Gavical Research experts highlighted the unusual trend of rising US asset prices despite the contraction of the money supply, which is a deviation from the typical correlation where excessive growth in the money supply leads to an increase in asset prices.
While the traditional link showed signs of weakness, US stock prices, along with other assets such as gold, cryptocurrencies and industrial metals, continued to rise.
The research firm notes that non-monetary factors can influence asset prices. For example, stocks have been boosted by factors such as the rollout of artificial intelligence, which has boosted corporate profits.
A prime example of this is Nvidia's (NASDAQ:) recent earnings, indicating a continued AI boom.
Unlike in the early 2000s, US technology companies do not currently appear to have excessive capital spending plans.
Gold prices have also risen since February, driven by demand from countries with loose monetary policies, unattractive real estate sectors, or geopolitical motives to diversify away from US dollar-denominated assets.
Industrial metals are seeing increasing demand due to the growth of artificial intelligence data centers and the need to strengthen the global electrical grid.
Cryptocurrencies have been on the rise, partly due to regulatory approvals of Bitcoin and Ether exchange-traded funds, which are expected to expand the investor base.
The introduction of gold ETFs in 2004 had a similar effect, leading to increased access for retail investors and thus higher gold prices.
What about other macro drivers
Macro factors also play a role in US money supply and market dynamics.
“In the past few months, rapid reaction force attrition has declined, suggesting that a temporary equilibrium has been reached,” Gavical strategists noted.
“If so, this positive liquidity driver for markets may be on its way out. Even if RRP depletion resumes, there will only be $496 billion left to draw down.”
However, the market expects US monetary policy to ease, with the Fed poised to reduce the pace of quantitative tightening starting next month, which could lead to renewed growth in money supply.
Investors now face the possibility of a decline in asset prices if the driving factors supporting them weaken, especially since most asset prices have shown signs of decline in the past few days.
“Indeed, with most asset prices falling in the past two days – with the notable exceptions of Nvidia stock and Ether – one has to wonder if this has already started to show,” the report noted.
