Gavekal Research strategists highlighted the unusual trend of rising U.S. asset prices despite a contraction in the money supply, a departure from the typical correlation where excessive money supply growth drives asset price increases.
Although the traditional link shows signs of weakening, US stock prices, along with other assets such as gold, cryptocurrencies and industrial metals, have continued to rise.
The research firm suggests that non-monetary factors can influence asset prices. For example, stocks have been supported by factors such as the rollout of artificial intelligence, which has boosted corporate profits.
A notable example is Nvidia’s (NASDAQ:) recent earnings results, which indicate that the AI boom is continuing.
Unlike the early 2000s, US tech companies do not appear to have excessive investment plans at the moment.
Gold prices have also risen sharply since February, driven by demand from countries with loose monetary policies, unattractive real estate sectors or geopolitical motives to diversify away from US dollar-based assets.
Industrial metals are experiencing increasing demand due to the growth of AI data centers and the need to improve the global power grid.
Cryptocurrencies have seen a rally, partly due to regulatory approvals for exchange-traded funds on bitcoin and ether, which are expected to broaden the investor base.
The introduction of gold ETFs in 2004 had a similar effect: they increased accessibility for retail investors and subsequently drove up gold prices.
What about other macro drivers
Macro factors also play a role in the US money supply and market dynamics.
“However, over the past few months, the decline in MSRP has moderated, indicating that a temporary equilibrium has been reached,” Gavekal strategists noted.
“If so, this positive liquidity driver for the markets could come to an end. Even if the RRP decline resumes, there is only $496 billion left to absorb.”
However, the market expects an easing of US monetary policy, with the Fed reducing the pace of quantitative tightening from next month, which could lead to renewed money supply growth.
Investors now face the possibility that asset prices could fall as the driving forces behind them weaken, especially as most asset prices have shown signs of weakening in recent days.
“With most asset prices falling in recent days – with the notable exceptions of Nvidia stock and the ether currency – one has to wonder if this is already starting to play out,” the report said.
