People tend to associate recessions and economic downturns with fear, stress, and anxiety. However, these periods also offer fantastic opportunities for savvy investors to grow their wealth faster than in normal times. Stagflation is a word that sends shivers down the spines of most investors. The first time stagflation reared its ugly head was in the 1970s, when it brought about a worldwide recession. Half a century later it has resurfaced, and the commonality between the two periods is massive government spending. Stagflation is a scary word because it means stagnant growth and high inflation at the same time. This article explains what stagflation is, how it differs from bubble deflation, and why you should care about this phenomenon as an investor.

What is Stagflation?

Stagflation is a situation in which the economy is growing very slowly or not at all, there's very high unemployment and very high inflation. That means there's no growth in the economy, unemployment is very high and inflation is very high as well. So, if inflation is high and people's wages are not going up and the economy is not growing at the same time, then the value of money is going to go down. In a normal situation, if there is inflation, then people's wages are going up and that is how it balances. But in a stagflation situation, none of these three things is happening.

How is Stagflation Different From Deflation and Inflation?

Stagflation is an undesirable economic scenario that combines high inflation with low growth and high unemployment. It is different from deflation, which is an economic scenario in which the general price level of goods and services falls. It is also different from inflation, which is an economic scenario in which the general price level of goods and services rises.

Why does Stagflation happen?

As far as economists can tell, stagflation happens because the government is growing too much of the economy at the expense of the private sector, which creates what is called demand-pull inflation. This happens when the government takes on too much debt, which leads to high-interest rates that are caused by the government needing to pay off its debt.

Ways to Grow Your Money in a Stagnation Environment

• Diversifying your portfolio - Diversifying your holdings across as many different asset classes as possible is essential to creating a balanced portfolio. This will help you make the best out of market fluctuations.
• Understand your investment horizons – Consider short-term (less than two years), medium-term (two to five years), and long-term (five-plus) requirements when diversifying. Remember that market volatility will continue through a stagflation environment.
• Short-term – US Treasury Inflation-Protected Securities, TIPS for short, are designed to protect against inflation so that your purchasing power is preserved. ETFs are a great way to invest in TIPS.
• Medium-term – Since liquidity is a fundamental requirement of medium-term investments, and growth is also a requirement, there are several options. ETFs offer the ability to invest in diversified portfolios that are professionally managed. And because inflation is a major force during stagflation environments, commodities such as gold tend to fair well. Additionally, there are low beta recession-resistant portfolios designed to perform during slow growth environments.
• Long-term – for funds that will stay invested longer than five years consider alternative assets. Alternative assets offer the ability to invest directly in real assets such as companies, real estate, and loans. These assets are not subject to market volatility and generally offer a significant premium to liquid assets. So alternatives offer a way to achieve decent growth during a period when the public markets are too volatile. These assets are ideal for 401K, Keogh, and A well-structured alternative assets portfolio should be diversified across asset classes.

• Invest in technology – Technology companies represent a great way to generate long-term growth. Technology is fundamentally redesigning our entire economy. That being said, in the current environment, they are unsuitable as public stocks. Publicly traded technology portfolios have not faired well. However, for long-term investments, choosing to invest in technology alternatives is a way to achieve tech growth without market volatility. The focus should be on late-stage companies funded by top-tier VCs. They should also have low debt ratios. Many software companies are growing at rates exceeding 50% despite the economic environment. So, investment in solid growth alternatives is a good way to diversify.
• Real estate – Real estate is generally a good long-term inflation hedge. It can also be an income-producing asset. However, leverage can introduce a high degree of risk in an inflationary environment, so high leverage partnerships should be avoided. Further, not all real estate is the same. Residential, for example, which was at all-time high’s in 2021 is likely to experience a downturn in an environment of rising interest rates. Multi-family real estate partnerships are a reasonable option depending on the leverage of the partnership. Industrial real estate leased to recession-resistant businesses such as utilities and cold storage facilities are among the most conservative ways to invest in real estate. As a rule of thumb, avoid partnerships with high debt ratios.
• Direct loan portfolios – Business Development Companies, or BDCs, are alternatives that suit investors that require cash flow. In environments where credit is tight middle-market businesses struggle with bank financing and turn to BDCs for credit. BDCs charge rates as much as 10% over prime to businesses that have strong balance sheets. Not all BDCs are the same in terms of their underwriting, so examine the history of the manager's investments carefully before investing.

3 Reasons to be Optimistic about Stagflation Markets

• There will be fewer new issues - The fact that it's harder to obtain financing during a stagflationary environment means that there will be fewer issues of new stocks and bonds, which will leave room for existing, high-quality stocks and bonds to rise in value.
• Fewer unprofitable companies - At the same time, many companies that can't get financing will go bankrupt. And those that remain tend to be the profitable ones. This will decrease the number of unprofitable companies in the marketplace and allow the profitable companies to increase in value.
• Interest rates will eventually peak opening a window to invest in the bond market. However, investors should avoid bonds unless the plan is to hold to maturity. In particular, bond funds should be avoided because of the potential to lose principal as rates rise.

Conclusion

Stagflation is always a frightening word because it means stagnant growth and high inflation at the same time. Inflation in the U.S. is currently 8.6%, and many argue that real inflation is much higher. $100,000 today is worth $91,400 twelve months from now. So a careful investment strategy is essential to preserve buying power and create growth. Additionally, the current environment of rising rates, slowing growth, and rising commodity prices, has introduced a significant degree of risk to the public markets. So investors should think carefully when considering investments.

It is always advisable to consult with a licensed investment advisor before designing an investment plan. Be sure to choose an advisor that can help you consider the full range of available alternatives.