“All Roads Lead to Inflation”

“All Roads Lead to Inflation”

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

Will there be a rate cut next week?

The answer is less clear now than it was just a few weeks ago.

The Fed “went big” with its 50-basis-point rate cut in September. Weird thing is, that hasn’t had the impact most expected.

Long-term Treasury rates have risen in the wake of the first big rate cut:

That’s not what’s supposed to happen. What we should see is long-term borrowing costs following the Fed’s path: down.

Instead, investors drove yields higher by dumping long-duration Treasurys; they’ve effectively called a big bluff and demanded higher long-term returns.

Why would they do that? Because they’re not convinced the inflation fight is over. And they’re very convinced that the Fed made the wrong move in cutting so big, so soon.

Now we’ve gotten a piece of data to confirm it from the Fed’s favorite inflation gauge – the “core” Personal Consumer Expenditures (PCE) index, which tracks prices aside from housing and energy (as if these measures are irrelevant). On Thursday came word that core PCE rose 2.7% in September, higher than expected.

That comes after the most recent Consumer Price Index (CPI) report, which showed much the same kind of higher-than-expected advance in September.

Inflation is not squashed, no matter what the first rate cut signaled. And no matter who becomes president next, their plan is inflationary and will add to the deficit.

Trump’s broad-based tariff plan, not to mention his plan to deport millions of undocumented immigrants, are clearly inflationary. Americans will pay higher prices for foreign goods, and fewer undocumented immigrant workers will drive the cost of labor up, at least in the short term and depending on how quickly either goal is achieved. On top of this, he’s proposing tax cuts that will result in lower tax revenue and deeper deficits.

Harris’ plan is laden with subsidies – first-time-homebuyer tax credits, forgivable loans, student-debt cancellations, and more. Lest we forget the boneheaded plan to limit “price gouging” at grocery stores, a historically inflationary move with a very high hit rate.

Harris would like to raise taxes, too. However, her ability to do that – or anything, really – is uncertain if she winds up with a deadlocked Congress.

Really, a deadlocked Congress is about the best thing the market could ask for next week. And that could wind up being a bigger cure to volatility than the winner of the White House.

Regardless, most market participants do expect a 25-basis-point cut at the next meeting. So, it would be truly shocking if the Fed makes a second pivot back to hawkishness:

Not that the inflation data supports a cut next week. We’ve seen higher inflation numbers since the first cut.

But as regular readers know, the real reason why the Fed will probably keep cutting comes down to U.S. government debt expenses, which are at their highest nominal level ever.

And despite the recent relief from the September rate cut, government interest payments are still clocking the fastest pace of the 21st century… a bad mix with record-high deficits:

The government’s interest expense has become the Fed’s third hidden mandate, aside from price stability and employment. They will be quietly willing to accept higher baseline inflation if it means the government doesn’t go bankrupt… at least, not soon.

Paul Tudor Jones sees what we see…

Last week on CNBC, billionaire hedge fund manager Paul Tudor Jones shared where he’s placing his bets ahead of the U.S. election.

It’s a confident stance, and one I agree with:

“I’m long gold. I’m long Bitcoin. I think commodities are so ridiculously under-owned, so I’m long commodities. I think most young people find their inflation hedges via the Nasdaq, that’s also been great.”

The reason he gives is simple: “All roads lead to inflation,” no matter who is president next. That’s exactly what we expect, too, as the result of bigger spending, bigger deficits, and bigger money-printing to prop the economy up.

Think back to what we’ve been telling you right here in TradeSmith Daily. Two weeks before Jones’ CNBC appearance, we told you why we think we’ll see a 2025 inflation wave and why technology is the biggest disinflationary force at our disposal.

We’ve also been pointing out the gains in gold… and the setup in bitcoin.

And both in the past and recently, we’ve talked up oil & gas companies and nuclear stocks as must-own parts of a commodities portfolio.

All of these things are exactly what you want to hold in inflationary times: a mix of real assets with inarguable value, and equities in tech-based businesses that drive inflationary forces down.

We haven’t talked about altcoins much here in TradeSmith Daily…

Namely because there’s just not been a lot to talk about.

Bitcoin (BTC/USD) has beaten the pants off of every other cryptocurrency.

In fact, not for the first time, bitcoin is one of the best performing assets so far this year. It’s beaten stocks and gold (the only real contenders for the top spot) handily.

Take a look at this comparison of bitcoin, gold, the S&P 500, the Nasdaq 100, and “TOTAL2,” which represents the market cap of cryptocurrencies as a whole – aside from bitcoin:

Bitcoin has almost doubled the closest competitor, gold. It’s tripled stocks. And other cryptos, while holding their own, have just not put up the same numbers after diverging from bitcoin’s rally in September.

Another way to look at this is with the measure of bitcoin dominance, which we looked at last Friday. This line measures how much bitcoin’s market cap makes up the entire cryptocurrency market. Since bottoming in 2022, BTC has gone from less than 40% of the crypto market to more than 60%:

This is a strong uptrend, and it tells me that people getting into crypto are not swayed by bitcoin’s $1.5 trillion market cap. They’re not chasing “memecoins.” They’re not buying NFTs or DeFi or trying to earn Ponzi-scheme-level yield on sketchy protocols.

They’re buying bitcoin.

Part of the reason was the launch of “spot” bitcoin ETFs. Up until this year, the only ETFs available were based on bitcoin futures and didn’t hold the crypto itself. Now that the SEC has allowed that type of fund to exist, bitcoin is much easier for everyday people to buy. And as those everyday people buy, fund managers have to buy, too.

However, you have to understand that this trend cannot and will not last forever. Eventually, alts will catch up as the retail crowd wakes up to the broader trend and the startup culture finds a new creative way to sell get-rich-quick crypto to the masses.

That time is not now. It’s when the chart above crosses below that uptrend line: a meaningful change in bitcoin’s market dominance.

As you can probably tell, I’m watching this data extremely closely. And when we do see that trend change, you’ll hear it here first.

Until then, if you own bitcoin, keep on holding it. The most recent breakout is extremely bullish for the end of the year and 2025. I think, eventually, a cost basis under $100,000 will be looked at with extreme envy.

It’s the last full trading week before the election…

And we’re starting to finally see some of that risk-off behavior we’ve been warning you about.

The S&P 500 dumped about 1.5% on Thursday, with big tech leading the losses:

Tech earnings are a big part of the equation. The “ol’ reliable” AI trade is starting to show cracks.

But another big part is the growing realization that the election, which normally would bring a refreshing dose of certainty, might now do just the opposite.

This is no surprise to anyone who’s been following TradeSmith Daily or The Freeport Society.

For the past couple weeks, we’ve been preparing you for just such an event.

And next week, volatility could spike even higher as the election results, or lack thereof, spook markets right before the next interest-rate decision.

Things could get even shakier from here, there’s no doubt. But if you yourself get a little too risk-off, that may well prove a mistake.

The market is more than the benchmarks. It’s more than the Magnificent 7. And the volatility we’re experiencing now will one day be looked back on as a generational opportunity.

If you haven’t caught the research presentation from Freeport that’s all about this topic, I strongly urge you to check it out before it comes down in a few short days.

Freeport’s founding voice, Charles Sizemore, has a battleplan for anyone willing to tune out the noise and follow the money towards the best growth opportunities for 2025 and beyond.

Get the full story here.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily

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