Key insights
- The article suggests the US economy is vulnerable to stagflation, drawing parallels to the 1970s. Despite GDP growth driven by AI data centers, consumer spending is weak, and an energy crisis exacerbated by geopolitical tensions is brewing. The author believes big capital is anticipating interest rate cuts due to recessionary pressures outweighing inflation fears, especially given the Fed's inaction on rate hikes despite the energy crisis.
The current economic crisis, combined with the geopolitical context in the Middle East, might lead one to think that the stock markets look similar to how they did in the 70s; one only needs to look at the rising delinquency rates on credit to realize that people are finding it very hard to make ends meet—there is a retraction of liquidity—which is impacting the level of spending and consumption in the market. If you add to this an oil shock (like the one in 1970), the probabilities of being in a similar stagflation scenario increase substantially.
Why hasn't a recession been declared yet if the economy is so bad? Unlike what happened in the 70s, the current economic situation is different because a formal recession has not been declared, and this is because GDP has been growing; however, it is driven almost entirely by the construction of AI data centers, which could ultimately be interpreted as a clear sign that the real economy (that of the ordinary citizen, that of the consumer) is in fact not growing. If we add to the above a weak job market, an energy crisis due to the increasing demand from data centers, and a geopolitical situation that has further raised gas and oil prices, we have all the ingredients to support said thesis.
Nonetheless, and despite all that, we are not seeing the dollar devalue as in the 70s; we even see that 10-year bond rates remain flat, or even downward at certain moments, even when the war in the Middle East has increased mandatory payments to nearly 40 trillion dollars. What does this indicate? That big capital is waiting for a drop in interest rates. Why? A priori, because the effects of the recession are weighing more than the fears of inflation due to the energy crisis (which is impacting the price of gold), and this is reinforced when the FED has not announced a rate hike despite the growing energy crisis; and a posteriori, the Genius Act effect, as some stablecoin-issuing institutions would already be increasing the demand for bonds to be prepared when this law comes into force in January 2027. Does it mean then that the dollar is going to go up in value? Warren Buffett is sitting on the largest mountain of cash, invested in short-term bonds. The effects of the recession will impact the profit margins of companies, which will have a deflationary effect on the dollar and a fall in stock market prices (both due to liquidity needs and the punishment the market will give companies for their profit margins).
So what do I invest in? Oil and gas --> Through ETFs indexed to prices or directly in energy companies.
Short-term USD bonds --> So that when the stock market falls, the capital is ready to buy cheap.
And gold? Honestly, under this thesis, gold implies a downside. Perhaps 15% maximum as a hedge in case the thesis turns out to be incorrect.
Disclaimer - This is my investment thesis; under no scenario do I want to incite anyone to follow it, I only seek for people to give me nuances to find points of view that I am not seeing. Have a great day, and happy Monday.