The US Economy: Recession, Inflation or Stagflation?

Asset Class 50-days Prices

To have a deeper insight into whether the US economy is headed for Deflation, Inflation or Stagflation (rising prices but falling growth and high jobless rate), as a consequence of the high degree of uncertainty created by the MAGA Man’s unpredictability, policy zig-zags and on-off switches, it is best to look at all Asset Classes of the economy-not just the stock market.

The chart above compares the 50 most recent days of price changes of the most widely traded ETFs tracking each asset class: Equities (stock market), Debt (Bonds), Commodities, Currency (USD). I have also added Gold as a distinct and separate asset class and thrown in the VIX volatility tracker to round out the comparison. All prices have been normalized to Z-score for inter-comparison.  Note: ETFs do not track their underlying assets perfectly but for our purpose it will do.

The ticker symbols and full name of the ETFs are as follows:

1.       AGC: iShares Core US Aggregate Bond ETF

2.       DBC: Invesco DB Commodity Index Tracking Fund

3.       GLD: SPDR Gold Shares

4.       SPY: S&P500 ETF Trust

5.       UUP: Invesco DB USD Index Bullish Fund

6.       VNG: Vanguard Real Estate Index Fund ETF

7.       VXX: Barclays iPath VIX Short-Term Futures ETN

Summary

·       Gold up-à Not due to expectation of inflation but due to fear caused by uncertainty in the economic and geopolitical environment.

·       Commodities downàDeflationary

·       Real Estate downà Deflationary

·       Equities downàDeflationary

·       USD downà together with tariffs will cause both consumer and producer prices to rise

·       Bonds downà Deflationary which means yields are up which means inflationary

·       VIX downàDeflationary as equities lose steam

Conclusion:

There will be a short period of inflation followed by deflation leading to the worst scenario - STAGFLATION.