Party Like It’s 1995

Party Like It’s 1995

By Michael Salvatore, Editor, TradeSmith Daily

In This Digest:

The most anticipated CPI release since the last one dropped on Wednesday…

It was the first read on inflation of 2025. And, what a surprise, inflation shot higher.

Here’s Bloomberg with the key fact breakdown:

The monthly consumer price index [CPI] rose in January by the most since August 2023 [0.5%], led by a range of household expenses like groceries and gas, as well as housing costs. Excluding often-volatile food and energy costs, the so-called core CPI climbed 0.4%, more than forecast, fueled by car insurance, airfares, and a record monthly increase in the cost of prescription drugs.

Then on Thursday, the January Producer Price Index not only came in hot, but December’s data was revised higher too. From Bloomberg once more:

The producer price index for final demand climbed 0.4% from a month earlier following an upwardly revised 0.5% increase in December, according to a Bureau of Labor Statistics report released Thursday. The median forecast in a Bloomberg survey of economists called for a 0.3% gain. Compared with a year ago, the PPI increased 3.5%.

Anyone reading TradeSmith Daily wasn’t too surprised by the numbers this week.

Recently, we suspected that the new U.S. tariff policy, among other factors, would lead to inflation reigniting. Even though tariffs weren’t in effect for January, perceptions can impact consumer behavior.

Adding on, five months ago we speculated that inflation has found a “new normal” level well above 2%. The reason being that money creation, after going negative for the first time in at least 60 years, had turned positive again. And, as soon as it did, the pace of inflation’s deceleration… decelerated.

Here’s what we wrote then:

New money supply (M2) began to slow in early 2021. And as the bear market began in 2022, it continued slowing until the money supply began to shrink toward the end of the year.

While that was happening, the lagging effect of money creation started to drive inflation higher. And inflation peaked in early 2023 – right around the time the M2 money supply went negative for the first time in at least the past 60 years.

So, where are we at today?

This tells me that the current pace of inflation has found its “new normal.” We’ve likely seen the bulk of downward inflation pressures, and any further progress will be more and more incremental. Growing M2 could slow it even further.

And here, importantly, is an updated look at the chart of both M2 and the Core CPI. (Note: M2 data for January hasn’t yet been added to the St. Louis Federal Reserve’s database.)

As you can see, M2 grew at a faster pace than the Core CPI in December. There’s more liquidity in the market even as the pace of inflation has continued to slow:

What can we take away from this? Well, it might sound bad. More money is being created, and the trend of disinflation is slowing down. Sounds like a recipe for inflation to get a lot worse. And that may be the case.

But we’re investors. We can’t just worry about inflation. We have to think about how this will impact the market.

And here’s the good news: Slower disinflation may not be a bad thing for stocks. In fact, it might drive even greater capital flows into the market.

Where do you want to be in an economy with sticky inflation? You want to spend like there’s a hole in your wallet (because there is)… And you want to be investing in assets that you’re pretty sure will outpace that inflation. Those two things spur the economy and stock prices, respectively… And the former can often support the latter.

History also has some evidence for this…

Let’s look at the most recent time we saw M2 creation begin to outpace the rate of inflation, the mid-1990s.

Back in 1995, M2 creation started to outpace Core CPI, which was running just over 2.5% at the time. That continued on through the turn of the century, with inflation continuing to moderate around 2.5% but not fall much more, and new money creation speeding up:

I don’t remember 1995 because I was three years old, but you might remember it as a very exciting time to be an investor. From January 1995 to March 2000, the peak of the dot-com bubble, the Nasdaq 100 rose more than 1,000%. At the bottom of the ensuing bear market, the Nasdaq wound up falling more than 82% from those highs, settling at “just” a 100% return from 1995 to 2002 – returns that still beat the long-term market average.

Funny thing… The ‘90s were also a time of massive technological breakthrough due to this little thing called the internet. New companies sprang up, promising the world via the internet concept, and investors rewarded them in excessive fashion.

Sounds kind of… familiar?

Now, am I saying we’re going to see another unbelievable bubble of ridiculous wealth creation sometime around 2030, and another devastating crash that removes 83% of the market’s peak value?

No…

And I’m also not saying we won’t.

My key point is that fearing inflation and money creation is likely not to get you far as an investor (unless your conclusion is to buy bitcoin and gold – the latter of which we’ll get to today).

The fact of the matter is, disinflation is moderating as more liquidity is coming into the market. History and plain common sense show that’s supportive of higher asset prices in the years to come. Stay invested.

Besides, there are seasonal factors to consider in the inflation data…

Two of the biggest contributors to the hot CPI reading were the price of food, namely eggs, and fuel.

