Can there be both price inflation AND economic deflation?
''With the Federal Reserve and other central banks pumping so much money into the financial system, yet getting such muted economic results, many investors are debating whether inflation or deflation ultimately will prevail. 'Our view is that inflation and deflation can in fact coexist, an economic paradigm we have dubbed 'inverse stagflation,' ' Haugerud explained in a recent interview at her company's New York headquarters.
Inverse stagflation would entail little or moderate economic growth and the underperformance of traditional paper assets like stocks and bonds. Commodity prices, however, would soar, along with real asset values. Agricultural commodities and farmland would do well in such a scenario, while U.S. stock and bond returns would lag. This is a structural shift away from the regime of the past 30 years, in which paper assets have outpaced real assets five times over, Haugerud says.
'Stagflation in the 1970s was particularly painful because stagnating growth was accompanied by high inflation and extremely high interest rates,' but the new environment would be different, she says. 'There shouldn't be the same pressure on the Fed to hike rates as there was 30 years ago,' says Haugerud. In fact, she argues that real U.S. rates could actually go negative in the next few years. 'It will be slow, not cataclysmic,' she says.
Galtere International's view is that commodity-based, resource-rich economies that are fiscally responsible should do very well. Among them: Brazil - where there are 4% to 5% real yields currently - Canada, Turkey and Southeast Asian nations like Indonesia. Haugerud likes currencies and longer-term bonds in these countries, and predicts a continued U.S. dollar depreciation of 20% to 40% over the next decade: 'It won't be a formal dollar devaluation. It will be a broad-based natural devaluation against all currencies.'
And what of the shiny yellow metal? She wouldn't short gold, even at today's record price around $1,300 an ounce. 'If the U.S. can't get out of this deficit, we could see a corresponding 20%-to-50% rise in gold,' she says.''