background, let's first look at what happened with the "triggering event" and how it was stopped. Then I'll compare it to what I see here today and how investors can profitably play it.
The triggering event of this costly, stagnant economic mess was called an "Oil Shock." Geopolitics led the Organization of Petroleum Exporting Countries (OPEC) to quadruple oil prices - practically overnight. Pump prices followed suit. Prior to that "shock," I gassed up my parents' car with "high-test" - at $0.25 a gallon. Just a few weeks later, after the OPEC cartel acted, that same gallon of gas had rocketed nearly fourfold to $1.
And it wasn't just the cost; we all had to wait in long "gas lines." But instead of adding a few gallons, everyone filled up, a de facto form of hoarding that exacerbated the gas lines and had a massive spillover effect that reached far beyond transportation.
Oil is a key "ingredient" in about 6,000 products - from plastic and fertilizer to trucks and airplanes. And when the prices of a product's "ingredients" increase, the overall cost of making that product surges, as well.
Some companies "ate" the increases, either by design or because they had to - which put the squeeze on their profit margins. Other firms raised the sticker prices of their wares. When that happened over and over again throughout the economy, overall price levels rose - and it suddenly got more expensive for workers to live. That further increased company costs, crimping profits even more.
Many companies that couldn't afford higher input costs and couldn't pay higher wages began losing money and went out of business. As a result, unemployment spiked frighteningly.
Americans now faced high unemployment, a stagnating economy, and rising prices for everything. That's a picture of the stagflationary cycle that then-U.S. President Jimmy Carter described as a great "malaise."
It took a gutsy, aggressive move to jump-start the economy out of its stagnant state, and even though it also had some downsides, it did what it needed to for the most part. U.S. Federal Reserve Chair Paul Volcker forced interest rates into the stratosphere, driving a wooden stake through the heart of inflation, and setting the table for an economic boom and falling rates in the decade to come.
So let's look at what's going on today and figure out what we're actually dealing with...
We're Calling "BS" on Stagflation
Just when you thought it was safe, on account of vaccines helping put the pandemic behind us, travel and restaurants and bars opening up, jobs being plentiful and wages rising, the fearmongering pundits are now claiming that stagflation is the "new variant" that will trip up the economy's reopening.
My response: No way. There's no malaise spreading over the country, just this damned virus, and we're dealing with it.
Unemployment soared during the pandemic. And while jobs have returned and employment has recovered, there are still about 5.3 million people who had jobs before COVID-19 struck and who aren't working now.
And while job growth is continuing, the 235,000 added in August were only about a third of the 730,000 that had been forecast. And economists aren't seeing big job-growth gains and aren't forecasting substantive drops in the unemployment rate. They're worrying that a slowdown in job growth or spike in joblessness will boost stagflationary risks.
What these "experts" should be talking about is the end of the stimulus checks - which means workers just go out and find new jobs.
What they should be talking about is how many more jobs are suddenly there for the taking. Fact is, Walmart and Target and Amazon - the Big Three of U.S. retailing - are suddenly looking to hire a combined 350,000 people. And most of those are permanent (not temp) positions.
These "experts" should be talking about the training and tuition and benefits packages these companies are dangling as incentives.
They should be talking about all of these bullish developments. But they're not.
In the meantime, prices are rising - for just about everything - which signals inflation for sure. Just look at the evidence...
Auto sales have been through the roof, especially for used cars. And that demand has driven sales prices higher as supplies dwindle and new car manufacturers can't get the semiconductors needed to finish production.
Name a product that uses microchips, and you'll find that they're in short supply - and that their prices have spiked. There's also food inflation, rising commodity prices, and so on.
U.S. inflation for August rose at a year-over-year pace of 5.3% - more than double the central bank's 2% target.
But inflation is not stagflation. And I'll explain in a minute why that's good news.
The Move to Make Now
Rising prices aren't necessarily bad. If they're rising because of robust economic growth and demand that's healthy because there are lots of good-paying jobs, that's a good thing.
Rising prices are imbalances that eventually get knocked aside by new investments in factories and production equipment - something we'll get to see in the semiconductor market.
Demand and supply will balance out, and price increases will moderate and then fall with more robust competition. That's where we're headed - and yes, some goods and services inflation will come along for a longer ride than we'd all like.
But that's not stagflation. Because there's growth.
In the second quarter, U.S. economic output as measured by gross domestic product (GDP) came in at 6.3%. That's a bit less than the first quarter's rate of 6.4% - but still represents tremendous growth.
The New York Federal Reserve Bank's GDP Nowcast calls for third-quarter growth of 3.8%. The Atlanta Fed's GDPNow forecast, based on recent releases by the Bureau of Economic Analysis (BEA), U.S. Consensus Bureau, and ISM reports, calls for third-quarter growth of 2.3%.
Both estimates represent big declines from the second quarter. Slow growth is still growth.
Of course, GDP growth is going to slow down. For heaven's sake, the U.S. economy was growing at a 33.8% pace in the third quarter of last year - and no economic system in the universe could maintain a pace like that.
There's pent-up demand and supply disruptions and other imbalances that will come back into balance. Growth is continuing. Corporate profits remain strong. And wages are growing at their fastest pace in more than three decades.
Stocks and bonds don't do well when stagflation rules the roost - everyone should know that. Bonds get hit by rising rates, whether those rising rates are from rising inflation or the Fed raising rates to combat inflation. Stocks don't do well if companies have to pay more for labor and see their profit margins eroded by increasing input costs and a slowing economy where there's less demand for what they sell.
But I repeat, one last time: We're not in a stagflation environment. So, I'm going to tell you about a giant company that's on sale right now - a company that will do well if there's no stagflation but could do even better if it turns out that there is stagflation down the road.
That company is Rio Tinto Ltd. (NYSE: RIO), one of the biggest mining companies in the world - and one that happens to be the most profitable, as well.
At a recent price near $68, Rio is nearly 40% below its 52-week high of $95.97 - a price reached in mid-May.
You want commodities? Rio's got 'em.
You want to be on the "commodities supercycle?" Rio's your stock.
You want to see the economy grow like gangbusters and global growth explode when COVID-19 is fully controlled? Rio is your home run.
Are you afraid of the stagflationary headlines - despite what I've detailed here today? Rio is your way to play your way out. It will allow you to make your best play.
And speaking of best plays... There's a penny stock that's the number-one stock you need to see today. Why? This little guy is doing big things. It's democratizing the game of golf to the tune of... 3X, 4X, maybe even 5X returns for investors who get in immediately. But here's the catch... As soon as the company doubles, I won't recommend this stock again. Because once this penny stock sheds the "penny" part, I expect Wall Street to come flooding in. There is a very brief window to catch Wall Street by surprise... And I'm not wasting another second. Let's get started.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.