Three Big Signs of a 2025 Inflation Wave By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - A lifelong Floridian’s hurricane reflections…
- Dispelling the compelling narrative of “crisis investing”…
- One yield curve measure is back to “normal”…
- Why a no-landing economy is back on the table…
- Tomorrow’s big event and an inevitable change to daily life…
I’ll never forget this… I’m a lifelong Floridian. As such, I’ve encountered more than my fair share of major hurricanes. Hurricane Andrew, probably the worst hurricane to hit South Florida in my lifetime, struck three weeks after I was born. That one was a doozy, causing an estimated $33 billion in damages ($73.7 billion in today’s money… which speaks for itself). My ability to form memories wasn’t quite there for Andrew, but I do recall Hurricane Wilma, which was 19 years ago this month. I vividly remember sitting in a bathtub in the pitch dark – apparently the safest place in our tiny apartment – while my mother did her best to hide her panic. I listened to the roaring wind gusts outside and pictured the aftermath to look something like a tropical Mad Max-ian post-apocalypse. In some ways, I was right. I’ll never forget riding up to my grandmother’s house and seeing the massive banyan trees I used to play on completely uprooted, parallel to the ground, and fearing the worst before we learned she was fine. Point is, these storms make a huge impact. Wilma caused an estimated $29 billion ($45.8 billion inflation-adjusted) in damages. Our home had no power for two weeks. Schools and businesses were shut down. Andrew blew the roofs off and the windows out of so many homes, it essentially redesigned how Florida homes were built and gave way to modern hurricane shutters and impact windows. And neither of these have squat on Hurricane Helene. Entire towns in the Asheville area have been wiped out by flooding – something Floridians don’t have to contend with nearly as much with our flat geography and world-class drainage systems. The rebuild will be fascinating, to say the least. And now, of course, we have Hurricane Milton coming for the Gulf Coast once again – sure to drive home insurance premiums, already eye-wateringly high, even higher. (Editorial note: Being a proper Floridian, I’ll be staying put through the storm. So, if you see our publishing schedule go topsy-turvy this week, the reason is likely because the power’s out. Or because I went out for the traditional Florida-Man run through the chaos and got blown away.) Rumination aside, is there any tie between crises and investing? As a thought experiment, let’s see if we can figure out where the economic impact of these storms could flow. Should we invest in, say, water and electric utilities, infrastructure companies, grocers, and insurance providers during hurricane season? These all sound like good bets. But is there any real connection? I went back and looked at which S&P 500 stocks performed best in the two-month stretch defined as “peak” hurricane season: between mid-August and mid-October. Here are the top 10 names, sorted by win rate (after I filtered out outright money-losers and those with adversely large one-off gains): 
Noticing any narrative tie between these names? Me neither. And that’s the point I want to make today. None of these businesses have anything really to do with hurricanes. The stocks with the highest win rates and average results for this two-month period are human-resources software company Paychex (PAYX)… energy company EOG Resources (EOG)… and cloud software company Salesforce (CRM). And there’s not really a pattern when you go further down the list, either. I share this to show you the difference when you invest with data backing you up. All the intuitive ideas in the world won’t be worth a damn if they don’t hold up to history. What this list shows us is that you’d be better off throwing darts at a board than to start with any kind of narrative focus when picking investments. Speaking of data, something interesting just happened with Treasury yields… There are lots of different measures of the “yield curve” people follow, and one of them is the 10-year/2-year curve. When this curve is below 0, or “inverted,” it means that 2-year Treasurys are paying out more than 10-year Treasurys. In other words, you earn less for loaning your money to the U.S. government for a longer time. To be clear, this is an unusual state that tends to precede recessions. The theory goes that inverted curves mean bond traders are pessimistic about the near-term – because higher short-term yields imply greater near-term risks for both the economy slowing and inflation rising. After spending more than two years in this inverted state, the curve “reverted” as long-term yields rose. Now, though, the curve had roundtripped its way back down and seems to be on the verge of inverting again: 
This is in large part due to the blowout jobs report last week, which showed not only an upside anomaly in hiring but also wage growth. The latter, especially, is a sign the Fed may not have yet won the inflation battle… and there are risks inflation could re-emerge. We should also note that another useful measure of the Treasury yield curve, the 10-year minus the 3-month, has stayed inverted and has barely scraped higher: 
