The Market May Not Be Irrational After All, and Inflation Is Going to Persist As Money Supply Increases Along with Tariffs

Heading into the final trading session of the week, the major indices look to be on track for another strong performance. Through Thursday's close, and, despite being sent lower on the day, the Dow is up 351 points. The NASDAQ is ahead 162 points, and the S&P has added 67 points.

Needless to say, even though the NASDAQ and S&P have been setting new record highs day after day, advances have been less-than-impressive. The S&P has finished green every day this week, but on three of those four days, the advances have been less than 10 points.

There is a chance that the constant pumping by rabid stock pushers may be running out of steam. Just maybe, though as John Maynard Keynes once quipped, "Markets can remain irrational longer than you can remain solvent." But, what if the market isn't irrational, isn't overpriced, even though many gauges confirm that there's a degree of bubble behavior being transmitted through the algorithms down to the floor traders.

Could it be that between the advances in AI, the turmoil in Trump's tariff negotiations, and the Fed keeping interest rates on hold, that stocks are actually well-priced and there's more room to run?

That's getting to be a tougher and tougher argument to make with each passing day. The cause for stocks' general advance is likely tied more to the Fed's liquidity spigot than anything else.

As the chart below shows rather clearly, the Fed's brief affair with QT (Quantitative Tightening) began in April 2022 and ended in October 2023, which, not by coincidence is exactly when the last bottom occurred in stock markets. From November 2023 to the present day, the Fed has been pumping liquidity into the market, and the primary recipients of that fresh loot are your friendly neighborhood robber barons Wall Street bankers, who buy, among other things, treasury issuance and, you guessed it, stocks.

The U.S. money supply is above $22 trillion, an all-time high, just like stocks, and, while correlation does not always necessarily imply causation, it wouldn't take a leap of faith to imply that the Fed has been responsible for the current rally and the recent returning spate of inflation. The Federal Reserve, being at all times less-than-forthright about its intentions, doesn't have to lower interest rates to fuel inflation, they can do it simply by increasing the money supply.

While we're quoting famous economists, recall Milton Friedman's view: "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output."

Friedman certainly had a way with words. Among some of his more pithy comments, he said,

Central bankers always try to avoid their last big mistake. So every time there's the threat of a contraction in the economy, they'll over stimulate the economy, by printing too much money. The result will be a rising roller coaster of inflation, with each high and low being higher than the preceding one.

and...

If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand.

Funny guy, but, accurate. There's a whole volume of his quotes here.

So, it should be fairly clear that the markets are not irrational, but merely, for lack of a better term, following the money.

Whenever President Trump chides Jerome Powell for not lowering interest rates, it elicits no response from the Chairman, for a couple of good reasons. He's well aware that lowering interest rates could spark another round of higher inflation, and, he also knows that he's already kicking inflation higher by adding to the money supply. It appears, that the Trump-Powell feud, like so much else that goes about in Washington, D.C., is all for show.

These guys aren't stupid. Even Trump has to know that lowering interest rates with stocks and the money supply already at record levels would lead to a massive inflationary blow-off. It boggles the mind as to why he keeps insisting on it.

Meanwhile, as the money printer hums along, going brrrr... and the dollar continues to be debased, the riggers at the COMEX can't keep their greedy little fingers off precious metals. After gold hit a five-week high at $3445.70, and silver a 14-year high at $39.90 Tuesday night, it's been straight downhill for shiny rocks. Just before 9:00 am ET on Friday, gold was at $3340.80 and silver at $39.03. That's $100 off the gold and a buck lower on silver.

Though the takedown of precious is obvious and ongoing, this most recent attempt to squash real money looks like amateur hour. A $100 decline in gold isn't even three percent and knocking a buck off silver - which, BTW is among the best performing assets of 2025 - is only 2.5%, so not so scary.

Just to make one last shot at calling the stock market irrational, what is another leading asset for 2025, rivaling silver? It's not Amazon or Meta or even Nvidia. It's eBay. Yeah, eBay. It's gone from the low 60s to yesterday's close of 82.45 this year, a 33% gain.

Go figure.

At the Close, Thursday, July 24, 2025:
Dow: 44,693.91, -316.38 (-0.70%)
NASDAQ: 21,057.96, +37.94 (+0.18%)
S&P 500: 6,363.35, +4.44 (+0.07%)
NYSE Composite: 20,853.42, -68.42 (-0.33%)