Wall Street’s Bubble Mechanics

We’re hyper aware this morning that Wall Street is in the throes of an AI bubble.

The numbers are startling: the Shiller CAPE ratio has climbed above 34, its highest level since the dot-com mania, while margin debt among retail investors is pushing toward records last seen in late 2021.

According to Bloomberg, the top 10 stocks now make up over 41% of the S&P 500 — a concentration “unprecedented in modern market history.”

Even cautious voices are sounding the alarm. “This is a very precarious setup,” warns Rob Arnott of Research Affiliates. “When so much of the market’s value is tied up in a handful of names, history suggests it doesn’t end well.”

The Magnificent 7 alone accounts for 35% of the S&P’s weighting, making the index look less like a diversified basket of U.S. enterprises and more like a leveraged bet on Nvidia, Apple, and Microsoft.

AI Mania and the Fed’s Push

The Fed’s pivot into rate cuts is adding fuel.

Last Wednesday’s quarter-point trim was presented as a “risk management cut,” but in practice, it kicks $10 trillion parked in money market funds into more speculative channels.

Much of that capital is eyeing AI as the engine of the “new economy reset.” CoreWeave, Intel, and Nvidia dominate headlines not just for technology breakthroughs, but because the speculative capital needs a home.

As one strategist told Financial Times, “AI has become the vessel into which liquidity is being poured. Whether it can carry the weight is another question entirely.”

Gold Goes Mainstream

Against this froth, gold is gaining legitimacy as a mainstream portfolio asset. JPMorgan has quietly shifted away from the old 60/40 orthodoxy, publishing forecasts that see gold rising to $4,000 an ounce by mid-2026 — and perhaps $6,000 by the decade’s end.

The bank cites a weaker dollar, persistent geopolitical risk, and central bank diversification as tailwinds.

“Gold has moved from a tactical hedge to a strategic allocation,” JPMorgan’s private bank wrote this summer. That sentiment is showing up in flows. Bullion deliveries, ETF inflows, and even central bank purchases are running at their strongest pace in decades.

Meanwhile, the junior miners — often the last leg of a metals bull market — are stirring.

The Wall Street Journal reported last week that Canadian and Australian explorers have seen double-digit gains since July, even as their larger peers plateau.

Silver, too, has surged past $44, with traders whispering about a retest of its $48 high.

Politics at the Edge

Geopolitics only complicates the picture. President Trump meets Argentina’s Javier Milei this week, hoping to calm markets ahead of $9.5 billion in looming debt payments.

The peso has been in freefall, and Milei’s radical libertarian program now faces its first true market test.

At the UN in New York, Canada, the UK, and Australia recognized a Palestinian state, joining 147 member nations already on record.

U.S. officials criticized the move, and Israeli Prime Minister Benjamin Netanyahu dismissed it outright: “It’s not going to happen.” Still, the coordinated step signals a broadening break between Washington and its traditional allies.

Reading the Signals

So, the ever-present question: what to do with your money?

Acknowledge the bubble, but don’t get trapped in it.

Speculative froth can run longer than logic allows, but concentration risk is real.

“We may take a breather here in the next few days given how overextended the market is in the short term,” notes Portfolio Director Andrew Packer, who just made a trade betting on a market pullback over the next few weeks in the Grey Swan Trading Fraternity.

Andrew adds, “I don’t think we’ve seen the final top for markets yet – but it’s now or never for a pause before a year-end rally.”

Diversify where incentives still make sense — commodities, select value plays, and yes, even gold.

Gold’s “gradual rise,” as JPMorgan frames it, is your friend if you’re reallocating at this moment. But don’t treat it as a slam dunk. Remember: after 1980, gold holders waited 25 years to recover in real terms.

Balance, ballast, and patience remain the investor’s best tools.

~Addison

P.S.: Don’t miss this Thursday’s Grey Swan Live! at 2 p.m. ET. Andrew will be joined by Shad Marquitz to dig into commodities. With gold over $3,700, silver breaking out, copper near all-time highs, and uranium stirring, the question isn’t whether to own them, but how.

Click here to sign up if you’re not a member yet.

If you have any questions for us about the market, send them our way now to: Feedback@GreySwanFraternity.com.

We’re hyper aware this morning that Wall Street is in the throes of an AI bubble.

According to Bloomberg, the top 10 stocks now make up over 41% of the S&P 500 — a concentration “unprecedented in modern market history.”

AI Mania and the Fed’s Push

The Fed’s pivot into rate cuts is adding fuel.

Last Wednesday’s quarter-point trim was presented as a “risk management cut,” but in practice, it kicks $10 trillion parked in money market funds into more speculative channels.

