Hot Money Monday: Stagflation's ghosts are real – Powell admits it and experts say hedge fast

News.com.au

12-05-2025

Stagflation is here, the Fed finally admits
Expert Nigel Green says hedge now, Fidelity's Monk points to safe havens
Gold, bonds and cash – time to rethink portfolios
For months, whispers of stagflation circled Wall Street like ghosts in the corridors – visible enough to spook, but never quite real enough to confront.
But last week, Fed boss Jerome Powell said the word out loud.
'Stagflation' isn't just a tail risk anymore – it's here, it's real, and the Fed is not pretending otherwise anymore.
"The Fed has just confirmed what we've been warning clients about for more than three months," said Nigel Green, CEO of financial advisory giant deVere Group.
Green said the warning lights have been flashing: slower economic growth, higher inflation and unemployment ticking upwards.
Those three ingredients, when tossed together in the economic pot, make a bitter stew called stagflation.
And this time, Powell pointed the finger squarely at trade policies, specifically, Donald Trump's barrage of tariffs.
"When you weigh rising prices against declining productivity, and then throw in trade wars, the result is a stagnating economy with no good choices.
'That's the definition of stagflation, and now the Fed is saying it, too," Green added.
The Fed's honesty is late, but welcome, Green quipped.
"Investors can't wait around for policy clarity from Washington. The time to hedge, reposition and diversify was yesterday, but the next best time is now."
Inflation-resisting assets
According to Green, Trump's temporary pause on the next wave of levies might be just that, a pause.
His track record suggests that unpredictability isn't a bug, it's a feature. And markets are starting to price that in.
What looked like a soft landing earlier this year now seems like a mirage.
So what's the plan when the world's biggest economy lurches towards stagflation?
"In this environment, traditional 60/40 portfolios are insufficient. Investors need greater exposure to inflation-resistant assets like certain commodities, real assets and defensive equities."
Bonds and gold
But while Green points out the dangers, Ed Monk from Fidelity offers a bit of a map for the minefield.
Monk acknowledged that higher prices paired with slower growth is a cruel combo.
"It's a combination that markets hate, as evidenced by the steep falls in US shares this year," he added.
For investors, Monk suggests a handful of strategies that could serve as a life raft in stagflationary waters.
Government bonds, for instance, might seem like a dry option, but when volatility shakes the stock market tree, they reassert their role as portfolio protectors.
"In theory, stagflation should present a challenge to fixed-income assets like bonds because it comes with higher inflation, which erodes the value of the income they pay over time.
'However, high-quality government bonds begin to look very attractive when returns from riskier assets, like shares, are in question," he explained.
It's a case of retreating to the castle when the storm hits, safe behind the walls of low default-risk.
Gold, that old warrior of economic turmoil, is another safe haven, Monk said.
Already brushing up against record highs, the yellow metal is proving its mettle once again.
"Gold tends to perform best when fear is at its highest, and has a track record of holding its value when other assets are vulnerable to falls.'
And when the US dollar wobbles, gold shines even brighter.
Cash and dividends
Then there's cash, often sidelined when markets are booming, but a savvy investor knows when to keep some powder dry.
"Canny investors may well be thinking about building a cash pile at the sidelines of their portfolio, and to deploy it to take advantage of further falls in stock markets," Monk advised.
In times of chaos, sometimes the smartest play is to wait, watch, and pounce when the moment's right.
Finally, there's the quiet strength of dividends.
In the tumult of stagflation, companies that reward shareholders with reliable payouts act as anchors. They're not flashy, but they're steady.
Monk pointed out that firms in stable sectors, those less dependent on consumer confidence such as utilities and staples, can still deliver in choppy waters.
So it's about shifting strategy, building in resilience, and waiting out the storm with an eye for opportunity, he said.