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.

Just a couple of days ago, everyone was celebrating gold’s move above the critical $4,000 psychological resistance level. But with today’s pullback, it slipped back below that level in both COMEX futures and spot, which makes me pause and think, as it indicates a rejection of that key level.

This increases the likelihood of a modest pullback or a period of sideways consolidation, as gold may have temporarily run out of momentum to push higher in the short term. That is perfectly normal, healthy, and not at all surprising. It is much like a sprinter who has just run hard and needs a moment to catch their breath.

Gold. Stocks. Bitcoin. Prediction markets. Each a different surface on the same wave — money searching for a story it can still believe in.

The Schelling Point of this moment isn’t one price or policy; it’s the shared intuition that something historic is shifting… even though we haven’t named it.

It’s Friday. It’s a good time to “remobilize our axioms,” as my favorite William F. Buckley quote goes.

We need to stick to our guns and remember that the goal of understanding Grey Swan events as they unfold is to plan, preserve our capital, and earn a good return for the long run. Let’s not get distracted by the market highs or headlines of a terrifying bull!

Only during the ‘08 financial crisis and its aftermath have the majority of money managers seen stocks as undervalued.

This data point is another in a list of historic highs – stock indexes, gold, silver, bitcoin, retail investment, retail margin borrowing – we’re seeing in the market right now.

Markets are out of whack to the upside.

History’s cautionary tale? When markets are out of whack… it takes an unsettling event (crisis) to get them back into whack.

As AI clusters demand more light at every layer — from rack to package — Coherent’s share of that energy pathway increases. The startups illustrate what’s possible; Coherent ensures it happens.

As light enters the data center — step by step, layer by layer — Coherent is the most experienced and scaled name in the field. It carries the light forward.

Gold. Stocks. Bitcoin. Prediction markets. Each a different surface on the same wave — money searching for a story it can still believe in.

The Schelling Point of this moment isn’t one price or policy; it’s the shared intuition that something historic is shifting… even though we haven’t named it.

It’s Friday. It’s a good time to “remobilize our axioms,” as my favorite William F. Buckley quote goes.

Only during the ‘08 financial crisis and its aftermath have the majority of money managers seen stocks as undervalued.

This data point is another in a list of historic highs – stock indexes, gold, silver, bitcoin, retail investment, retail margin borrowing – we’re seeing in the market right now.

Markets are out of whack to the upside.

History’s cautionary tale? When markets are out of whack… it takes an unsettling event (crisis) to get them back into whack.

As light enters the data center — step by step, layer by layer — Coherent is the most experienced and scaled name in the field. It carries the light forward.