Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / The 1970s Playbook for Stagflation Investing
Transcript
- Lucas: So the S&P 500 dropped another 2.3 percent this week, the Nasdaq is down over 4 percent in five days, and gold — the great stagflation hedge — fell more than 4 percent as well. That's the kind of week that makes you question whether the old playbook still works. Luna: Gold down 4 percent in a week when CPI is still running hot — that does feel like a head-scratcher. I mean, isn't gold supposed to be the ultimate inflation trade? Lucas: It's supposed to be, yeah. But the thing is, gold had an enormous run. It was above $4,200 an ounce earlier this year. So some of this is profit-taking. But there's a deeper story here, and it connects to something a lot of investors are missing about the current stagflation environment. Luna: Which is what? Lucas: That the 1970s playbook for stagflation investing doesn't apply cleanly today because the macro setup is fundamentally different. Back then, real interest rates were deeply negative for years. Today, real yields are positive. The ten-year Treasury inflation-protected security, or TIPS, yields about 1.8 percent. That's a real return. Gold doesn't pay you anything. So when real yields are positive, the opportunity cost of holding gold goes up. Luna: Right, so gold's rally earlier this year was more about geopolitical fear and central bank buying than a pure inflation hedge? Lucas: Exactly. Central banks, especially in emerging markets, have been buying gold as a reserve diversification play. That's a structural bid, not a stagflation bid. And now that the dollar is strong again — the dollar index is up — gold takes a hit. But here's what's interesting: the S&P 500 and the Nasdaq are also getting hit, and that tells me the market is pricing in something worse than just sticky inflation. Luna: Which is slow growth — the 'stag' part. We've got real GDP growth at 1.6 percent annualised, which is not recession territory but it's not booming either. And job openings actually rose to 7.6 million in April, so the labor market is still tight. Lucas: That's the puzzle. Normally you'd see job openings fall fast in a stagflationary slowdown. But they're up from 6.9 million. So companies are still trying to hire, they just can't find people at the wages they want to pay. And wage growth is still around 4 percent year-over-year, which feeds into services inflation. That's the part that keeps the Fed on hold. Luna: So if gold isn't working, and equities are getting hammered, where is the inflation protection showing up? I mean, look at the Nasdaq down 4.4 percent this week — growth stocks are getting crushed. Lucas: They are. And I think the protection is showing up in areas that people don't talk about as much. Commodities producers — energy, materials, some agricultural stocks — they benefit from inflation because their input costs are relatively fixed and their output prices rise. We've seen the energy sector hold up better than tech. Also, infrastructure and industrial names tied to physical assets have done okay. Luna: But even those are getting volatile. The broader market is down. So what's the actual investment takeaway for someone who's sitting here in June 2026 trying to figure out what to do? Lucas: I think the takeaway is that the 1970s didn't have a one-size-fits-all solution either. The people who did best weren't the ones who bought gold and sat tight. They were the ones who rotated sectors aggressively — energy one year, consumer staples the next, and held a lot of cash. Cash was actually a good hedge in the 1970s because money market funds paid double-digit yields. Luna: We're not at double digits on cash, but the Fed funds rate is still elevated. So cash is yielding something respectable. That's part of why gold is struggling — why would you hold gold when you can get 5 percent in a money market fund? Lucas: Exactly. And I think that's the structural shift that people are still adjusting to. For fifteen years after 2008, the playbook was 'don't fight the Fed, buy duration, buy growth.' That era is over. We're now in a world where real returns on cash and bonds exist, and that changes the relative attractiveness of every asset class. Luna: So for the investor who's been burned by this week's sell-off, what's the move? Do you just sit in cash and wait? Lucas: I think a blend. Cash for optionality, but also look at sectors that have pricing power. Consumer staples, healthcare, utilities — they can pass through cost increases. And I'd actually look at small-cap value, the Russell 2000 value index, because those companies are more domestically focused, less exposed to the global tech slowdown, and they trade at lower valuations. Luna: The Russell 2000 is down 1.1 percent this week, so it's holding up better than the Nasdaq. That fits the narrative. Lucas: It does. Now, I want to be clear: I'm not saying we're headed for a 1970s-style decade. But the pattern of 'inflation stays higher than expected, growth stays lower than hoped' — that's a stagflation lite, and it requires a different portfolio than what worked in 2021. Luna: And that's exactly the kind of analysis that I think makes this show valuable — connecting historical patterns to today's data in a way that actually helps people think about their own money. Lucas: I appreciate that. And you know, we do this show every day, ad-free, because we want people to have a clear-headed, data-driven take on the economy. If you've been listening and it's made a difference in how you think about markets or your own finances, there's a simple way to support the show and keep it going. Luna: Yeah, we don't run ads, we don't do sponsorships. It's just us. So listener support is what makes this possible. If you're inclined, you can head to buy me a coffee dot com slash fexingo. That's it — no pressure, just a way to keep the conversation going. Lucas: And we really do mean that. No tiered memberships, no exclusive content. Just the podcast, as is. Now, coming back to the market — one more data point I want to flag is the jobless claims number. Initial claims came in at 225,000 for the week ending May 30th, up from 212,000 the prior week. That's a notable jump. Luna: It is. And we've seen long-term unemployment surging, according to recent reports. So the labor market isn't falling apart, but there are cracks forming. Lucas: Right. And that's the stagflation dynamic in a nutshell: the headline numbers look okay — unemployment at 4.3 percent, payrolls still growing — but underneath, the quality of that employment is shifting. More people are working part-time involuntarily, more are dropping out of the labor force, and wage growth is being eaten by inflation. Luna: So real wage growth is probably negative for many workers. Lucas: For most, yeah. And that's the part that feels like the 1970s — the squeeze on purchasing power. The difference is that today's inflation is less about an oil shock and more about a combination of housing costs, services inflation, and supply chain adjustments. So the solutions are different too. Luna: What do you think the Fed does from here? They've been on hold. Do they have room to cut if growth slows? Lucas: That's the trillion-dollar question. If they cut before inflation is clearly under control, they risk repeating the 1970s mistake of easing too early. If they hold, they risk tipping the economy into a recession. I think they'll hold through the summer and watch the data. The core PCE is still at 2.8 percent, well above their target. So I don't see a cut anytime soon. Luna: And that keeps real yields elevated, which keeps the pressure on gold and growth stocks. So the stagflation trade might actually be 'short duration, long value' for a while longer. Lucas: That's my read. And I think the key is to stay flexible. The 1970s had multiple phases — inflation accelerated, decelerated, then accelerated again. We could be in for a similar pattern. So the investor who locks into one strategy and never revisits it is going to get burned. Luna: Alright, so bottom line for this week: don't assume gold is the answer, watch real yields, and keep some powder dry. Lucas: And keep listening. We'll track how this plays out.