Blain’s Morning Porridge Mayday 2026 – Stagflation… No, definitely not… but yes.
“By tax adjustments we have planned to institute the promised land, and just to show we’re still sincere, we’ll sing the Red Flag once a year…”
When staring down the abyss of looming stagflation, a bond market rout, and a reset on the global economy… let’s try to pretend it’s all something else. Christine Legarde would have made a great French President. Of course it’s not Stagflation… it’s just… Well? What is it?
Its May Day – The Sun is shining brightly on this most Socialist Day of the year. Bandiera Rosa, La Triumphera indeed! Tonight, I shall recall my youth on the barricades of leftist student politics and put on my reddest of red ties to celebrate the working class and the nobility of the proletariat as we quaff the bubbles at the Yacht Club dinner…. I will wonder where the f*** it all went so wrong?
Yesterday ECB President Christine Legarde dismissed the threat of Stagflation that hangs over the Western Economy. She played semantics and argued stagflation was something from the 1970s – like flared pants and platform soles. She suggested we face something completely different today.
Really? What might that be then Chrissy?
Let’s think it through – where are we today?
- The threat of a long-lasting energy shock from the stalemated Iran War.
- Threats to global supply chains as trade is weaponised – chips, rare earths and tariffs.
- The ECB and The Bank of England both moving towards rate hikes to counter rising inflation. (That was yesterday’s message.)
- Flat lining economies across Europe. (The US is different – it’s still flying on the hopes from AI.)
- Growing frustration with broken political accountability hiding behind the mechanisms (bureaucracy) of state. (My road out of the village is blocked because a small pothole metastasized into an Olympic sized swimming pool – it will cost £17 bln just to patch our broken road system.)
- Governments that are effectively broke and resorting to austerity spending decisions – which inevitably prioritise the wrong things in pursuit of political expediency rather than good policy.
- Rising income and societal inequality, wages not matching inflation, young people struggling to find security of accommodation and an increasing number of retirees without sufficient pensions from the private sector furious at gold-plated public service provision.
- Rising conflict risks.
Aside from the Bad Fashion, Bad Hair, Bad Bay City Rollers, Glam Rock, and Disco…. all the ingredients of the 1970s are staring us in the face. Inflation, economic slowdown, austerity, political frustration, and growing unfairness. Tell me something is not going to give?
Yesterday Apple reported an absolutely stunning first quarter, selling more phones and other bright shinny tat than you can shake a stick at. A lot of it to China surprisingly. (Tim Cook should thank me – I contributed by buying new Macs for the office – although I did decline the mega expensive Apple Screens and went for Dell widescreens instead.) Some analysts suggest the success of the current iPhone (x+1) is due to customers now replacing them less frequently since the last inflation shock 3 years ago.
But ultimately, what happens when consumers stop consuming? At some point rising interest rates and falling wages will leave less dosh on their phones and they will cut back spending causing shops to go bust, suppliers to fail, commercial property prices to tumble, and company earnings to slide. And alongside that the housing markets will spiral into weakness, breaking the last plank to which economic confidence clung. You get the picture…
Call it what it is likely to be. Stagflation. Rising interest rates and recession. Thank you, Mr Trump. (Actually, his Iranian miscalculation will be remembered as a catalyst… Trump will still achieve something of his longed-for “Great Man” status, remembered forever on the front pages of “Warnings from History” and “Great Economic Mistakes”.)
Back to the ECB: of course, Christine Legarde is not a central banker. She is a politician. A French politician who might resign early from her role as the political President of the ECB, and do a Mark Carney looking to succeed Macron in 2027… (she is leaving it a bit late if that is the plan…) Stranger things have happened. And if she is going to play French politics, she needs a hopeful story to sell the electorate… i.e.: “It’s not stagflation… it’s just manageable inflation for which I can solve…” or some such nonsense…
Lagarde said 1970s inflation was sustained and solid, accompanied by high unemployment, “and a monetary and fiscal framework that had nothing to do with what we have at the moment.” That was an interesting comment.
Always remember one of the core tenants of the Morning Porridge and my Market Mantra no 2 is: Things are never as bad as we fear, but seldom as good as we hope.
Er… Sometimes… they are.
Its looking increasingly likely the current oil shock will be long lasting, and Europe already has serious long-term energy cost issues still to solve. Young people are under increasing threat from AI “MacDonaldising” decent jobs – converting their parents well paid jobs into their futures as low wage proles. And in the UK, there is the additional issue of students with now-pointless degrees saddled with life-changing crippling debt.
Sure… no prospect of rising social tensions then? Social unrest and powerful unions were a defining issue of the 1970s. Legarde may be right that the unions have little real strength any more, but the rise of Hard Socialist Left – now being seen by the takeover of the UK Green Party, and the reality that Hard Right Wing parties are more than willing to embrace redistributive policies to garner votes, suggests economic militancy is not far off.
And to cap it all we have the prospect of a global bond shock in the offing. I was chatting to a client y’day about bonds and private credit. History shows bubbles occur because of abundant liquidity and the moment that turns off, they burst because liquidity suddenly runs short. Imagine if the single largest market on the planet – the US Treasury market was to suffer a liquidity crunch because folk stop buying. (Perish the thought… let’s pretend it won’t ever happen. (Which will ensure it does…)
If, as has been suggested, the Iran war plays out badly pushing inflation up to 6-7%, then the European Central Banks will be looking at substantial rate hikes – which isn’t different to what they did in the 1970s.
What did Christine Lagarde say about “this time (monetary and fiscal tools) it’s different”?
Brace, Brace, Brace! here it comes… The bastard daughter of Quantitative Easing this way comes. Bond Buying and ZIRP. Lest we forget, QE from 2010-2023 did absolutely zip to promote growth and create jobs in Europe, but it did fuel financial asset prices to shoot higher and raise debt quantums… (Any one still holding the Austria century bond? Ouch.)
Would a global bond reset actually help? Perhaps. But probably not.
Sorry to be so bleak on this beautiful May Day Morning…. It’s a Bank Holiday in Blighty this weekend. The rain is coming tomorrow.
Out of time, and back to the day job… have a great weekend. Back Tuesday.
Bill Blain
Author of the Morning Porridge
CEO Windshift Capital
Advisor – Spitfire Strategic Capital
Please don’t forget about my new book, The Battle For Hamble. It’s a proper grown-up examination of how bureaucracy has failed: a tale of Greedy Corporates, Bad Planning and Economic Illiteracy. It explains how a wholly unnecessary Gravel Quarry will be dug in middle of a prosperous village – putting 6000 jobs at risk. The truth is no one wants gravel, and the quarry company understands it’s not what you dig out, but what you stuff back into a hole in the ground that matters. Gravel sells for £30 a tonne – Landfill earns £150 a tonne to bury. Go figure.
