The Anti-Goldilocks Portfolio
- By Alberto Gallo
- 7 min read
Global inflation surprises remain strong, while economic data is deteriorating. Consequently, the market is debating whether 2022 will be characterized by stagflation. Yet that may be too strong: data suggests we are not in stagnation. US and European growth remains strong – with the UK the only exceptional candidate for stagflation due to self-imposed bottlenecks. However, markets will likely withdraw from the past decades’ goldilocks environment, comprising strong growth and low inflation. Such a stagflation-lite environment would be bad for bonds and stocks, making asset allocation difficult.
From Reflation to Stagflation
2021 started with big hopes for economic reopening and growth-led reflation. As the global economy bounced back from the worst recession in three decades, real growth accelerated strongly. With massive fiscal and monetary policies supporting incomes, inflation bounced back too. In 2021, global growth will hover around +6%, the highest in 20 years. 10-year inflation breakevens in the US moved from 1.6% to 2.7% in the past 12 months, reaching a two-decade record. In fact, most countries displayed both growth and inflation substantially above their 20-year averages, led by the US.
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