Evidences Of Stagflation...

I have been a goldilock for a long while now, crunching numbers and economic data like every economist should and have brushed aside any notion of stagflation so far. Today, I begin to change my mind...

Stagflation is the most dangerous and complex economic condition ever. Stagflation is when inflation is rising but the economy is sinking in terms of employment and growth. Under such conditions, the Fed can neither raise rates to beat inflation without sinking the economy further nor can the Fed lower rates to boost the economic without risking inflation running amok.

All throughout 2007, I am seeing evidences of inflation and not sinking economic conditions and employment but this week's data changed my mind. Both the ADP and Jobs report turned in extremely lousy numbers which indicated for the first time since 2003 that employment conditions are sinking, job growth is grinding to a halt and unemployment rising. PLUS, commodity prices are rising and headline inflation numbers are rising too. All these points towards the dreaded Stagflation which the economy went through in the turbulent 70s. Stagflation is more dangerous than recession or inflation by themselves. In fact, the market is reacting as though stagflation is already here by totally reversing the previous bullish reversal pattern into once again a bearish continuation pattern. In fact, with the current pattern unfolding, I would not be surprised to see the rest of the year performing a rendition of the 2004 conditions. Under such conditions, stock options traders who can trade both to up and down side would certainly be advantageous.