The former isn’t so much an entrenched factor as it was something temporary. An avian flu outbreak has forced farmers to cull massive numbers of infected or exposed hens, sending egg prices up an average of 15% over the span of a month as supply has drastically shrunk. This also happened to hit the already expensive and lower-supply free-range organic farms the hardest.

The other major contributor was fuel, namely natural gas. This factor is simply seasonal – natural gas prices tend to rise in winter as temperatures drop and demand picks up.

Beyond that, there’s a widely observed “January effect” for inflation, which tends to run hot in January as businesses use the new year as a fitting time to adjust prices.

To be clear, the Core CPI we discussed earlier, which excludes food and energy, still advanced at 0.4% against expectations of 0.3%. That reflected a pickup in housing costs in the services segment, the biggest contributor to that measure.

But while inflation may be stalling out, we should take some comfort in the fact that one-off events appear to be making the bulk of the impact. And one analyst, a growth-investing expert of over 40 years, Louis Navellier, has prepared his subscribers well for what’s happening right now.

Here’s what he shared in Breakthrough Stocks in a subscriber podcast Wednesday:

When we dig into the details of CPI, food prices were up largely due to a 15% increase in eggs. That’s OK because we own [new portfolio addition] and Vital Farms (VITL). So we’re profiting from the egg inflation out there.

I’ve obscured one of the stock names here out of respect for it being such a new recommendation, added just last week. But the second stock, VITL, had already been in the Breakthrough Stocks portfolio since July “thanks to growing demand for its pasture-raised eggs.”

I can’t say I’m too surprised Louis was so early on this. He’s been known to spot trends in the market well ahead of the masses, positioning his subscribers in high-quality companies set to benefit.

Notably, Louis has been out in front of every zig and zag of the AI boom. And yet, he believes the biggest plays are yet to come.

In fact, Louis’ legendary system has generated A-grades on seven under-the-radar companies he believes are ready to surge as AI unleashes its $100 trillion crossover opportunity.

The Navellier Stock Grader is impervious to hype about AI or anything else – it simply finds stocks with major momentum building… and makes sure they have the fundamentals to sustain that momentum into substantial gains.

That’s how Louis locked in on Advanced Micro Devices (AMD) before it jumped 4x… data-center play Vertiv Holdings (VRT) before it gained 1,000%… and Super Micro Computer (SMCI) before it soared 1,900%.

So, now with this crossover opportunity on the new class of AI stocks, Louis just issued a free briefing that you can watch at this link as, incredibly, the AI “party” may just be getting started.

Let’s take another look at the gold trade…

About a week ago, I wrote you saying that it might be time to take profits in gold. That was clearly a bit premature, as gold has gone on to chart new highs:

Gold is outperforming stocks not just this year, but since the start of last year and even going all the way back to the previous bear market bottom in October 2022.

The zoomed-out reasons for this are multifold:

Here’s some key details on that latter point from USAGold:

While LBMA data shows 279 million ounces stored in London vaults as of December 2024, only 36 million ounces (the “float”) are theoretically available for immediate market use, revealing a critical liquidity shortfall against an estimated 380 million ounces of outstanding spot/cash contracts.

Whatever the reason for gold’s rise, it’s a market leader, and it deserves our attention.

Owning gold in your portfolio is step one. One of the many gold ETFs are perfectly suited for getting exposure to its price gains. For its true protective power, you’ll want to own physical bullion.

And, honestly, you might want to just stop there. Because the traditional way to leverage gold price gains hasn’t been working so well lately.

In my early financial education, I learned that gold and silver miners had the tendency to follow the price of the metals with some amount of leverage. As you get into the smaller-cap side with the junior miners, that effect only amplifies further.

But over the last 10 years, that relationship has largely fallen apart, as you’ll see in the chart below of the relationship of gold to gold miners (GLD/GDX, blue line) and silver to silver miners (SLV/SIL, red line).

Just look at that big spike in the blue line around 2022. Gold rapidly outperformed gold miners as the gold bull market got started. Since then, GDX has made scarcely any headway against the metal itself:

Silver’s picture is even more wild. Silver has made substantial price gains against the miners, up more than 38% both over the last 10 years and the last few.

What does this tell us? Investors do not want precious metals mining businesses. It’s a notoriously difficult business because it’s so capital intensive. And high interest rates make any capital-intensive business that much trickier.

However, watch for breakdowns in the pairs above. If miners start to gain on the metals in significant fashion, it could be an early sign that mining stock speculators are stepping in. That would be a good time to join them.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily