In looking at a period of stagflation, I think that you probably have to look at the transition to it and then what you do when we get there.  The transition to it will be awful for bonds and especially bond funds.  At some point when rates are high, it will be a good time to go back into these investments.  You might want to bring a "shovel."

I think that it will also be important to understand whether or not the stagflation is global or just in the US.  I think that higher inflation will probably be a global phenom, but the stagnation may not be.  Emerging markets are really the worldwide economic engine right now (little alone in a period of even less spectacular growth).  Any large decline or crisis in EM would be disastrous for the world economy... it may be able to withstand a slowdown in the US.  It couldn't handle both...

Higher inflation has always been good for commodity prices... I don't think that it will be different this time.

Currencies are a tricky "animal" because they can be manipulated, regardless of what Paulson says.  I think that the chances of a strong dollar are remote for any extended period of time... as long as we import a large part of our oil and we import most of what we buy.   The dollar could stabilize and show modest strength, though.  The currency tailwind for foreign investments is not blowing as hard (for now).  I don't think that you invest in currencies or because of currencies... you can trade (speculate in) currencies.

Stagflation would be a cancer to most equities... stock indices would tank imho.  P/E's in high single digits would become the norm (again), if high quality interest rates hit double digits. 

erryl

I heard that in 70s, real estate proved to be a good investment during stagflation. This time its very different due to credit crisis - which did not happen back then.

So following seems to be the investment themes for stagflation:

1. Short term bonds
2. TIPS and I-bonds
3. Commodity futures
4. Natural resource stocks or mutual funds
5. Precious metal funds
6. Canadian oil trusts
7. Commodity rich country funds: FICDX, FLATX and their currency/bond funds
8. Foreign REITs? (interest rate rise can kill them)

Most of the above look over bought right now. Bonds and TIPS have lower yield due to government unserstating inflation.

Late starters can have a look at FICDX, precious metal funds, CANROYs, FNMIX and perhaps foreign REITs.

Breaking the problem of stagflation into two problems and looking at them seperately might be helpful.  Let's take the problem of a stagnant economy first.  The lead weight on economic growth in the U S and other parts of the world seems to be the credit crisis or the credability crisis in the financial sector.  I see no easy or quick resolution to that problem, but a way for an investor to deal with it might be by investing in cash rich companies that do not need a lot of credit.  Generally speaking, companies that pay dividends usually have strong balance sheets and considerable cash so we might have a clue there. 

Staying ahead of inflation is a must for the succesful investor, but it can be challenging if inflationary conditions deteriorate into runaway or double digit inflation.  We are not there yet so I will continue to expect commodities and/or companies that benefit from high commodity prices to benefit.  Companies like CAT, Deere, POT, CPB & others come to mind.   

There should also be special situations in green tech, emerging markets, and perhaps real estate, but selection of investments will be critical in those sectors. 

The deterioration of the USD has slowed considerably if it has not stopped, so I would not expect the tailwind effect that a falling dollar has had recently on some investments to continue as strong as it has been in recent years. 

uh

norbertc:

Ideas?  Convictions? 

Charged but never convicted...  it was a college thing...

Charged but never convicted...  it was a college thing...

I didn't inhale, so I was all right...

I've been in  EVX for awhile.  It's an "environmental" ETF that covers (among other things) waste collection and disposal, incl. commercial, residential and medical waste.  Garbage trucks use fuel, but the ETF has gone up along with the price of oil.  I suppose if there's a more severe downturn, less waste will be produced, but so far, the ETF is doing quite well...save for the past several days.  This may be a good place for a stagflation market.

Here are a few weekly charts of the top 3 component stocks, showing how well they did during the last bear market. 

RSG has been on a roll since 2001.  It's had a few ups and downs but the LT trend remains up: 

(removed)

SRCL has been on a roll since 2000, though it declined during the first part of 2008, since recovered: 

(removed)

WMI plunged in 1999-2000, then recovered.  It's the least impressive of the top three, though it did zig while the S&P 500 zagged during the last bear market:

(removed)

EDIT:  Well dang it, I posted weekly, 10-year charts and they reverted to 1-year charts!  Sorry about that, but I removed the links since they didn't show the bear market trend. 

stagflation is only a temporary condition that really isnt an economic condition you can invest in other than cash.   stagflation always leads to one of the basic 4 possibilites we can have. its those possibilities you want to invest in. 

prosperty=stocks

inflation gold or commodities

depression/deflation  long term treasuries

recession  cash , could be long term bonds or could be gold

best thing is cover the 4 conditions and forget guessing which way we go

from bloomberg:

``The BRICS are better placed to withstand a slowdown, but that doesn't mean they won't feel it,'' said Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina. ``Everyone is going to.''

Net private investment in developing countries surged by $269 billion last year to a record $1.03 trillion, with the bulk of the money going to the BRIC countries, according to the World Bank. It forecasts those investment flows will drop to about $800 billion by next year.

Felix Zulauf, who I respect a lot for his global views, suggests that we are at the early part of a global rising inflation cycle. Some of his comments n this week's Barron's roundtable are worth reading, at least to understand the secular forces at work. A few snippets:

• We're at the doorstep of the next inflationary period. You won't see greater inflation in the next one or two years, but prices will be much higher in 10 years. Bond yields will rise as inflationary pressures mount. The yield on 10-year Treasuries, now 4%, could hit 5.5% in 12 to 18 months. The U.S. Treasury bond is a short, though you'll probably get a better entry point below 4% in the next few weeks.

• Investors should also be long commodities, through the DBC, the PowerShares DB Commodity Index Tracking Fund. This is a trading market. Based on real-estate cycles in other countries, the U.S. housing market will decline for another two years, bottoming in 2010. The consumer will be in such a precarious position that the government will have to step in to increase spending and support the economy. The Federal Reserve, despite rising inflation rates, has no choice but to leave short-term rates low. That means the dollar won't strengthen much either.

 Sounds pretty much like the 70s record is being replayed here ..... Anil

AKHalea:

Felix Zulauf, who I respect a lot for his global views, suggests that we are at the early part of a global rising inflation cycle. Some of his comments n this week's Barron's roundtable are worth reading, at least to understand the secular forces at work. A few snippets:

• We're at the doorstep of the next inflationary period. You won't see greater inflation in the next one or two years, but prices will be much higher in 10 years. Bond yields will rise as inflationary pressures mount. The yield on 10-year Treasuries, now 4%, could hit 5.5% in 12 to 18 months. The U.S. Treasury bond is a short, though you'll probably get a better entry point below 4% in the next few weeks.

• Investors should also be long commodities, through the DBC, the PowerShares DB Commodity Index Tracking Fund. This is a trading market. Based on real-estate cycles in other countries, the U.S. housing market will decline for another two years, bottoming in 2010. The consumer will be in such a precarious position that the government will have to step in to increase spending and support the economy. The Federal Reserve, despite rising inflation rates, has no choice but to leave short-term rates low. That means the dollar won't strengthen much either.

 Sounds pretty much like the 70s record is being replayed here ..... Anil

The sky is falling, the sky is falling!

The economic data still shows a positive rate of GDP and the weak dollar is boosting exports and helping many sectors of our economy.  The Fed will raise interest rates in 2009 if not before then (but I doubt that it will happen before 2009).

The mistakes of the 1970's have been learned.