- Jamie Dimon of JPMorgan highlights stagflation as a serious threat, combining inflation with slow or negative economic growth
- Stagflation is historically one of the hardest economic conditions to combat through monetary policy
- The crypto market has never faced stagflation, adding uncertainty for investors during potential economic turmoil
Not everyone is convinced that markets can get out of the cycle without a recession. Some remind us that there is also a third option on the table, which is stagflation – an economic phase characterized by high inflation on one side and reduced or even negative growth on the other. This hasn’t been discussed for a while – and Jerome Powell has repeatedly denied its possibility (based on today’s data).
However, Jamie Dimon, CEO of JPMorgan, has brought it back into the conversation, indicating stagflation as the worst possible scenario. Although remote, he doesn’t feel it should be ruled out from the possibilities ahead of us.
Contributing to the possibility of stagflation are Wednesday’s interest rate cuts – cuts that could be as large as 50 basis points and might support a resurgence in inflation. All this while several economic indicators point to a potential slowdown in the U.S. productive machine.
For crypto investors, there’s another problem: this market has never had to face stagflation – adding to the uncertainty. We will try to reduce it by analyzing what happened in similar markets in the past.
Jamie Dimon’s warning: what if stagflation is the case instead?
There are two options on the table, at least according to leading analysts. The first is a return to lower inflation levels, equally low interest rates, and an economy that will avoid recession overall. The second option involves the possibility of a recession: if the Fed’s intervention turns out to be too late, the economy might enter a recession.
However, there is a third option, recalled by Jamie Dimon, CEO of JPMorgan – historically, Dimon has proven to be more pessimistic than other market operators, CEOs of large banks, and in general, influential figures.
What kind of situation are we talking about? And why should it interest Bitcoin and crypto?
Recession plus inflation
Jamie Dimon is right to call it the worst of the remaining possibilities on the table. Stagflation is indeed a term that refers to the simultaneous presence of economic slowdown and rising prices/inflation. It is one of the worst scenarios to be in and also one of the hardest to combat through monetary policy.
The most well-known cases occurred between the ’70s and ’80s, mainly caused by the oil shock. In this case, it’s unclear what might trigger stagflation, and the economic debate is more heated than ever and will only intensify if such a scenario actually occurs.
What happens to risk-on assets during stagflation?
In short, and without turning this into an academic treatise, we can say that stagflation is generally a bad sign for stock markets. Companies face rising costs and shrinking revenues.
Looking at 1973-74, which marks the beginning of the oil shock, we see some of the worst years for the major stock indexes. The S&P 500 went through one of the largest corrections in its history, losing almost half of its capitalization between early 1973 and the end of 1974 (October, in particular). Other U.S. stock indexes weren’t far behind.
Conclusion
In conclusion, Jamie Dimon’s warning about stagflation is a risk that should not be underestimated. While remote, this scenario could lead to serious economic challenges. For investors, especially in the crypto sector, it’s essential to keep an eye on the Fed’s actions and major economic indicators to navigate future uncertainty.
