Reflation 2025: Something’s Gotta Give

“The Great Inflation of the 1970s destroyed faith in paper assets, because if you held a bond, suddenly the bond was worth much less money than it was before.”

—Ron Chernow

December 12, 2024— On paper, yesterday’s CPI was exactly what markets wanted to hear…

Consumer price inflation held steady month over month, which is just enough to keep the Federal Reserve on track for another quarter-point rate cut by year-end.

And allow trading algos to push the market higher.

The bots take an immediate view of the future. Human beings have the luxury of taking a longer look forward… and back.

The inflation data for the past few months hints that the disinflation trend ballyhooed by the Biden administration.

The indicator we’re mostly concerned today is the producer price index (PPI) which showed 3% inflation in November, up nearly half a percentage point from October.

We stand on the cusp of re-inflation in 2025, hesitate as we might call it a Grey Swan event.

Inflation often comes in waves with some big spikes. And we may be witnessing a scene reminiscent of the 1968-1980 inflationary wave.

Turn Your Images On

That’s why we have to chuckle a bit at yesterday’s market reaction. Sure, we didn’t get re-inflation for November. That’s “good enough” to give the market the quick shot of adrenaline for stamina here the top.

Mind you, higher inflation shows up first in asset prices.

The Joneses don’t complain when their home value or stock portfolio is growing like gangbusters. It’s only when taking the family out to McD’s suddenly costs $45 for a family of four Mr. and Mrs. Jones realize inflation has gotten out of control.

Meanwhile, let’s add some nuance to our Grey Swan view on inflation for 2025: Globally, central banks are already lowering interest rates rapidly.

Today, Switzerland followed Canada’s decision on Wednesday to cut rates by 0.5%. A half-point move is pretty notable. If inflation ticks up, these fast rate cuts will have proven to be the wrong move.

So what’s Jerome Powell to do? The Fed can’t step on the brakes… and the gas pedal at the same time. Something’s gotta give.

As Grey Swan Investment Fraternity contributor John Rubino shows with a few telltale charts below, re-flation is here already. As the kids say, John brings the receipts. ~ Enjoy, Addison

Crash Alert: Priced for Perfection in an Imperfect World

John Rubino, John Rubino’s Substack

The last few US inflation reports have been ominous, with the general trend morphing from sharp decline to gradual increase. Here’s the Core Services index, which is now rising at a 4% annual rate:

Turn Your Images On

Stocks, meanwhile, are priced for perfection, with the second highest price/earnings ratio on record:

Turn Your Images On

Investors are getting cocky, as evidenced by the soaring popularity of leveraged ETFs:

Turn Your Images On

And gold has shaken off its post-election correction and is now threatening its all-time-high:

Turn Your Images On

Can the Fed keep easing into all this?

Today’s stock market enthusiasm is based in part on the expectation of ever-easier money for the balance of the decade. But can the Fed really deliver this in the face of soaring financial assets, off-the-charts speculation, and rising general inflation? Wouldn’t that spike inflation? Probably. So at some point in 2025 the Fed will have to stop lowering rates.

What happens then? Well, check the above P/E chart for what became of the last few priced-for-perfection markets. ~ John Rubino, John Rubino’s Substack

Regards,

Addison Wiggin,
Grey Swan

P.S. Thanks for your feedback so far as we build out the Grey Swan community. We value all feedback, but it’s always nice to get a compliment, like that from John, who writes:

You convinced me, long ago, that, like Bill Bonner, you are a terrific writer founded on solid economic principles.

In your writing today, it also occurred to me that the motto of the denizens of the swamp should be: “We came, we saw, we burrowed.”

Clever.

Responding to yesterday’s P.S. on living in “Smalltimore” longtime reader Basil writes:

If you’ve lived in Central MD for any length of time, you cross paths with the name, Mangione. A very surreal event in a very surrealistic year. Cannot condone the act of which Luigi is accused. But Obama, indeed, sold us down the river to AHIP. One reason the name Obama sticks in my craw. They wrote the legislation.

United Healthcare was forever a flagrant outlier in the biz. (see William McGuire and his $400M disgorgement).

Sad times, Addison. Pray for all impacted. Thank you.

Share your thoughts on reflation, the economy in 2025, healthcare reform, and other pertinent Grey Swan topics here: addison@greyswanfraternity.com.

“The Great Inflation of the 1970s destroyed faith in paper assets, because if you held a bond, suddenly the bond was worth much less money than it was before.”

—Ron Chernow

December 12, 2024— On paper, yesterday’s CPI was exactly what markets wanted to hear…

Consumer price inflation held steady month over month, which is just enough to keep the Federal Reserve on track for another quarter-point rate cut by year-end.

And allow trading algos to push the market higher.

The bots take an immediate view of the future. Human beings have the luxury of taking a longer look forward… and back.

The inflation data for the past few months hints that the disinflation trend ballyhooed by the Biden administration.

The indicator we’re mostly concerned today is the producer price index (PPI) which showed 3% inflation in November, up nearly half a percentage point from October.

We stand on the cusp of re-inflation in 2025, hesitate as we might call it a Grey Swan event.

