A while back, we tried to transition to more stock-related “Things” for this piece. Then, we get a week like this one where all the news is macro and inflation. We’re nothing if not flexible so that’s what we have this week.

Inflation indexes come in above expectations and above last month. DKI warned the Fed wasn’t going to look good when inflation rose right after rate cuts. That’s where we are now. Higher inflation means reduced purchasing power for the dollar. It also means record prices for hard assets like Bitcoin. A Bitcoin-friendly new Administration and some strategic changes in Congress are helping as well. DKI hates huge wasteful government spending so we’re behind the new Musk and Ramaswamy-led DOGE. We’re also skeptical they can cut much and hope that next year we get to apologize publicly for being wrong. President Trump and Jerome Powell are already going head-to-head in the media. It’s not a good look, especially for a Fed that just took a lot of risk that recent policy would appear politically driven. Finally, we provide our thoughts on the key things to look at when evaluating a new investment idea. There’s a new feature at www.DeepKnowledgeInvesting.com that lets people ask investing questions and we’re already getting great submissions.

This week, we’ll address the following topics:

• CPI comes in hot. PPI comes in hot. Fed talking about pausing rate cuts. Will DKI be gracious enough to avoid saying “we told you so”?
• Bitcoin crushes all-time highs. Peter Schiff still complaining. Why can’t we all just get along?
• DKI cheering for Musk and Ramaswamy to succeed at the DOGE. We’re also skeptical they can cut meaningful amounts of spending.
• President Trump wants low rates. Jerome Powell wants to keep his job. On this topic, both of them look like political operatives. Only one of them is a political operative.
• What are the first things to research when looking at a new stock idea?

Interns Andrew and Alex continue to take ownership of the 5 Things and are operating with less oversight every week. Andrew worked with me to prepare our new eBook on the Macro Environment that we’ll release this week. All three of us are working on a re-release of an older eBook that’s more relevant now than it was when we released it three years ago. Anyone who thinks Gen Z is lazy should spend a week with the DKI Interns. You’ll feel better about the future.

Ready for a week of more inflation and rising Bitcoin prices? Let’s dive in:

1) Another Hot CPI:

Wednesday, we got the October Consumer Price Index (CPI) report which showed an overall increase of 2.6% for the last year and 0.2% for the month. That’s above last month’s 2.4% and in-line with expectations. The Core CPI which excludes food and energy was up 3.3% vs last year and up 0.3% from last month. That 0.3% annualizes to 3.7%. Those figures were roughly in-line with expectations with the monthly Core a bit above some estimates. The Producer Price Index (PPI) came in high as well. Seeing an increase in the CPI so quickly after the Fed started cutting the fed funds rate is a bad look, and something DKI predicted.

Core has been stuck for months. CPI now rising. Not what the Fed wanted to see.

Fed knows this so they either think we’re in recession, or the cut was politically motivated.

DKI Takeaway: When the Fed lowered the fed funds rate in September, and again last week, DKI warned of the “Arthur Burns” problem. Burns was the Fed Chair who reduced the fed funds rate while inflation was on the way down, but not under control. That’s where we are now with the Fed cutting rates into above-target and now-rising inflation. With Congressional overspending (regardless of which party is in control), we will have continued inflation-causing stimulus. The US is printing dollars to pay the interest on the dollars we printed last year. (Definition of a Ponzi scheme.) At this point, there’s little the Fed can do. Raising rates to the level where they’d need to be to offset this stimulus would lead to higher interest expense and a further increase in the money supply to pay that. They’re stuck.

2) Bitcoin to $93,000, $MSTR at All-Time High, & Peter Schiff Eyes Potential $100K Party:

Last week, Bitcoin rocketed to $93,000, giving hodlers plenty to celebrate and sending MicroStrategy $MSTR to an all-time high. It’s been a wild ride, with Bitcoin breaking free from its trading channel and pulling investors back in, all eyes now set on that magical $100,000 mark. Even Peter Schiff is getting curious. The gold bug and Bitcoin sceptic tweeted, asking if he could come to Michael Saylor’s big $100K Bitcoin party when prices get there. But like the Flat Earthers who insist the “sphericists” might have missed something; Schiff still asserts it’s just a matter of time before the bubble bursts. Who knows, maybe he’ll show up at the party, clutching a map of his favorite precious metals and swearing he’ll never “fall off the edge” into Bitcoin.

Gold bugs and Bitcoiners should be allies. Schiff chose trolling instead.

It’s ok to be wrong. Bad look to not admit it.

