Stagflation is simply a condition where economic growth is minimal (i.e., about 2 pct presently in the U.S.) but the credit cycle is tightening and short-term interest rates rising due to monetary policy of central bankers trying to control rising inflation rates.

Unfortunately, as U.S. interest rates have risen higher than many equivalent risk alternatives in other countries, international traders are deploying new money in U.S. bonds, which has pushed down the long-term yield.

Interestingly, they are doing that because they see that inflation in many other countries is greater today or has prospects of becoming so.

With falling long rates and rising short rates, a flat to negative yield curve condition can happen. In fact it has happened where today 2-year Treasury yields are higher than 5-year and 10-year yields.

Historically, periods of stagflation have ushered in significant bear markets for equities. This is a time for U.S. equity traders to protect capital. Potential rewards are not comparable to the risks of capital loss.

For equity markets to become healthy, the economy has to start growing.

But another interesting call was made yesterday afternoon by Steve Forbes on CNBC. He said he believes that the U.S. is headed for a period of out-of-control inflation. I accept that, but what I find odd is that Forbes also has been forecasting an oil market that will, he says, fall from over $60 a barrel to about $30.

That would be anti-inflationary in my view because it would serve to get the U.S. economy growing again, which would sop up the excess liquidity that exists today and gone into luxury goods and so forth.

Maybe Forbes does have a point. If the economy were to crank faster, there would be an even greater shortage of commodities, like metals, construction materials, etc.

I don't have an answer, but I thought his last two calls on the economy have been rather extreme, which, like stagflation, Iran, etc, is another reason why traders are nervous today.