All Inflation is Not Equal

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“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” – Ernest Hemingway

Milton Friedman, the late Nobel laureate economist once said, “Inflation is always and everywhere a monetary phenomenon.” While supply shocks and other events may cause short term price fluctuations, Mr. Friedman’s statement referred to sustained, ongoing inflation, in which persistent inflation is caused by a more rapid increase in the quantity of money than in economic output.

Monetary and Fiscal Policy are the two main tools the U.S. government uses to influence the broad economy. While they operate differently, they are connected in their impact on the money supply.

An additional factor, which also has an effect on the money supply comes from financial institutions such as banks. Bank lending can have an impact on the money supply through a process called money creation which leads to what is known as the money multiplier effect.

All inflation is not equal. There is asset inflation, which refers to investment assets such as financial assets (stocks and bonds), real estate, fine art, etc. Then there is consumer price inflation, which refers to the everyday goods and services we all consume during the course of our lives.

Observationally, I believe fiscal policy tends to have a larger impact on consumer price inflation, while monetary policy appears to feed more directly into financial asset inflation. There is disagreement regarding my contention above, however we can think about this from a commonsense point of view. For example, if the U.S. government sends money directly to households through transfer payments (as they did during COVID), those households are likely to directly impact consumer price inflation fairly quickly via their greater consumption demand for all the same goods and services. Whereas changes in the cost of money via the central banks interest rate policy or through commercial bank lending would likely have a larger direct impact on investors making borrowing decisions to finance their investment purchases.

This is why I believe the upcoming easing cycle the Fed is embarking on will probably have a larger and more positive impact on asset prices than a negative impact on consumer price inflation.

With that said, as an investment manager and adviser I personally tend to focus more on the risk side of the risk/return equation. In this spirit, I have chosen to pass along a recent article by James Mackintosh of The Wall Street Journal, “The Market’s Riskier Than It Used To Be – and Investors Love It,” to clients and friends. Although, I do believe financial markets could continue higher through a shot of adrenalin via easier monetary policy, investors should not lose sight of the risks out there and be willing to adjust positioning if warranted over the coming weeks.

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The Market’s Riskier Than It Used to Be—and Investors Love It

By James Mackintosh

The Wall Street Journal

September 13, 2025

Investors have a strange relationship with risk. On the one hand, they want it: Risk brings reward when it works out. On the other hand, unrewarded risk is the very last thing anyone wants.

The result is the all-too-familiar swing between fear and greed, boom and bust, as investors switch from loving risk to fleeing it. This is relevant to today’s stock market because the market is riskier than it used to be on three important metrics:

First, it is much more concentrated in a handful of stocks than in modern times. That means investors who simply track the market are taking much more single-stock risk than in the past.

Second, the stocks that dominate the market are heavily exposed to one big bet, on generative artificial intelligence, into which they are expected to pour almost $400 billion this year.

And third, everyone agrees that those stocks are phenomenal and bound to go up, creating a form of groupthink vulnerable to a sudden reverse on any setbacks.

The concentration is well-known, but that doesn’t stop it from being scary. Buy the S&P 500, and the top five stocks make up 27.7% of the portfolio, up from 11.7% a decade ago and the same as in 1964. Back in 1964 it wasn’t a problem: The rest of the market soared as the economy boomed, and concentration dropped steadily.

But as in 1964, investors are taking on a lot more of the single-stock risk that diversification is meant to shield against. Management trouble, product problems or fraud can hit an individual company hard, but they rarely matter much to a widely spread portfolio. If Nvidia (7.8% of the S&P) or Microsoft (6.7%) has some internal difficulty, it matters to the whole market in a way that setbacks to the strategy of Kimberly-Clark (0.08%) don’t.

In 1964, single-company exposure for the biggest stocks mattered, but investors were at least making a diverse set of bets. Back then the biggest stocks were a telecom operator (AT&T), a carmaker (General Motors) and an oil major (now called (Exxon Mobile). Today the value of the top eight companies in the U.S. is driven by one big bet: AI.

You don’t have to be skeptical about the benefits of generative AI to see the risks to Nvidia, Microsoft, Apple, Amazon, Broadcom, Meta, Alphabet and Tesla, the big eight.

How much will people and companies be willing to pay to use AI? How much competition will there be between AI providers? Will cheaper ways of creating the large language models behind GenAI mean big spending was wasted? How long will it take for mass adoption? How long before expensive microchips need upgrading?

At least some skepticism is warranted too. Academics and AI workers worry that getting ever bigger isn’t making AI models ever better. Businesses are finding uses for GenAI, but large-scale productivity improvement hasn’t happened so far.

Made-up answers, known as hallucinations, continue to be a problem. The latest GPT-5 model from OpenAI, for example, estimates that it makes up 10% to 20% of answers when asked about things it doesn’t have access to, and a few percent even where it can cite sources. That’s fine for a social chatbot, but no good if real money depends on the answer. Even assuming it didn’t make up its own error rate, of course.

On top of that, demands for regulation are growing after chatbots were consulted before suicides and a murder. More red tape could push up costs further and slow development.

Wall Street doesn’t care. Analyst estimates for earnings in 12 months for the Big Tech stocks that dominate the market have leapt again this year, with double-digit rises for all bar Apple (its forecast earnings are up only 4%, held back by concern that it is lagging behind in AI) and Tesla (down 36% on poor car sales).

It isn’t just that the average analyst thinks things will work out great. Agreement between analysts—using the statistical measure of one standard deviation of forecasts as a percentage of the average—is also extremely high. For Microsoft, where almost all analysts have a “buy” rating, forecasts have been closer together only once since 2008, and for Meta, Nvidia and Alphabet, agreement is the tightest since before the 2020 pandemic.

This is odd, given the heavy investment into a new business with uncertain revenues and completely unknown profit margins. I’d expect a wider range of predicted outcomes, not a narrower one. But when markets are booming, Wall Street wants to be along for the ride.

The same goes for investors. When risk is on your side, you want more of it. And there’s no doubt that risk has worked out recently, pushing the S&P to yet more new highs in the past week. Who wants to diversify when concentration has worked so well? Who wants reliable but slower-growth companies when risky but hopefully faster-growth companies are soaring?

In the past, lots of people—but only after the market turned against risk. None of us know when that will happen again. But it’s worth hedging your bets, because it will happen eventually.

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Sincerely,

Justin Kobe, CFA

Founder, Portfolio Manager & Adviser

Pacificus Capital Management

A referral is the best compliment.

Feel free to forward this email to family and friends.

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Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Cambridge and Pacificus Capital Management are not affiliated. Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. These are the opinions of Justin Kobe and not necessarily those of Cambridge Investment Research, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing in the bond market is subject to risks, including market, interest rate, issuer credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counter-party capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification and asset allocation strategies do not assure profit or protect against loss.