Wesley Chapel, FL
““You really have to just look out the window and see how your policy rate is affecting the economy, and I think we see that it’s having meaningful effects in bringing inflation under control.””
He really said that!☝️ With a straight face and everything!
My reaction… 👇
Let’s start with a little technical analysis and then look at how markets performed in January.
This chart shows the S&P 500 ETF (SPY) going back to the October 2023 lows. Since then, the market has been in a consistent up-trend and has stayed within a well defined channel that you can see shaded in yellow.
During that time, there have been several pullbacks within the channel, but none have broke down. There have also been at least two other periods where the market was essentially flat for several months (Mar-Aug and Jul-Nov) as it has been since the beginning of December to now. But each time, the market has bounced and rallied with prior resistance becoming support (see the horizontal purple and black lines).
What happens from here is anyone’s guess, but a technical trader would be looking to short this market here unless it breaks out to a new all-time high, above the red horizontal line. On the downside, the low end of the channel should act as support and if the market breaks down through that support the next major support area is the 200-day moving average, currently at 563 - which is about 6% down from here. If that doesn’t hold, look out below!
Here is a look at the indexes we are tracking for the month of January:
Notably, the S&P 500 Equal Weight Index was the best-performing stock index (that we track in this commentary) in January. It has plenty of catching up to do after the last year+ of significant underperformance. We’ll keep a close eye on it to see if anything has really changed or if it is just a one-month anomaly. Interestingly, the S&P 500 and the Equal Weight version were both up the exact same amount at the highs before falling into the end of the month.
No surprise that the top 10 stocks in the S&P 500 were up the least, given that the Equal Weight was up the most. The top 10 stocks represent the vast majority of the difference between the two indexes. In fact, as of the end of January, the top 10 stocks account for nearly 40% of the S&P 500 index – an all-time high. Those 10 stocks were up nearly 60% last year.
There is no doubt that a rotation back to the other 490 stocks will happen someday. The only question is when.
In the meantime, an equally weighted index of the top 10 stocks was up 2% for the month, which annualizes to a 24% return if you multiply the 2% by 12 months. If only investing were that simple.
The big winner of the month was gold! And gold, if you remember, was the big winner last year, too. This is very surprising. Gold is usually a hedge against poor equity returns. It normally falls when interest rates rise, too. But that hasn’t been the case over the past year. In fact, as I pointed out last month, gold outperformed both the S&P 500 and Nasdaq last year in an “all-out” bull market.
It looks like that has continued into 2025, with gold more than doubling the return of the S&P 500 in the opening month of the year.
What is really amazing is that if you look back 12 months to the end of January 2024 to the end of January 2025, gold has basically doubled the returns of the S&P 500 and Nasdaq for a whole year!
That is amazing, even to me. And I have been checking in on this comparison since at least June of last year, when I first pointed it out in that month’s commentary.
Thankfully, we maintain a nice gold position in our core strategies.
In that June commentary, I posed the question, “What is gold trying to tell us?” and I concluded that it was telling us that rates could go higher and stay higher than anyone thought possible regardless of what the Fed was doing.
I think that has pretty much played out, especially as interest rates have risen despite the Fed cutting its policy rate by 1% since September. I also went on to suggest that gold could go a lot higher. And it certainly has. I hope you bought some if you didn’t own enough already!
Of course, gold is a wonderful inflation hedge. But gold has probably also been trying to tell us that inflation is nowhere near under control.
Let’s look at a few charts. First, the annual increase in the Consumer Price Index (CPI) between December 2023 and December 2024.
For the fourth consecutive month, prices have increased at an accelerating rate. I do not think it is a coincidence that this aligns with the time frame in which the Fed cut interest rates. Lower rates, all else equal, lead to higher prices.
The Fed’s so-called “preferred inflation gauge,” Personal Consumption Expenditures (PCE), has basically done the exact same thing and now shows expenditures increasing at the highest rate since May of last year.
Even the Fed tacitly acknowledged that inflation is still a problem when it a) decided to hold rates steady at its January meeting instead of cutting them again and b) released its policy statement that reworded a sentence to say, “Inflation remains elevated,” where it had previously said, “Inflation made progress toward the Committee's 2 percent objective but remains somewhat elevated.”
Incase it isn’t clear, they removed “made progress toward the Committee’s 2 percent objective but” and “somewhat.”
Remember, just a few months ago, this same Fed was confidently projecting more rate cuts in early 2025. Today, the futures market is not expecting another rate cut until July. I have my doubts.
With that, let’s check in on our analog of inflation between now and the 70s.
The image still speaks for itself. We don’t know how this will evolve, but if inflation reaccelerates to a new high surpassing what we saw in 2022, don’t say I didn’t warn you.
Meanwhile, GDP growth is slowing in rate of change terms. Sure, the economy still grew by 2.3% in the fourth quarter of 2024 (according to government data, anyway), but that was slower than the 3.1% that it grew in the prior quarter.
