By Sean Hyman

Investors are in for a rude awakening this year.

The fact is we are about to enter a very strange, rare period in financial history. If the past is any indication, this new period in history will affect every investment you place this year. But unfortunately, most investors have no idea it’s coming yet.

It’s called stagflation – something we haven’t seen in the U.S. since the ‘70s. But it’s very likely we will see it again later this year.

Let me explain. You see, economies usually react to market influences in two ways. Either economies expand and spur inflation or they contract and encourage deflation. But stagflation doesn’t fit neatly into either definition.

Instead, stagflation happens when you have declining or stagnate growth in an economy and high inflation at the same time. Hence you have stagnation with inflation or “stag”-“flation.”

Why Stagflation Is So Dangerous to Your Wallet

If you lived through the 1970s, then you already know how dangerous stagflation is. In fact, even if you knew nothing about economics in the 1970s, you undoubtedly still felt the effects of stagflation.

What does stagflation do? As I mentioned, stagflation happens when there is no growth in an economy. If there’s no growth, then there is no reason for companies to grow and expand. That means they won’t create more jobs or give big raises.

But at the same time, inflation keeps rising, so everything you need to buy costs more. So your cost of living continues to soar, but there are no new jobs or raises to support those new expenses.

But how can that be? I think Wikipedia explains it best. See what they say below:

…Stagflation can result when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable. This type of stagflation presents a policy dilemma because most actions to assist with fighting inflation worsen economic stagnation and vice versa.

Secondly, both stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets. Together, these factors can cause stagflation.

The second paragraph sounds familiar doesn’t it? It definitely sets off warning bells for me considering that is exactly the environment we are living in right now.

Technically, the Charts Are Predicting Stagflation Too

Need more proof? All the charts are also predicting stagflation right now.

Just this past month, the U.S. finally started creeping out of its deflationary period. The first inflationary reading was a high one for its first month post-deflation (1.8%).

However, we are certainly NOT the first ones to show a bit of inflation. As you can see below, six of the eight largest industrialized nations in the world are now showing inflation. Only one has deflation (Japan, no surprise there).

By the way, a couple of months ago…only three of these countries were showing any inflation AT ALL. At that time, only Australia, New Zealand and the U.K. had inflation on their books. Now it’s creeping into other nations around the world.

Inflation is Now All Around Us!

Okay, that’s the “flation” part but what about the “stag” part?

Check out the chart below and I think you will quickly see the “stagnated growth”…so much so that the GDP growth of the U.S. is still in negative territory.

U.S. GDP Growth Has Been Contracting for a Year Now!

 
How to Profit Off the “Cure” for Stagflation

So what’s the remedy for stagflation? Well, a government typically has to do a couple of things at once to cure stagflation.

First the Federal government has to act. The politicians have two choices: They can either increase spending or reduce taxes to spur GDP growth. Well, with Obama in office, we know which one of those is going to happen!

Then, at the same time, the central bank has to fight inflation by raising interest rates.

NOW, knowing that…here’s how to profit from it.

While inflation is still out of control, and the Fed refuses to raise rates, you want to buy the currencies that prosper when inflation rises. Those would be the “commodity currencies” such as the Australian dollar, New Zealand dollar and Canadian dollar.

You also want to short the countries and currencies that are still in deflationary modes like Switzerland’s franc or Japan’s yen.

For the highest profits, my fellow Forex traders out there can pair the inflation currencies with the deflationary currencies. These are the currency pairings to look to while inflation reigns supreme.

However, once the central bankers get it in gear and finally do something about inflation, you will need to quickly switch gears and pile into the currencies that are tackling inflation by AGGRESSIVELY hiking interest rates.

Stay attune to the central banker’s speeches to see who means business and who is just waiting for things to improve (without actually acting).

At that time, you want to buy any country that starts attacking inflation fearlessly. Forex traders, please look to pair the aggressive inflation-fighting countries vs. weak countries that either are NOT fighting inflation OR didn’t have inflation in the first place.

You can be sure I’ll be back here to tell you the second I see that happening. But in the meantime, once again, please pair the inflation currencies the deflation currencies for the highest profits.

Bottom line: Stagflation is so rare that many people don’t know what to do when it happens. So please be on the lookout for these events this year, so you can move fearlessly into the proper positions with the correct “plan of attack.”

P.S. I’ll be guiding my Currency Cross Traders through the worst of this stagflation all year with currency crosses like the AUD/JPY, CAD/JPY, NZD/CHF and others. To get the inside track on all my research, read my latest special report.