Euphoria, Shmuphoria.

1.) SPX/GOLD – As you know if you've been reading my stuff for a while, I like ratios. Comparing an asset priced in another asset. The ratio of the S&P 500 to gold prices is a time-proven measure of investor confidence in human innovation. The ratio is essentially how many ounces of gold are required to buy the S&P 500 index price. The chart below shows the S&P 500 index level divided by the price of gold per ounce over time. When the ratio was at 5.5x (the peak around 2000), it meant you would need roughly 5.5 ounces of gold to have the same dollar value as the S&P 500 index level at that time. Currently (shown as ~1.6x), it takes about 1.6 ounces of gold to equal the S&P 500 index level. By this metric, US large-cap valuations do not reflect any excessive enthusiasm about the AI trade, continued economic growth, or corporate profitability. Markets top on euphoria and excessive optimism and enthusiasm. We’re still not there.

2.) RATES – Rates are still signaling a bullish trend (upward bias) across the curve (2YR – 30YR). Most of the yields look like they want to test their trend support levels (4.25% for the 10YR). I do find it interesting that a new US-Iran “peace deal” seems to leak almost every time the 10Y US Treasury yield breaks 4.4% on the upside. Bond volatility (MOVE Index) reversed after tapping its trend resistance near 80, now trading at 70. Calm bond volatility is important.

3.) BUBBLE – Are we in a bubble? Who knows! But what I can tell you is that there is a bubble in people talking about being in a bubble! Here’s the funny thing about markets: if everybody thinks we’re in a bubble, then by definition we probably aren’t. Go study every major bubble in history: The Dot-Com Bubble; The Roaring ’20s; Railroads; The South Sea Bubble; even the Great Bowling Bubble of the 1960s. What do they all have in common? Euphoria. Not fear or skepticism or constant debates about crashes and valuations and recessions every single day on television and social media. Real bubbles happen when people stop believing risk exists. In actual bubbles, investors become convinced prices can only go higher. Every dip gets laughed at. Risk management disappears. People start believing we’ve entered some new permanent era where the old rules no longer apply. Do you honestly see that today? Consumer Sentiment just hit fresh all-time lows this month, and more than half of American adults believe now is a bad time to invest in stocks. We also see no euphoria on magazine covers. Just look at the recent New Yorker cover. The headline for the cover literally says “Red, White & Kinda Blue.” Look at poor George. Does that look like a guy caught up in speculative mania and feeling euphoric? The poor guy looks absolutely miserable, and that’s exactly what the sentiment data has been telling us.