“No where to run, no where to hide,” would be my description of world financial markets this week. Remember last week’s bugaboo: the multi-billion dollar municipal bond auction market? Well, this week investors fretted over the possible reemergence of Stagflation, something I haven’t encountered since watching Johnny Travolta dance his way through “Saturday Night Fever” in the late Seventies.

For you younger readers who never had the pleasure of wearing polyester suits, Stagflation was the scourge of the U.S. economy for 11 years ending in 1980. The Seventies was a period of stagnating economic growth marked by three recessions, skyrocketing unemployment (9%) and an inflation rate that spiked to 15%. Our only way out was jacking up interest rates so high that it snuffed out inflation but also sent us into a deep two- year recession ending in 1982.

Wednesday’s release of the CPI indicating .04% increase in January, which matched December’s increase, gave the market the willies as did the news that food prices ratcheted up 5.7% year over year– the largest increase since 1990. The Bureau of Labor statistics does not include energy and food costs in their calculations of the Consumer Price Index. If you add those two important variables into the calculation, I believe the unofficial, non-core inflation number is somewhere between 10-11% right now.

The bond markets reacted to that news with a vengeance. They sold down bond prices, forcing interest rates higher (remember, there is an inverse relationship between bond prices and interest rates). To make matters worse, Treasury bonds, a safe haven for frightened investors over the last two months, look pricey or “overbought” to me. Yields are way down and it looks like a market waiting to correct. So where do you go? CD and money market rates are dropping, municipal bonds have their own woes and the stock markets are working their way back down to the lows of last month.

Some contrarians argue that stocks are cheap. Today, the expected P/E (price/earnings multiple) of the S&P 500 is trading at 13.7, a discount to its historical range of 14-16%. That’s true as far as it goes but I believe the “E” for the earnings portion of that equation is still too optimistic. As the economy weakens and earnings forecasts continue to come down, investors will perceive that overall prices are not at fire sale levels yet. Of course, there are some sectors that are cheap, like financials and housing stocks, but most investors refuse to wade into those murky waters.

Sounds pretty dismal, doesn’t it, yet there are some bright spots. I mentioned that several commodities looked interesting last week. Most of those areas were up in a down market this week. Gold, silver, copper, platinum, palladium, iron ore, energy and agricultural commodity-related stocks, mutual funds and exchange traded funds were all up. I believe this trend will continue. Whether we enter into stagflation or simply a higher inflation cycle, commodities and natural resources should be winners for the foreseeable future. And by the way, with all the wrinkles in these global markets, polyester might make a come back.