Right now, you can earn 4.6% loaning your money to the government for three months as opposed to 4% for 10 years. That’s a huge demerit… and shows us traders haven’t yet bought ongoing rate cuts as a foregone conclusion. Indeed, the CME’s Fed Watch tool shows that any expectations of a rate cut beyond 25 basis points at the Nov. 7 FOMC meeting have now been obliterated. The odds were at 34.7% just last week – now they’re at 0%: 
And this leads me to a big call I have for next year… I see a second wave of inflation coming in 2025… And this wave will see our new "normal" rate of annual inflation staying above 2%. It could take years before we return to those levels. This forecast is driven by three key factors, among others, that may or may not resolve soon. Let’s break them down: - Dockworkers Strike
While news broke last week that the dockworkers strike was “over,” that’s not exactly right. Strikers reached an agreement to raise wages for now and renegotiate in January. Chances are the strike will continue then, as nobody currently has any good answer to the question of how we can promise not to increase the level of automation at ports (because we inevitably will). Any further striking, especially a prolonged strike, poses a significant inflationary risk. If the strike drags on for weeks or longer, it will hit the same sectors that proved vulnerable in 2021/2022: food, autos, clothing, and already-stressed crops like cocoa and coffee. This would lead to further price surges in these areas and trickle through to the broader inflation numbers. - Middle East Conflict
Iran, the world’s seventh largest oil producer, plays a critical role in global oil supply. If the war between Iran and Israel escalates and Iran cuts off oil shipments, it could trigger inflation similar to what we saw with Russia, although on a smaller scale. Iran's oil production is about half of Russia's, but it still supplies key markets like China. Japan, South Korea and India also bought their oil while the Iran nuclear deal was in effect. Combine this with ongoing attacks on ships in the Red Sea, which are already slowing down supply chains. Higher oil prices make shipping more expensive, and in turn, that drives up the cost of goods. - Lower Interest Rates
The Fed has begun lowering interest rates into a stock market at all-time highs, with valuations at peak levels for this time in the cycle. These lower rates will encourage investing and spending rather than saving, especially among wealthy investors who are likely to see the returns from risk-free yield-bearing assets like money markets evaporate. So not only will these wealthy investors move their money, but really all Americans are incentivized to spend when they can’t get a good yield. This behavior mirrors the stimulus-check effect, where people spent money they knew wouldn’t earn strong returns in savings. As a result, more money is chasing fewer goods—an inflationary pressure, particularly in areas already stressed by supply-chain disruptions. And as you can probably see, each of these trends feeds into and accelerates each other. As we’ve discussed before, technology is the disinflationary force at odds with this trend. - Automation at ports would put a lid on wage inflation in that industry, and AI promises to do the same in many more.
- Renewable energy and nuclear fusion could stabilize volatile fossil-fuel supplies.
- And bitcoin, a disinflationary asset, could address poor savings rates.
While inflationary forces aren’t going away, the degree to which we adopt tech will determine how much we can mitigate its impact. The takeaway from all this is simple, though: Own tech stocks, ride the market higher, but expect volatility. Inflation may be painful for savers and those without the ability to invest. But just like we saw coming out of 2022, once panic subsides, technology companies will get the brunt of the capital focus. As a wild card, keep an eye on signs of a continued and worsening "recession of the have-nots," which could lead to more social unrest, including strikes and protests. For more on how technology fights inflation, check this out… Imagine what life will be like once cars no longer need drivers. Shipping will also be faster and cheaper, as we discussed earlier. And ride shares will cost a fraction of what they do now. And when you’re not using it, you can hire out your car as a “robotaxi.” Now, instead of being a depreciating asset, your car will be an income-producing asset. That’s the future we’ll be taking a big leap toward after Thursday, when Elon Musk takes the stage to reveal Tesla’s contribution to the robotaxi trend. Musk believes $9 trillion in value will be created if he pulls this off… And it’s easy to see why once you remember that Google’s Waymo robotaxis, which are already operating in major West Coast cities, can get you there for half the cost of an Uber, with a great safety record. In fact, the best way to play this trend might not be TSLA at all. My friend Luke Lango of our corporate partner InvestorPlace has identified a much smaller company with greater growth potential that is already a key Tesla supplier. Because of its critical technology, Luke believes its stock has way better profit potential from Thursday’s event. Luke’s free briefing to help you prepare for this historic opportunity is available now at this link. To your health and wealth,  Michael Salvatore
Editor, TradeSmith Daily | 
