Stagflation Threatens Economy & Markets
Weekly Investment Update | By Brian Schreiner
FINANCIAL MARKETS WOBBLE AS WAR ENTERS THIRD WEEK - U.S. stocks slipped for a third straight week, with investors weighing the risk of a prolonged Middle East conflict on energy prices and economic stability. All three major indexes logged a weekly decline of more than 1.2%. On Friday, the S&P 500 fell 0.6%. The Dow Jones Industrial Average lost 0.3%, or 119 points. The tech-heavy Nasdaq slipped 0.9%. Stocks are up this morning as investors monitor developments in the Middle East. Bonds and gold were also down last week while commodities and bitcoin moved higher. (Wall Street Journal)
STAGFLATION THREATENS ECONOMY AND MARKETS - The U.S. economy grew at an annualised rate of just 0.7% per cent in the fourth quarter. Combined with inflation trending well above 2%—even before the recent spike in oil prices—the threat of 1970’s-style stagflation or something similar is starting to take hold in markets. Of that earlier time, Barron’s reported, “The roots of the problem are traced to the Revenue Act of 1964, which cut taxes even as the administration was increasing spending on both the Vietnam War and the Great Society social program.” (Bloomberg)
NO END TO WAR IN SIGHT - Historian Neil Ferguson and foreign relations expert Richard Haass said the war may drag-on longer than expected due to a fundamental mismatch in strategic incentives and inherent unpredictability. While U.S. officials need a short war to avoid political backlash, Iranian leadership has every reason to keep it going. By sustaining the conflict, Iran maximizes the economic and strategic pain inflicted on the West, essentially winning by not losing. Even though Iran’s conventional forces are weak, their ability to launch missiles and attack drones remains intact. History is littered with “short wars” that turned into decade-long quagmires as leaders have consistently underestimated unintended consequences and the resilience of their enemies. Because the U.S. goal is "regime alteration," the current Iranian leadership is fighting for its literal survival, leaving them with no reason to seek a diplomatic off-ramp. (Coleman Hughes)
CLIFFWATER AND MORGAN STANLEY LIMIT PRIVATE CREDIT WITHDRAWALS - The Financial Times reported that Morgan Stanley and Cliffwater have restricted withdrawals from private credit funds, in the latest sign of investor unease about the sector. After withdrawal requests in the Cliffwater Corporate Lending Fund surged to 14% of its shares, the firm limited investors' access to their capital. Around the same time last week, Morgan Stanley informed investors in the North Haven Private Income Fund that redemptions have been restricted.
FED EXPECTED TO HOLD INTEREST RATES STEADY - The Federal Reserve meets Wednesday, with markets widely expecting policymakers to leave the federal funds target range unchanged at 3.50%–3.75%. With no move anticipated, investor attention will likely shift to the updated economic projections—particularly whether officials revise their expected pace of interest‑rate cuts in 2026, after the December median projection indicated a single 25‑basis‑point (0.25%) reduction for the year. The recent rise in oil prices has pushed near‑term inflation expectations higher, dampening market expectations for Federal Reserve rate cuts in 2026. Whereas futures had priced roughly 50 basis points of easing for much of the year, they now only marginally imply a single 25‑basis‑point reduction in 2026. (Reuters)
REPORTS OF BITCOIN’S DEATH EXAGGERATED - Bitcoin skeptics came out of the woodwork after its recent sell-off but “digital gold” just had its best week since September. The iShares Bitcoin Trust (IBIT) was up 4.5% last week and as of this morning is down -15.1% year-to-date and down -40.1% from its all-time high on October 8 last year. Since the launch of bitcoin ETFs in January of 2024, its volatility has been high, but IBIT has outperformed the S&P 500 Index (SPY) by 28%. Bitcoin ETFs recorded about $1.3 billion in net inflows so far this month, potentially marking the first positive month for flows since October. (CoinDesk)
IS HOLLYWOOD TURNING INTO A GHOST TOWN? - Hollywood is navigating a period of profound existential dread as its traditional business model is collapsing under the weight of technological disruption and shifting audience habits. A convergence of shifting economics and industry-wide strikes has led to a dramatic reduction in local production, with Los Angeles shoot days dropping over 16% in the last year alone as work flees to other states and overseas. For the professional workforce—ranging from Oscar-winning sound mixers to veteran staff writers—this shift has resulted in massive layoffs, depleted retirement savings, and the unsettling reality of taking retail or gig-economy jobs just to survive. Big tech, the rise of YouTube, and the looming threat of AI are fragmenting audiences and driving mega-mergers among massive studios. Meanwhile smaller, leaner outfits are proving that disciplined budgets and bold, original narratives can thrive in the changing landscape of entertainment. (Bloomberg)
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