DKI Takeaway: In the meantime, Bitcoin keeps climbing, and Schiff’s stance is looking more and more like it belongs in a time capsule—perhaps to be opened when Saylor’s party is well underway. What Gold bugs and Bitcoiners have in common is they both hold their preferred assets because they’re worried about ongoing dollar debasement. Schiff has been wrong by thousands of percentage points on Bitcoin, but continues to double down on the rhetoric that Bitcoiners are dumb and that “digital gold” is going to zero. Schiff isn’t a dumb guy which leads me to believe that he’s being a “troll” for engagement on social media. DKI’s more constructive solution: We get along with both sides and own both gold and Bitcoin. It’s been a good year for DKI subscribers.

3) Can DOGE Really Make a Dent?:

Within the past few days, President Elect Trump has appointed Elon Musk and Vivek Ramaswamy to lead the Department of Government Efficiency (DOGE). We love the idea, but see some hurdles. First, DOGE isn’t an official government agency and only has the power to make recommendations, like any think tank. More importantly, even if President Trump likes those suggestions, it’s not clear that he’ll have the power to make the recommended cuts. Musk has talked about cutting $2 trillion in spending, yet only $1.7 trillion of the budget is discretionary. To cut more would entail reducing military spending and social services, highly controversial issues that are unlikely to pass in a disunified Congress. While the Republicans will have a majority in the Senate, they won’t have the 60 seats needed to overcome a filibuster. It looks like the Republican majority in the House will be a very small one, all making it tough for the necessary dramatic cuts in government spending.

https://x.com/elonmusk/status/1856530955709587762

DKI Takeaway: I can’t remember a single government agency or significant program that was ever eliminated. I’d love to be wrong about this, but I think it’s unlikely that DOGE and the President are able to make significant cuts. Complicating this is a misperception about President Trump. The media likes to present him as a dedicated conservative. In fact, when it comes to government finances, he was a big-spending liberal in his first term. Despite the intellectual gifts and great intentions of Musk and Ramaswamy I believe major spending cuts are unlikely. I hope I’m wrong and that they succeed wildly. If you want to read more about this issue check out our recent blog post. If you want a good laugh, check out our thread on wasteful government spending.

4) Trump vs. Powell – The Brawl for Low Rates:

There have been rumors in recent weeks that President Elect Trump might consider trying to remove Federal Reserve Chairman, Jerome Powell, from his position. If he does attempt this, it’s not clear he’d succeed and a legal battle would be likely. President Trump wants lower rates to stimulate the economy. Powell has implied he will not be so pliable despite recent actions that some believe were intended to favor Democrats ahead of the election. While DKI disagrees with artificially low rates, every President wants an accommodating Federal Reserve. After more than a decade of stimulative interest rates and with Congressional overspending providing constant additional stimulus, we cannot withstand long periods of low rates resulting in more inflation.

Choose your fighter.

DKI Takeaway: In the short term, the Fed should remain fully independent from the White House regardless of the President’s party affiliation. At DKI, we hold a longer-term view that the only real solution is to end the Federal Reserve and let the market set the price of risk and time. While the media often portrays the Fed as purely objective, human decision making combined with partisan preferences inevitably introduces subjectivity, as shown by the big rate cut before the election and Fed governors threating to hike rates on Trump. Allowing the market to determine interest rates would alleviate any subjectivity. President Trump should wait till 2026 and nominate a hard money enthusiast like Judy Shelton @judyshel for Fed Chair. Alternatively, is anyone else in favor of handing all Fed buildings and salaries over to the DOGE?

5) When Evaluating a New Stock, What Should We Examine First?:

Great reader question this week. When I look at a new company, my first cut is business quality. I’m looking for a business with high growth, potentially improving margins, and some sort of competitive advantage. Following that, I look at valuation. If the company has a positive outlook, but the stock price reflects a great future, there’s a limit to how much I’m willing to pay. I like to get a sense for what other investors expect and what the dominant narrative is. If I think people are viewing the company or the stock wrong, then there’s often an opportunity to make money. Finally, I look for any problems or red flags that would make me think there’s a problem I’ve been overlooking. Management quality is another key metric to examine.

Not a comprehensive list, but a good place to start.

DKI Takeaway: DKI focuses on fundamental investing and work to understand the underlying business and what the market is missing in its evaluation of the stock. We focus on bottom-up detailed research. Other strategies may be more quantitative or catalyst driven, and those investors will have a different way to focus on investment opportunities. If you’re using a research service like DKI or investing in a limited partnership, it’s important to understand the process and methodology your portfolio managers or stock analysts are using. If you can’t get a clear understanding of how they invest, it’s probably not the best place for you to commit capital. Whether it’s my personal life or professional one, I’m always drawn to people who can give straightforward answers to clear questions. So ask those questions and see if you get good answers.

Here’s the video version: https://youtu.be/RBm_P89Iz4M

 

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