Blog | CB Investment Management

Inflation Signals And The Coming Stagflation.

Procyclical Stimulus Of 2023 Was Celebrated But Shows A Weak Inflation Commitment.

“Russell 2000 EPS Growth is tracking DOWN -42.3% year-over-year”

Keith McCullough

“Chicago Fed National Financial Conditions Index now as loose as in November 2021 when the Fed was still running QE and zero rates.”

Sven Henrich

“US unsustainable debt, less growth, persistent inflation.”

Daniel Lacalle

The data shows that the most extreme procyclical deficit spending in decades only just kept the US out of recession in 2023.

While last week’s GDP “beat” came from an inflation aberration, it now takes $1.55 in budget deficit to generate $1 of growth… and it takes over $2.50 in new debt to generate $1 of GDP growth!

The chart above shows how procyclical deficit stimulus, starting in 2015, accelerated to new highs in 2023. Even as the unemployment rate continued to fall the budget deficit was increased. Accelerating deficit stimulus is very aggressive policy stimulus, which was avoided prior to 2015 going back to 1970. 

US stock markets have returned to the highs of two years ago, but uniquely without the Russell 2000. The macro impact hugely benefits the biggest companies, and the data and surveys of small businesses look more like a deep recession or even a depression.

It is important to understand this transformation in policy and where it is likely to be going.


As extreme as government spending has been, it has only just been able to keep the economy out of recession. 

In the fourth quarter this effect was very pronounced.

One perspective is that recessions should be avoided at all costs, particularly to the extent that a recession could coincide with an election. However, is this really the most effective way to manage an economy? What is likely to be the longer term economic  outcome?

Certainly, the market’s own measure of future inflation has reversed to the upside following the astonishing fiscal stimulus in the second half of 2023.

In addition there has already been a trend deterioration in profitability, with a rising percentage of companies not even making profits. This should be a very real concern for long term investors.


The interplay between economics, policy and the markets has become quite complicated. For a deeper dive, here is a great discussion.

To get into the details of market function Sven Henrich has a great track record in this environment and well describes some the more technical influences that policy makers are using.

The price action in recent months has been extraordinary and it is well worth getting some understanding of what is really going on. Certainly we are now seeing extreme positioning, and record negative divergences.



There is an inherent contradiction in the relationship between economic policy and long term sustainable growth with low inflation. Excess liquidity and debt increases can disguise this for a long time. However, it should already be clear that private sector growth in aggregate is already impaired, as the long term trend in both profitability and GDP already clearly shows. If excess stimulus can’t turn this around, and furthermore is digging a deeper debt hole, and  is ultimately inflationary then investors need to plan carefully how they will negotiate the next several years.

Best Practice is a matter of your Best Interest.

Education and a Commitment to Informed Consent is an Obligation.

Chris Belchamber is an IRMAA Certified Planner

Medicare’s IRMAA impacts every retirement plan. Learning how to mitigate it is available via IRMAA Certified Planners designation.

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