June 24, 2022 Dave Wigginton

From the looks of it over the past few days, it appears the overarching concern of investment markets has pivoted from inflation to recession. Economic data points have softened globally with commodity prices and cyclical stock prices coming off quite a bit from their recent peaks.

Stocks, in general, have also started to rise again. Granted, this is off severely oversold and negative sentiment levels, but it does raise the question of what investors fear more, higher inflation or a recession. Recent price movements might suggest investors are more comfortable with a recession, which could end up being a garden variety one that isn’t too severe. The prospect of higher inflation and rate increases is scary and far less familiar to those of us in the business today.

Inflation typically falls during recessions, which I imagine it would if we end up in a recession. How much and how sustainable the decline in inflation would be is unknown. The US had two recessions in the 1970s. Inflation dropped significantly after both recessions only to rise again to higher levels than those prior to each of the two recessions.

There’s no way to know if we will see a repeat of the 1970s or some other historical period of higher inflation. However, we appear to be in a transition to a new regime. It’s evident that several variables are different today than they were prior to 2020.


Geopolitical tensions have meaningfully increased leading many to suggest a reversal in the globalization that we have experienced over the past 20+ years. A recession will reduce demand but how much will prices decline? If globalization is indeed in reverse then input costs, including labor, will likely remain higher than we’ve been accustomed to, leading to higher prices structurally going forward.


Constraints on fossil fuel production without alternatives have put pressure on energy prices. A recession will reduce demand but unless energy supply constraints are loosened what will keep energy prices from rising to higher levels post a recession? Without a policy change, higher energy prices seem like a near certainty.


Most of us like a narrative that clearly explains the cause and effect of a specific situation and that resonates with our understanding of how the world works. Food prices are clearly on the rise and the conflict in Ukraine is the poster child for the cause. I’m reasonably certain other factors are contributing to the current food pricing dynamics. For example, how has the situation in Ukraine contributed to higher meat and fish prices?

House of Cards

Governments, societies, economies, global orders, etc… are very fragile. It potentially only takes one disruption to cause upheaval throughout a system. It feels like that may be happening today.

I don’t consider myself an inflationista, but it appears higher structural prices are inevitable for the next several years unless something changes.

Stan Druckenmiller made a poignant comment at the Sohn conference recently: “Once inflation gets above 5% it’s never come down unless fed funds have gotten above the CPI.”

For those keeping score, Fed Funds is currently at 1.75% and the most recent CPI print was 8.6%. That’s not to say Fed Funds has to rise to over 9%. There will likely be a convergence in the two rates but at what level and is it even possible for Fed Funds to get above CPI at that point? This is the thesis (a fairly strong one, in my opinion) for stagflation.