Strip Out M2, AI Boom Is Sticking to the Bubble Script

Stocks were hungry for good news from Iran last week.

Now, traders have moved from hedging geopolitical risk tied to Iran to adding exposure to anything with “AI” attached.

We’re kicking this week off with renewed concerns that the Strait of Hormuz will remain treacherous for some time. But if you strip out the noise, it reveals what’s really happening in the stock market:

Dividing the S&P 500 by the M2 money supply gives a clearer picture of how late the market is in the AI boom/bust cycle. (Source: Joao Wedson)

Analyst João Wedson stripped out the rise of M2 money supply to see how far equity prices have run relative to the pool of dollars available in the system.

Adjusting the S&P 500 Index’s price relative to M2 growth, we’re in the final inning or two of the AI boom on Wall Street.

Stock prices on the S&P 500 have outpaced the growth in money supply. Without inflation, the S&P 500 continues to track the cycle last seen during the telecom buildout in the 1990s.

Of course, “this time is different,” Right?

We heard the same in the late 1990s. It’s a “new paradigm.” The “internet will change everything.” That turned out to be true. It just didn’t happen on the timetable that is convenient for individual investors.

The dot-com crash arrived while the network was still being built.

Alphabet (GOOGL) and YouTube wouldn’t catch investors’ attention until 2006. Mobile apps that let you skip the line at Starbucks until the 2010s. Netflix (NFLX), PayPal (PYPL), Tesla (TSLA)… today’s stock market darlings were all founded after the dot-com bust.

AI systems are improving. The demand is rising. Companies are experimenting with deployment. At the same time, the market is assigning value today based on outcomes that may take years to fully materialize.

“Crack up booms” – inflation-driven stock market Melt Ups — add another layer.

Extended periods of 20% annual returns in the stock market have occurred before. They tend to cluster near the later stages of a cycle, when participation broadens and expectations stretch.

Today’s chart will not tell you when the market will bust. But it should give you serious pause. For an interesting way to trade today’s Ripple Effect, see: Shadow Stocks.

~ Addison

P.S. Last week on Grey Swan Live!, we showcased our latest research on Shadow Stocks – volatile stocks that move rapidly up and down beneath the surface of the calm indexes.

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Stocks were hungry for good news from Iran last week.

Now, traders have moved from hedging geopolitical risk tied to Iran to adding exposure to anything with “AI” attached.

Dividing the S&P 500 by the M2 money supply gives a clearer picture of how late the market is in the AI boom/bust cycle. (Source: Joao Wedson)

Analyst João Wedson stripped out the rise of M2 money supply to see how far equity prices have run relative to the pool of dollars available in the system.

Today’s chart will not tell you when the market will bust. But it should give you serious pause. For an interesting way to trade today’s Ripple Effect, see: Shadow Stocks.

~ Addison

P.S. Last week on Grey Swan Live!, we showcased our latest research on Shadow Stocks – volatile stocks that move rapidly up and down beneath the surface of the calm indexes.

Debts and deficits will eventually cause a crisis. Treasury Secretary Scott Bessent’s effort to help bail out the Japanese Yen this week is entirely motivated by self-preservation. The contagion signal flashing in Japanese bonds since late ‘25 is infecting the BOJ, which may be forced to sell U.S. Treasurys to stabilize its own currency.

The copper price is no doubt benefiting from inflation driven by money printing. But the doc don’t lie. Copper’s new all-time highs, while gold and silver still languish, are a sign the AI growth story is also that of the global economy itself.

Many miners were profitable with gold around $2,000 and silver near $50. At sustained prices closer to $4,000 gold and $60 silver, the arithmetic changes dramatically.

The stock market is getting an unexpected boost to kick off August, bucking the historically weak summer session for the U.S. stock market.

What’s happening? The Bank of Japan and the U.S. Treasury are making a coordinated effort to support Japanese yen; a move last attempted nearly 30 years in the height of the Asian Financial contagion (1998).

Many miners were profitable with gold around $2,000 and silver near $50. At sustained prices closer to $4,000 gold and $60 silver, the arithmetic changes dramatically.

The stock market is getting an unexpected boost to kick off August, bucking the historically weak summer session for the U.S. stock market.