Has Inflation Found its "New Normal" ? By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - September’s surprising new high…
- Why the inflation battle may shift to a “new normal”…
- What fund managers know about the great yield chase…
- China just slammed the pedal to the metal…
- TradeStops is a cheat code for growing and preserving wealth…
September’s gains are highly unusual… The odds were certainly against investors in September. As we’ve showed throughout this month, it’s historically the worst month of the year for stock prices. It’s also a month where volatility tends to really pick up, especially in election years. 2024 has bucked the trend, though. The S&P 500 seems to have gotten all its selling out of the way in the first half of the month, rather than the traditional second. It’s up 1.76% at writing after recovering from a 4% rut at the start of September. The VIX, also, is off its seasonal trend. It’s currently flat – compared to an average rise of 9% over the last 34 years, in which it closed the month positive more than 60% of the time: 
Not only that, but the stock market made a new high in September. Since 1945, September has been the least common month for stocks to see a new high – with it happening just under 6% of the time. (I’m sure you’re as curious as I was – November is the month with the most instances of new highs, with the market entering uncharted territory nearly 12% of the time.) There’s two trading days left in September – today and Monday. I’ll wait until the monthly close to humbly wipe the omelette from my face. But we should acknowledge that this is an unusual September. Namely, because the Fed just cut interest rates by a “go big” 50 basis points. That’s despite stocks at all-time highs, GDP supposedly in just fine shape, and unemployment (while rising) still at a comfortably low/below-average 4.2%. Is the Fed celebrating too early? Could inflation come back to bite us? Does it see something we don’t? Only time will tell. But keep an eye on this chart… Based on the money supply, inflation could be at a “new normal”… The Fed’s M2 is a measure of the money supply in terms of cash, checking and savings accounts, and money-market deposits in circulation. M2 went vertical during the pandemic boom years (a strange but accurate phrase). M2 creation peaked at a rate of 26.7% year over year in February 2021. In other words, the Fed printed about 27% of all dollars in the span of a year. Here’s a chart of the annual rate of change in M2; those are the blue bars below, while the red bars represent the “core” Consumer Price Index (CPI), which excludes food and energy prices. 
We can look at M2 as liquidity. It’s the amount of available dollars that can be spent, saved, or invested in assets. It’s also a double-edged sword. More liquidity is great for financial assets, but it also tends to raise the prices of commodities and other consumer goods – aka inflation. New-money creation 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? - M2 money creation is now back to positive.
- The inflation rate has slowed…
- But it also stalled out entirely this summer, as we pointed out here in TradeSmith Daily.
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. This isn’t even looking globally. As we covered Wednesday and will have more to say on shortly, China just fired a massive liquidity salvo at its own struggling economy. That will, in time, drive inflation globally as well. But the takeaway is as simple as it’s ever been for an inflationary environment: own financial assets, especially income-producing assets. Recall just how well stocks did in 2020 and 2021. That was in large part due to the rapid expansion of liquidity. That expansion has certainly moderated today, but it’s going up. That means both financial and consumer prices should go higher. Dividends are always nice, but they’re especially nice now with the Fed’s rate-cutting campaign just beginning. In fact, take a look at what this major fund manager is doing… The fund managers at Charles Schwab seem to be preparing for a broad-based rise in investment appetite. In a filing issued Wednesday, Schwab announced it would be share-splitting not one, not 10, but 20 of its various ETFs. The full list can be found here. Share splits have no material impact on the value of your investment… in theory. But as we’ve shown in the past, they do generate substantial interest in company stocks from retail investment. Schwab clearly understands this, and is preparing for a wave of investment to hit soon. The timing of this is no accident. Risk-free money market and short-term Treasury yields are set to fall along with the federal funds rate. That makes dividends conversely more attractive. To me, this is a big signal that the uber-wealthy are set to dump their money markets and get more involved in the market. That, alongside the liquidity expansion we just talked about, means the next year could be great for stocks. China’s latest stimulus is making the U.S. blush… A couple weeks ago, we thought a 50-basis-point rate cut might err on the side of too accommodative. Well, clearly China saw Jerome Powell’s press conference and said, “hold my beer… watch this.” On the heels of its initial stimulus moves to breathe life into its shaky real-estate sector, China announced it would grant a one-time cash allowance to extremely impoverished citizens. Then, on Thursday, Reuters broke the story that the government was set to unleash a massive additional stimulus package to guide the economy to its 5% GDP objective: China plans to issue special sovereign bonds worth about 2 trillion yuan ($284.43 billion) this year as part of a fresh fiscal stimulus, said two sources with knowledge of the matter, adding to a string of measures to battle strong deflationary pressures and faltering economic growth. As part of the package, the Ministry of Finance (MOF) plans to issue 1 trillion yuan of special sovereign debt primarily to stimulate consumption amid growing concerns about a stuttering post-COVID economic recovery, said the sources. […] The proceeds will also be used to provide a monthly allowance of about 800 yuan, or $114, per child to all households with two or more children, excluding the first child, the first source said. China also aims to raise another 1 trillion yuan via a separate special sovereign debt issuance and plans to use the proceeds to help local governments tackle their debt problems, the source added. This is even further evidence that global liquidity is set to rise. It’s one of, if not the biggest liquidity expansion since COVID, and that means we should pay close attention. If you haven’t already, consider allocating some additional capital into higher-risk sectors. Think technology stocks and, yes, digital assets like bitcoin (BTC/USD). BTC surged about 4% higher on the China news Thursday, outperforming stocks and gold, which has also been plumbing new highs. That move was enough to bounce off the long-term downward resistance (black line) that’s recently turned into support: 
Bitcoin still needs to clear the major overhead resistance at about $71,000, near its all-time highs, before we can call the trend reversed. But we should note BTC isn’t even yet overbought on its Relative Strength Index (RSI), which as you see in the purple box above was putting in lower highs while the price traded more sideways. I maintain BTC is a buy below $100,000, and that it might surpass that level sooner than many expect. In the meantime: your cheat code for growing and preserving wealth... If there’s one thing we’ve learned from bitcoin’s rise (and fall) over the years, it’s that timing is everything. It’s far more important than “being right” in your investment thesis. And stocks are certainly no exception, either. Stocks like Lumen Technologies (LUMN) and AST SpaceMobile (ASTS) may be some of the top performers in 2024 to date, for example...but let’s not forget they were also some of the hardest hit during the 2022 bear market. That’s why at TradeSmith we focus on finding you high-quality companies that can stand the test of time... then we make sure that its stock is in the “green zone” and safe to buy at these levels. And according to the latest research presented by Eric Fry of InvestorPlace (using our TradeSmith tools), hundreds of stocks could collapse 50% or more from here. Eric and Keith Kaplan showed how our TradeStops software helps you opportunistically trade the market during both good times and bad. It helps you avoid excess risk, build portfolios that have the potential to beat the market, and notify you when key trends are about to shift. That way, you can take all the great research from these experts – and invest in just the right way to get up to 300% better returns on the very same ideas. Get the full details here... To your health and wealth,  Michael Salvatore
Editor, TradeSmith Daily | 
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