And that leads us to the trusty GIP (GDP, Inflation, Policy) framework that we learned from our friends at Hedgeye Risk Management.
In the fourth quarter of 2024, we were pretty clearly in “Quad 3,” with the rate of change for inflation⬆️ rising and the rate of change for GDP⬇️ falling. No surprise here – gold is historically the best asset in that environment, and that held true last quarter. It was also no surprise that the environment ultimately led to a “neutral” policy from the Fed.
The question then becomes, “Which ‘quad’ are we in now?”
It is difficult to say with certainty which quad we are in today, but it isn’t impossible to make an educated guess. “Nowcasting” uses higher-frequency data to assess where inflation and GDP are in “real-time.” There are all sorts of models and sources for this kind of data. But the sources I find most reliable suggest that inflation is still accelerating, and GDP might have flipped back to growth mode. So, that would put us in a quad 2 environment today.
Each quad shift is unique, and sometimes, they don’t persist for more than a quarter, so we don’t sell everything that has been working and reposition based on our best guess of the current quad environment. As longtime readers know, we don’t predict; we prepare. This is just one input in our analysis, and we consider it part of the overall environment as we manage our strategies.
In other words, the GIP framework doesn’t guarantee that we will catch any fish; rather, it helps us know which ponds we ought to fish in given the weather.
Before I give you my thoughts on tariffs, let’s look at a couple of other charts that suggest inflation is far from being tamed.
Here is the M2 money supply:
M2 is on the verge of a new all-time high. So, while the Fed is trying to focus our attention on how its policy rate is so “restrictive,” it is simultaneously pumping more and more liquidity into the system, which is basically the exact definition of inflation.
To complicate matters further, the Fed continues to reduce the size of its balance sheet. That should be “restrictive” or anti-inflationary, but even the pace of that policy has recently slowed. There is still almost $7 trillion left! That’s a good $6 trillion higher than pre-Financial Crisis and $3 trillion higher than pre-COVID. Insane.
The now former (thankfully) Secretary of the Treasury, Janet Yellen, actually said this a couple of weeks ago in an interview on CNBC:
“Covid spending may have boosted inflation a little bit.”
Are you kidding me?! It “may have”? “A little bit”? How dumb does she think we are?
Before I move on, let’s examine one more piece of data that I will be tracking throughout the year. Our country is now over $36 trillion in debt
Nothing to see here… not inflationary. Carry on.
I am not sure which I have gotten more questions about this month: Stargate, DeepSeek, or Tariffs. There have been more than a couple of questions about each, so I’ll just take them in that order.
For those who may not know, the Stargate Project was recently announced at the White House as a $500 billion artificial intelligence infrastructure initiative that would be a joint venture between OpenAI, Oracle, and Softbank, with other “technology partners” involved.
To be clear, this program would see these companies spend $500 billion of their own money over the next four years to build out data centers and perhaps other infrastructure. However, it is unclear to me (and plenty of others) what that other infrastructure might be.
To many, the announcement sounded like these three companies would receive a $500 billion investment to build out this infrastructure, which is the exact opposite of what it is.
From my perspective, there are a couple of glaring issues with this project.
First, this project was well underway long before the recent “announcement.” In fact, initial reports of the project go all the way back to March 2024, with construction of at least one facility breaking ground in June 2024.
Second, these companies don’t collectively have anywhere near $500 billion to invest—not even with “technology partner” Microsoft’s $80 billion commitment, which, by the way, was announced on January 3, 2025.
Oracle has $11.3 billion in cash and generates $10 billion/yr of free cash flow.
Softbank has $5.4 billion in cash and generates negative free cash flow.
OpenAI has at most $6 billion in cash from a recent capital raise, and it basically just lights money on fire. The company is not profitable. In fact, for now, it isn’t even a for-profit business.
So, even if you add Microsoft’s $80 billion, they are still about $400 billion short.
Perhaps you remember, back in 2017, Trump announced a “big beautiful” deal with Foxconn to invest $10 billion in Wisconsin. It was supposed to create 13,000 jobs and establish an electronics manufacturing facility. Foxconn later scaled back its plans. In 2021, the total investment was cut to $672 million, and it was expected to create only 1,500 jobs. To date, Foxconn has invested a little over $50 million in Wisconsin.
So, I will believe it (the Stargate Project) when I see it. Even without these issues, I don’t think it would necessarily be a good reason to invest in any of the named companies since, at least for now, it represents a significant capital expenditure, not a windfall.
Next up is DeepSeek, a Chinese artificial intelligence company that sent Nvidia’s stock down by nearly 20% on Monday, January 27th. This was the most significant loss of market capitalization or company value as a dollar amount in history. By the close of trading that day, Nvidia was worth around $600 billion less. Nvidia wasn’t the only stock that fell. The Nasdaq 100 was down as much as 4.5% on the news that this new Chinese AI company had developed a model comparable to OpenAI’s ChatGPT with only a tiny fraction of the cost.
