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To investors,
There is a national crisis unfolding in the US economy, but it isn’t the type of crisis you got used to over the last few years. Rather than the persistent risk of high inflation driven by out of control government spending, the economy is being swallowed by an expansive deflationary force.
This new risk is dangerous because it requires humans to update their mental models to be able to identify, understand, and mitigate it. And we know humans are horrible about changing their mind, especially when it requires them to synthesize new information.
First, let’s discuss where the challenges lie in identifying this deflation risk. There is a past experience issue and a modern data error that is driving the problem. The past experience issue is that an entire generation finally capitulated in recent years after realizing that undisciplined government spending led to higher levels of inflation. These folks failed to see the cause and effect coming out of the global financial crisis and they only took the lesson to heart after the pandemic era insanity that drove inflation over 9% in the government’s data.
The folks in this cohort are now trained to look at government spending and conclude that inflation will rise if the national debt is increasing. That was true in the past, but it is not true right now, which is why I call it a “past experience issue.” People are looking at the inputs, but not thinking critically about what that means for modern outputs.
The second big issue is a modern data error. Most of the “experts” and mainstream reporters are still relying on the Bureau of Labor Statistics to tell them what the inflation reading is. It doesn’t matter that the BLS is estimating more than 40% of the CPI inputs, nor does it matter that the BLS continues to manipulate the data collection by leveraging unproven and discredited methods.
These people simply believe whatever the government says.
The Bureau of Labor Statistics is reporting inflation to be 2.7% year-over-year. But compare that number to Truflation, which is reporting inflation under 0.9% as of yesterday.
This is a very wide gap in the metrics. In fact, the most concerning part is that the BLS is saying inflation is almost 50% higher than the Fed’s stated target, yet Truflation is saying inflation is more than 50% lower than the Fed’s stated target.
The sky can’t be blue and green at the same time, nor can inflation be high and low simultaneously either.
It is no secret that I trust the Truflation data much more than the BLS. Truflation uses more than 14 million daily data points provided by over 40 independent data providers. I’ll take the real-time, verifiable metric over the lagging, estimated metric any day of the week.
But this brings us back to the most important question in the economy today…why is inflation falling if the government is continuing to print money like drunken sailors?
This is where the deflationary force swallowing the US economy comes in.
There are three main contributors in my mind:
Tariffs are deflationary, not inflationary. I know this is still heavily debated, but I continue to explain that tariffs bring down domestic prices over time and they change consumer demand trends. There are anecdotal businesses that will show their input costs are rising, which is then being passed on to the consumer, but those anecdotes are heavily outweighed by the aggregate impact of tariffs on the US economy.
Artificial intelligence is the largest deflationary force of our lifetime. Companies are literally bragging on a daily basis how they are being more productive with less employees. The industry is moving so fast that it is hard for most people to keep up and the economic incentive to adopt this technology is only going to get larger. Lastly, A.I. is now in the “exponential production” phase where A.I. is writing code, so we are no longer limited by human time and energy.
Robotics is a subset of the A.I. story, but it deserves its own call out. It is very obvious that self-driving cars are going to be cheaper and safer, so they will become the standard. Companies like Amazon are the perfect example…the e-commerce giant employs 1 million robots and 1.5 million humans. They are reportedly looking to replace 500,000 jobs with robots in the coming years, which means they will soon have more robots working at the company than humans. This is highly deflationary.
This is the three-headed monster: tariffs, artificial intelligence, and robotics.
It doesn’t matter how much money the government prints, the elected officials literally can’t spend enough money to negate the deflationary forces that are swallowing the US economy. And yes, that would have been an insane statement just 3 years ago, but today it is the reality.
New information means you have to change your mind.
Finally, this brings us to the important question of what should we do from here?
Now that inflation is under 1%, it is obvious that the Fed should do an emergency 50 basis point cut. They don’t have the luxury of waiting longer. Artificial intelligence is accelerating, which means the deflationary force is only going to get stronger and more pervasive.
You can think of this as a virus. Once it was unleashed, it cannot be contained and it will not slow down. The only thing we can do is address the threat using other measures within our control.
Companies and people are economically incentivized to use A.I. more. The A.I. tools are starting to exponentially produce more A.I. products and services (ex: Claude Code writing 100% of the code for Claude Cowork, etc). Google “exponential curve” if you want to see how fast this will compound.
There needs to be an immediate, aggressive rate cut by the Fed or they risk a deflationary situation.
Consumer prices of various goods will come down, which is a positive outcome for the average American in the short-term, but wages can fall, unemployment can rise, debt can become more burdensome, and there is a potential for a deflationary spiral.
We need a 50 basis point emergency rate cut. Again, I know this will sound crazy to some of you, but I implore you to ask yourself “do I still believe that inflation has to happen if the government is spending money? Do I understand the effects of artificial intelligence, tariffs, and robotics on prices of goods and services? Am I willing to bet a material part of my net worth on assets that can only succeed if inflation is higher than normal?”
If the answer to any of those questions is “maybe” or “no,” then you have work to do. Spend the time this week learning about these things. Start by asking your favorite LLM to explain these topics and issues to you like a 5-year old. Even better, connect your accounts to Silvia and have her tell you what would happen in a deflationary environment or if the US government runs the economy hot.
Almost no one could have predicted the economy running hot without inflation, but here we are. High-growth, low-inflation. The dream of every politician and central banker in the world.
Hope you all have a great start to your week. I will talk to you next time.
- Anthony J. Pompliano
Founder & CEO, Professional Capital Management
Bitcoin vs Gold vs Stocks: The Chart Everyone Misses
Jordi Visser is a veteran macro investor with 30+ years of market experience and the author of the VisserLabs Substack.
In this episode, we unpack the Federal Reserve rate pause, the case for a more forward-looking Fed, and how rapidly advancing AI is reshaping inflation vs. deflation expectations. We also explore the scarcity trade across bitcoin, silver, energy, and semiconductors—and how investors can think about positioning as physical constraints collide with abundant software.
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