The markets may appear stable, but a closer look reveals a fascinating interplay between asset prices and the U.S. M2 money supply. Bitcoin, often seen as a barometer of dollar liquidity, is now flashing a warning sign. Its price, adjusted for M2 growth, has formed a head-and-shoulders pattern, a bearish signal that suggests its exponential edge over money supply growth may be fading. This could imply that Bitcoin's ability to outpace the flood of new dollars is diminishing, at least temporarily. This matters beyond the crypto world, as Bitcoin has been viewed as a leading indicator for broader risk appetite.
The S&P 500, too, tells a different story when adjusted for M2 growth. Nominally, it hovers near record highs, but on a money-supply-adjusted basis, it has only recently reclaimed its 2000-era peak. This suggests that every new dollar added to the system has had to work harder for a relatively smaller marginal gain in valuation. This raises a deeper question: Are the S&P 500's nominal gains resting on a thinner foundation than they appear?
In my opinion, this analysis highlights the importance of considering money supply growth when evaluating asset prices. It's easy to get caught up in the dollar price of a portfolio, but the true picture is significantly shaped by the money supply. As Bitcoin and the S&P 500 show, the relationship between asset prices and money supply growth is complex and dynamic. It's a reminder that what goes up may not always stay up, and that a deeper understanding of the underlying factors is crucial for making informed investment decisions.
One thing that immediately stands out is the potential implications for broader risk appetite. If Bitcoin's monetary valuation is genuinely losing ground to M2 growth, it could be an early warning sign for the S&P 500. This raises a cautionary note for the rest of the risk-on world, suggesting that the nominal gains in equities may not be as sustainable as they appear. As an investor, it's essential to consider these broader implications and not get too caught up in short-term market movements. What many people don't realize is that the relationship between asset prices and money supply growth is not always straightforward, and it can have significant implications for investment strategies.
