Welcome to the New Normal

03/18/2011 12:37 pm EST

Focus: MARKETS

James Stack

President, Stack Financial Management

If you're worried about double dips, hyperinflation or deflation, you probably shouldn't be, says James Stack of InvesTech Research in this exclusive interview with MoneyShow.com. However, there are a couple of worry spots in our long-term outlook that you should consider, as he explains.

A couple of years ago, everybody was worried about deflation—and now in the wake of the Fed's stimulus to the economy and the deficits, we're all worried about hyperinflation.

Which camp do you fall in?

Well, I really don't fall in either camp. The kind of runaway inflation—for example, the Germany experience in the 1930s—we're not going to see that.

I think we are transitioning into what you might call a “new normal,” but I might call it a more normal normal. What I mean by that is, we've had three decades of falling long-term interest rates and generally falling inflation ever since the peak inflation of over 10% in 1982.

I think looking out over the next ten or 15 years—because of the deficits, because of the debt that we have—we are going to have higher inflation in the future. Not dramatically so, but instead of seeing inflation around its published rate today of 1.5% (and if you take housing out of the CPI, it's closer to 2.5%), I think we're going to see inflation return more to a 4% to 5% level, more disturbing levels.

That means that our economic cycles are going to return to more normal cycles. The last three decades, we've only had three recessions. I think investors think recessions only come around about once a decade. Not historically.

If you look at it historically over the past 100 years, recoveries last about three and a half years. So there's not that much time between the end of one recession and the start of the next.

I think that's what's going to happen over the next ten to 20 years. We're going to see more cyclical inflation and that is going to mean a more cyclical economy and more frequent recessions. I think if we get through economic recoveries that last four to five years, that would be more the historic norm.

So we can go back to the old-fashioned business cycles that we had.

More like the '50s and '60s, and even the '70s before we went into bad inflation.

That's not a bad thing. It means we're going to have more frequent bear markets. It's going to make it more important for investors to manage risk—but at the same time, I think there's a good chance that those bear markets will not be like the devastating bear market we've just been through.

When you go through long economic recoveries without those healthy bear markets, then you end up with the devastating bear markets that we had in 2000 to 2002 and 2007 to 2009.

The average bear market is generally around 30% to 33%. That still is a devastating loss, but it's a lot better than the 58% loss we saw in the S&P this last bear market.

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