Inflation often comes in waves with some big spikes. And we may be witnessing a scene reminiscent of the 1968-1980 inflationary wave.

Turn Your Images On

Mind you, higher inflation shows up first in asset prices.

Meanwhile, let’s add some nuance to our Grey Swan view on inflation for 2025: Globally, central banks are already lowering interest rates rapidly.

So what’s Jerome Powell to do? The Fed can’t step on the brakes… and the gas pedal at the same time. Something’s gotta give.

As Grey Swan Investment Fraternity contributor John Rubino shows with a few telltale charts below, re-flation is here already. As the kids say, John brings the receipts. ~ Enjoy, Addison

Crash Alert: Priced for Perfection in an Imperfect World

John Rubino, John Rubino’s Substack

The last few US inflation reports have been ominous, with the general trend morphing from sharp decline to gradual increase. Here’s the Core Services index, which is now rising at a 4% annual rate:

Turn Your Images On

Stocks, meanwhile, are priced for perfection, with the second highest price/earnings ratio on record:

Turn Your Images On

Investors are getting cocky, as evidenced by the soaring popularity of leveraged ETFs:

Turn Your Images On

And gold has shaken off its post-election correction and is now threatening its all-time-high:

Turn Your Images On

Can the Fed keep easing into all this?

What happens then? Well, check the above P/E chart for what became of the last few priced-for-perfection markets. ~ John Rubino, John Rubino’s Substack

Regards,

Addison Wiggin,
Grey Swan

P.S. Thanks for your feedback so far as we build out the Grey Swan community. We value all feedback, but it’s always nice to get a compliment, like that from John, who writes:

You convinced me, long ago, that, like Bill Bonner, you are a terrific writer founded on solid economic principles.

In your writing today, it also occurred to me that the motto of the denizens of the swamp should be: “We came, we saw, we burrowed.”

Clever.

Responding to yesterday’s P.S. on living in “Smalltimore” longtime reader Basil writes:

If you’ve lived in Central MD for any length of time, you cross paths with the name, Mangione. A very surreal event in a very surrealistic year. Cannot condone the act of which Luigi is accused. But Obama, indeed, sold us down the river to AHIP. One reason the name Obama sticks in my craw. They wrote the legislation.

United Healthcare was forever a flagrant outlier in the biz. (see William McGuire and his $400M disgorgement).

Sad times, Addison. Pray for all impacted. Thank you.

Share your thoughts on reflation, the economy in 2025, healthcare reform, and other pertinent Grey Swan topics here: addison@greyswanfraternity.com.

America has consistently reinvented itself in times of crisis. The founders survived monarchy. Lincoln survived disunion. We’ve survived bank panics, oil shocks, stagflation, and disco. We’ll survive deplatforming, too.

The Second American Revolution won’t be fought with muskets or manifestos. It won’t be fought with petty violence and street demonstrations. It will be written into code. And available to those who wish to take advantage of it.

Russell Kirk called the first American Revolution “a revolution not made, but prevented.” The second will be the same. We’re not tearing down the house — we’re going to rewire it in code.

The result may not be utopia. But it will be freedom you can bank on.

Treasury Secretary Scott Bessent has called stablecoins, including USDC, “a pillar of dollar strength,” estimating a $2 trillion market within five years. U.S. Treasuries back every coin.

Bessent’s formula even suggests that a broader, more efficient market for US dollars will help retain its best use case as the reserve currency of global finance… and, perhaps, help the current administration address the nation’s $37 trillion mountain of debt.

In trying to cancel a man, the establishment accidentally reinforced the dollar, and may add decades to its life as a useful currency.

As we approach the 250th anniversary of the United States, it’s worth recalling that our first Revolution wasn’t waged to destroy an order — it was fought to preserve one.

Political philosopher Russell Kirk called it “a revolution not made but prevented.” The colonists sought not chaos but continuity — the defense of their “chartered rights as Englishmen,” not the birth of an entirely new world. Kirk wrote:

“The American Revolution was a preventive movement, intended to preserve an old constitutional structure. The French Revolution meant the destruction of the fabric of society.”

The difference, Kirk argued, was moral. The American Revolution was rooted in ordered liberty; the French in ideological frenzy. The first produced a Constitution; the second, a guillotine.

Two and a half centuries later, the argument continues — only now, the battlefield is financial. Who controls access to money? Who defines legitimacy? Can a citizen’s ability to transact depend on their politics?

Trump and Powell are no buddies. They’ve been fighting over rate cuts all year—Trump demanding more, Powell holding back. Even after cutting twice, Trump called him “grossly incompetent” and said he’d “love to fire” him. The tension has been building for months.

And Trump now seems ready to install someone who shares his appetite for lower rates and easier money.

Trump has been dropping hints for weeks—saying on November 18, “I think I already know my choice,” and then doubling down last Sunday aboard Air Force One with, “I know who I am going to pick… we’ll be announcing it.”

He was referring to one Kevin Hassett, who—according to a recent Bloomberg report—has emerged as the overwhelming favorite to become the next Fed chair.