The Fed's Hidden Fuel: Why Money Growth Spells Trouble for Financial Assets—and How to Prepare

The Federal Reserve's monetary policy has long been the lifeblood of financial markets, but its current approach is creating a dangerous imbalance. While officials have signaled a hawkish pivot, the data tells a different story: money supply growth remains elevated, fueling asset inflation while CPI targets lag. This disconnect bodes poorly for overvalued stocks and bonds—and investors ignoring it risk being left behind when the correction hits.

The Fed's Dovish Disguise

Despite rhetoric about inflation control, the Fed's actions reveal a far more accommodative stance. The M2 money supply—encompassing cash, checking accounts, and easily liquid assets—grew at a 4.5% year-over-year rate in April 2025, the highest since July 2022. While this lags its long-term average of 6.9%, it's still a stark reminder of how monetary easing persists. May's data dipped slightly to 4.44%, but the trend remains clear: money creation hasn't slowed as much as headlines suggest.

The Fed's seasonal adjustments and revised methodology (excluding savings deposits post-2020) muddy the picture, but the core issue remains: low interest rates and indirect asset purchases continue to pump liquidity into markets. Even as the Fed claims to focus on price stability, the data shows it's still propping up financial assets at the expense of long-term stability.

Why CPI Isn't the Whole Story

Official inflation metrics like the CPI have moderated, but they don't capture the full impact of money growth. The Fed's policies have skewed inflation toward assets, not consumer goods. Real estate, stocks, and commodities have boomed as cheap money flows into them, while everyday prices stabilize.

The result? A structural misallocation of capital. The S&P 500's price-to-earnings ratio (P/E) remains elevated relative to historical norms, even as earnings growth slows. Meanwhile, rental costs and farmland values—both tied to real assets—have surged independently of CPI. The Fed's focus on headline inflation has allowed financial markets to stay inflated, creating a bubble that's overdue for a pop.

The Risk of Overvaluation

Financial assets are now a house of cards. Consider:
- Stocks: The S&P 500's 2025 valuation sits at 20x forward earnings, above its 15-year average of 16x. This despite a deceleration in earnings growth to just 3% in Q1 2025.
- Bonds: Yields on 10-year Treasuries remain artificially low at 3.5%, thanks to Fed purchases and global demand, despite rising debt levels.
- Cryptocurrencies: Bitcoin's price has rebounded to $35k, driven by speculative flows rather than fundamentals—a clear sign of excess liquidity chasing returns.

The disconnect between fundamentals and valuations is unsustainable. When the Fed finally tightens meaningfully—or when markets realize the economy can't support these prices—the correction could be sharp.

Positioning for the Unavoidable

Investors must act now to protect portfolios. The solution lies in real assets, which offer inflation protection and a hedge against financial market volatility:

1. Real Estate:
2. REITs: Sectors like industrial and healthcare real estate (e.g., AMT, HCP) offer steady dividends and exposure to rising rents.

3. Land: Farmland and timber assets (e.g., FPI) have outperformed stocks by 20% annually over the past decade, benefiting from supply constraints and inflation.

4. Commodities:

5. Gold: The yellow metal (e.g., GLD) has historically surged during periods of monetary overhang. With central banks adding to reserves, its $2,200/oz price is primed to climb.

6. Energy: Natural gas and renewables infrastructure (e.g., NEE) will thrive as energy demand outpaces supply.

7. Tangible Alternatives:

8. Infrastructure: Toll roads and ports (e.g., IIN) provide stable cash flows insulated from market swings.
9. Agriculture: Fertilizer companies (e.g., CF) and seed producers benefit from rising food prices.

The Bottom Line

The Fed's policies have created a world where money grows faster than the economy can absorb it. The result is a distorted market where financial assets are overpriced, and real assets are undervalued. Investors who cling to stocks and bonds are playing a losing game. Shifting to tangible assets now—before the correction—offers the best defense against inflation and the inevitable reckoning.

Act decisively. The Fed's fuel is running out, and when it does, only those in real assets will survive the fire.