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Debt Ceiling Taking Center Stage and a Whiff of Stagflation

The first quarter of 2023 was an eventful one, with a mini-banking crisis interrupting an otherwise good three month stretch for markets (Dow +.38%, S&P +7.03%, Nasdaq +16.77%, and Russell 2000 +2.34%). Tech, broadly speaking, was the far and away winner, after suffering some of the biggest losses in 2022.

In more recent news, the House Republicans passed the first attempt at raising the debt ceiling on April 26th, and now the bill will move to the Senate where it looks dead on arrival, according to Senator Schumer. I would expect this next phase of the debt ceiling debate to be the most harrowing, as House Republicans, Senate Democrats and the Biden White House jockey at the negotiating table. Market volatility is likely reminiscent of the 2011 debt ceiling drama between John Boehner and President Obama.

The US economy looks to be entering a particularly tricky phase of declining GDP growth but with some persistent inflation, particularly in wages and some commodities. This will lead to various headlines regarding the dreaded “S” word: stagflation. It is hard to see how we get from where we are to an outright, full-blown stagflationary environment like we faced in the 1970s, but an April article by Bloomberg macro strategist Simon White caught my eye and outlines a more subtle definition of “stagflation lite.”

Quoting from the article:

To show this, we need to first define stagflation-lite regimes using the following criteria:
  • The one-year moving average of year-on-year headline CPI > the two-year average;
  • One-year moving average of headline CPI is > 4.5%;
  • Inflation volatility is above trend on a persistent basis; and
  • The one-year moving average of year-on-year real GDP is less than the 10-year average.
This yields four distinct historical periods:
  • 1969-1971: a period when the Federal Reserve was over-easing in a mistaken belief the economy was further away from the unemployment rate that leads to accelerating inflation
  • 1974-1975: the tail-end of the 1973-1975 recession and heightened inflation after the Arab oil embargo
  • 1979-1981: the second big oil shock of the 1970s after the Iranian Revolution in 1979 and a recession induced by Volcker’s rate rises; and
  • 1990-1991: an inflation aftershock at the start of Greenspan’s tenure at the Fed and the 1990 recession Based on the above definition, the US entered stagflation lite at the beginning of this year:


This observation is only meaningful in that it frames the current issues the economy and market participants face in the context of stubborn inflation and a weakening economy. The financial media is likely to take up the narrative of stagflation, so expect to see a chorus of articles on the subject in the coming weeks. The takeaway I find most meaningful is that inflation is indeed slowing, so the bitter medicine the Fed and other central banks are delivering is working vis a vis bringing down inflation. The key for policymakers going forward is not over-delivering on the medicine so the cure isn’t worse than the disease.

Thank you for your continued support and trust in SouthState Wealth.

Brian A. Barker
Chief Investment Officer

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