As one strategist told Financial Times, “AI has become the vessel into which liquidity is being poured. Whether it can carry the weight is another question entirely.”

Gold Goes Mainstream

The bank cites a weaker dollar, persistent geopolitical risk, and central bank diversification as tailwinds.

Meanwhile, the junior miners — often the last leg of a metals bull market — are stirring.

The Wall Street Journal reported last week that Canadian and Australian explorers have seen double-digit gains since July, even as their larger peers plateau.

Silver, too, has surged past $44, with traders whispering about a retest of its $48 high.

Politics at the Edge

Geopolitics only complicates the picture. President Trump meets Argentina’s Javier Milei this week, hoping to calm markets ahead of $9.5 billion in looming debt payments.

The peso has been in freefall, and Milei’s radical libertarian program now faces its first true market test.

At the UN in New York, Canada, the UK, and Australia recognized a Palestinian state, joining 147 member nations already on record.

Reading the Signals

So, the ever-present question: what to do with your money?

Acknowledge the bubble, but don’t get trapped in it.

Speculative froth can run longer than logic allows, but concentration risk is real.

Andrew adds, “I don’t think we’ve seen the final top for markets yet – but it’s now or never for a pause before a year-end rally.”

Diversify where incentives still make sense — commodities, select value plays, and yes, even gold.

Balance, ballast, and patience remain the investor’s best tools.

~Addison

Click here to sign up if you’re not a member yet.

If you have any questions for us about the market, send them our way now to: Feedback@GreySwanFraternity.com.

Back in April, when we published what we called the Trump Great Reset Strategy, we described the grand realignment we believed President Trump and his acolytes were embarking on in three phases.

At the time, it read like a conceptual map. As the months passed, it began to feel like a set of operating instructions written in advance of turbulence.

As you can expect, any grandiose plan would get all kinds of blowback… but this year exhibited all manner of Trump Derangement Syndrome on top of the difficulty of steering a sclerotic empire clear of the rocky shores.

The “phases” were never about optimism or pessimism. They were about sequencing — how stress surfaces, how systems adapt, and what must hold before confidence can regenerate. And in the end, what do we do with our money?!

Relative to GDP, the net international investment claim on the U.S. economy was 20% in 2003. It had swollen to 65% by 2023. Practically every type of American company, bond, or real estate asset now has some degree of foreign ownership.

But it’s even worse than that. As the federal deficit has pumped up the GDP figures, and made a larger share of the economy dependent on government spending, the quality and sustainability of GDP have deteriorated. So, foreigners, to the extent they are paying attention, are accumulating claims on an economy that has been eroded by inefficient, government-directed spending and “investments.” Why should foreign creditors maintain confidence in the integrity of these paper claims? Only to the extent that their economies are even worse off. And in the case of China, that’s probably true.

As global government interest expense climbed, gold quietly followed it higher. The IIF estimates that interest costs on government debt now run at nearly $4.9 trillion annually. Over the same span, gold prices have tracked that burden almost one-for-one.

Silver has recently gone along for the ride, with even more enthusiasm.

Since early 2023, Japan’s 10-year government bond yield has risen roughly 150 basis points, touching levels not seen since the 1990s.

Over that same period, gold prices have surged about 135%, while silver is up roughly 175%. Zoom out two years, and the divergence becomes starker still: gold up 114%, silver up 178%, while the S&P 500 gained 44%.

According to the American Association of Individual Investors, the average retail investor has about a 70% allocation to stocks. That’s well over the traditional 60/40 split between stocks and bonds. Even a 60/40 allocation ignores real estate, gold, collectibles, and private assets.

A pullback in the 10% range – which is likely in any given year – will prompt investors to scream as if it’s the end of the world.

Our “panic now, avoid the rush” strategy is simple.

Take tech profits off the table, raise some cash, and focus on industry-leading companies that pay dividends. Roll those dividends up and use compounding to your overall portfolio’s advantage.

Back in April, when we published what we called the Trump Great Reset Strategy, we described the grand realignment we believed President Trump and his acolytes were embarking on in three phases.

At the time, it read like a conceptual map. As the months passed, it began to feel like a set of operating instructions written in advance of turbulence.

Silver has recently gone along for the ride, with even more enthusiasm.

Since early 2023, Japan’s 10-year government bond yield has risen roughly 150 basis points, touching levels not seen since the 1990s.

A pullback in the 10% range – which is likely in any given year – will prompt investors to scream as if it’s the end of the world.

Our “panic now, avoid the rush” strategy is simple.

Take tech profits off the table, raise some cash, and focus on industry-leading companies that pay dividends. Roll those dividends up and use compounding to your overall portfolio’s advantage.