The claim is that DeepSeek’s “R1” model was built with just $6 million, whereas OpenAI probably spent over $500 million on the original ChatGPT.
If true, the billions and billions of dollars major hyperscalers spent over the past several months to create a “moat” around their businesses went up in smoke overnight. If a viable competitor to ChatGPT can be built for such a small amount, the barrier to entry is very low, and anyone can compete.
It would also mean that the demand for Nvidia’s highest-costing state-of-the-art GPUs would fall dramatically. Why spend all that money when a Chinese company that is limited to inferior GPUs through United States export controls can build a viable competitor so quickly?
Whether the fears and stock market selloff were warranted remains a subject of intense debate.
The question is, “Should we believe the Chinese company?”
I am no technologist. Not by a long shot. But I know a few, and even they have different perspectives, but there seems to be agreement that there is no way DeepSeek was built for $6 million.
That said, it seems odd to me how many are trying to justify all the spending that has happened over the past several months and the spending that is currently planned, with the argument that if DeepSeek can do all this with $6 million, imagine what we are going to be able to do with billions!
It’s a version of Jevons Paradox: technological advancements make a resource (GPUs or even energy) more efficient so that customers need less of it. However, as the cost drops, new customers come in to more than replace the lost demand. Satya Nadella, the CEO of Microsoft, even posted about this on Twitter.
I think if DeepSeek really built their product for $6 million, there would be more pain to come, particularly for Nvidia. However, I also believe that regardless of whether they really built it for $6 million, the world is going to need more energy than we can produce without bringing on a lot more nuclear power. So, the selloff in nuclear stocks on the DeepSeek news seems like a decent opportunity to allocate some long-term capital.
And finally, on to Tariffs. I will try to keep it as concise as possible.
I actually want to love the tariff idea. It appeals to me and I want to think it will work. The problem is that history is very clear that it will not. In fact, history says emphatically that it is a terrible idea.
The economy works best when the government leaves it alone. Our economy cannot afford our government. Trying to get people in other countries to pay for our government’s reckless spending is a recipe for disaster.
At best, tariffs will be inflationary. At worst, they will cause a depression.
Look back to the United States just before the Great Depression, basically 100 years ago. (Hat tip to my favorite research analyst, Porter Stansberry, for bringing much of this back to my attention in his recent journals.)
Our economy was booming. It was the roaring twenties! We were the leaders in manufacturing just like today we are world leaders in all sorts of technology.
Eight years before the Smoot-Hawley Tariff Act of 1930, there was another lesser-known tariff act called the Fordney-McCumber Tariff of 1922. This act raised tariffs on imported goods to very high levels. It was designed to protect farmers in the post-World War I economy. Our trading partners retaliated with tariffs of their own. This meant the farmers had another challenge to overcome in exporting their crops. Thus, they were negatively impacted by the tariff designed to help them. They lost hundreds of millions of dollars, despite supporting the act.
These tariffs led to the Smoot-Hawley Tariff Act of 1930 and a trade war that significantly worsened the Great Depression. Global trade declined by 66% between 1929 and 1934, and the unemployment rate doubled over the same period. Goods and services became unaffordable.
Free trade is at the heart of every good economy. Specialization, or comparative advantage, as economists call it, allows each of us to be the master of one trade instead of a jack of all trades.
There are some things we either can’t do in this country or shouldn’t want to do because the profitability is so low.
Please go read the essay “I, Pencil.” It is always a fantastic reminder of how complex and interconnected our global economy is… and this was written in the 1950s! Supply chains have only gotten more complex and interconnected since then.
On the Monday after DeepSeek sent markets tumbling, we arrived at our trading terminals prepared for Mexico and Canada to be hit with 25% tariffs. The dollar was spiking to new highs, sending stock prices lower. By mid-day, the tariffs on Mexico had been delayed by 30 days, and by the end of the day, the same was true for Canada.
China, on the other hand, was hit with a 10% tariff and has already retaliated. I am interested in seeing what happens with Mexico and Canada, but I will not be surprised by any outcome. We prepare; we don’t predict.
Consider also that during his last administration, Trump imposed punitive tariffs on China which the Biden administration never cancelled despite having criticized them during the 2020 campaign. Instead, the Biden administration actually announced new tariffs on $18 billion more of Chinese imports focusing on electric vehicles, solar panels, steel aluminum and medical equipment.
Perhaps this had something to do with the inflation that we saw in 2022. As was the case int he 1920’s, it takes time for these policies to flow through the complex global economy.
To that end, coming full circle now, one of the best ways to prepare for both the inflation and the depression that could result from these tariffs and the ensuing trade war is to own plenty of gold! And probably bitcoin, too.
So, we’ll monitor developments. We have safeguards in place to protect our capital, and we are prepared for a wide range of outcomes.
Believe it or not, I could keep going. There are even more silly ideas to discuss, but it is getting late, and I’ve already taken up too much of your precious time.
Shane Fleury, CFA
Chief Investment Officer
Elevate Capital Advisors
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