Back in February, I contended that “although the last couple of days brought back euphoria into the market, with volatility hanging tough, one should be prepared for anything.”

That sentiment remains true right now.

With volatility holding recent lows while the Nasdaq gets closer to all-time highs and the S&P 500 inches closer to 3000, complacency and euphoria are risk on terms.

Yet, as millions take off their mask and begin to congregate for the long Memorial Day weekend ahead, I only become more convinced that the stagflation theory will take shape once the summer season officially begins.

Stagflation is risk-off.

The Federal Reserve minutes came out today.

Highlights of the FOMC:

• “To support the flow of credit…, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning…”
• “In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations…. The Committee….is prepared to adjust its plans as appropriate."

Will this ultimately keep equities in rally mode?

Uncertain.

Could it ignite stagflation as the economy is under siege while the cost to borrow money is virtually nil.

Wait, there’s more.

Out of Germany today: Germans paid to borrow as negative rates reach consumers

If the banks are paying you to borrow money, what might you do with that money? Save it? Doubtful. No interest rates to collect.

Spend it, very likely. Now multiply that not just by number of people globally, but also by businesses, and governments.

That is stagflation. Spending soars while supply dwindles.

Hence, consumer prices go up with the rising demand.

The economy still stagnates and voila: stagflation!

Michele ‘Mish’ Schneider serves as Director of Trading Education at MarketGauge.com. For 20 years, MarketGauge.com has provided financial information and education to thousands. MarketWatch named Mish one of the top 50 financial people to follow on Twitter. In 2018, Mish won the Top Stock Pick of the year for RealVision. Follow her on Twitter at Michele Schneider @marketminute.