It’s not all about AI. The equity rally, I mean. But there’s a self-fulfilling prophecy afoot and while readily admitting that this chicken-egg dilemma’s no easier to solve than any other, you wouldn’t be wrong to suggest it “starts” with the big run-up in semis and hyper-scalers.

It goes as follows. The AI hype cycle pushes up the names which comprise a very large share of index market cap, thereby inflating the value of enormous passive AUM tracking cap-weighted benchmarks. The higher the share of index market cap those names comprise, the more of every passive dollar gets allocated to those stocks which, when you throw in how prevalent they are across any number of factor-based products and “smart beta” ETFs, creates a kind of perpetual motion machine.

Well-to-do households are massively overweight the AI ecosystem via that dynamic. That’s the ironic, paradoxical punchline: You end up hugely overweight a handful of names — i.e., sitting with very concentrated positions — simply by tracking the benchmark(s).

That works until it doesn’t, and it hasn’t stopped working yet, which means well-off households are watching their on-paper, equity-linked fortunes print new highs week in and week out, and that’s to say nothing of dividends. At the same time, their money market funds are still throwing off 4% give or take, and even their token allocation to gold (which most traditional portfolios have) is up 50% this year.

I realize this is enormously unfair in some (a lot) of contexts, and thereby enormously frustrating at a time when so many people are left out, left behind and otherwise fed up, but the reality is that in environments like this one, someone with a $4 million portfolio — or even a $2 million portfolio — doesn’t really need a job, as long as they don’t have a lot of what I’ll insensitively call “life overhead.” (Now you see why I don’t have a wife and children. I’d conceptualize of them as an overhead cost, and I’d probably talk to them as such.)

Depending on how that $4 million (or $2 million) is allocated, it’s throwing off considerable income atop mammoth, untaxed capital gains. The latter aren’t spendable, but they sure do look good on the screen and it’s a lot easier to convince yourself to buy something you might not otherwise buy when you’ve “made” $100,000 in nine months for free.

I implore you: Look past the unfairness of it and consider what it means for the macro. If you’ve made $100,000 (even if it’s just paper gains) doing nothing during the first three quarters of a given year, you’re not worried about monthly bills nor any sort of “regular” spending, which is to say you’ll spend freely. No, you won’t be buying any Ferraris, but when it comes to eating out, shopping trips and so on, you’re good to go.

That spending supports the economy despite the faltering labor market. It’s true that eventually something would have to give: You can’t have a healthy economy without a healthy labor market. But as far as we know, the jobless rate’s just 4.3% in the US. That’s still pretty close to full employment on any conventional definition of the term.

The figures above are just two snapshots of the US Bloomberg Economic Surprise Index broken down by category. The screengrab on the left is indicative of pervasive, across-the-board misses to consensus in early July. Fast forward three months, and things look quite a bit different. As the figure on the right shows, only the labor market and survey data’s coming up short.

As the hard data (sans jobs) inflects for the better, equities respond bullishly, closing the loop posited here at the outset. Toss in Fed cuts and you’re left with a pretty favorable conjuncture that refers to itself whenever it needs a pep talk. (“I’m speaking with myself, number one, because I have a very good brain and I’ve said a lot of things.”)

Editorializing around all of this on Monday, Nomura’s Charlie McElligott wrote that financial conditions in the US have “shocked easier,” while the dollar’s “melted broadly lower,” corporate credit spreads remain at or near record tights, “cash continues to spin off ‘funny money’ income for rainy day spending and investors’ securities portfolios are at all-time highs.”

“All in all,” he went on, the US economy’s benefiting from a positive wealth effect which serves as a powerful “tailwind” for consumer spending, and all as the jobless rate still sits with a four-handle, while wage growth’s “stuck near multi-decade highs.”

If you ask me — and I haven’t done any work to quantify this — the whole thing’s starting to look a bit like a Potemkin village, and even more so than usual. Anecdotally, the national mood certainly doesn’t “feel” like it should if every John and Jane were gainfully employed and seeing their wages grow at a pace that’s outstripping headline inflation by a full percentage point. Instead, John and Jane are disaffected, furious and, if the near daily rate of violent tragedies in America is any indication, murderously so.

Rather, it feels to me like financial asset portfolios have taken the baton from real estate when it comes to explosive capital appreciation for the well heeled who are still ready, willing and able to spend courtesy of the dot-com bubble repackaged: “New and improved: This time with real revenue and actual profits!” That’s “great,” except that it suggests our new Gilded Age is being fueled by a speculative fervor around a technology which threatens to put huge numbers of regular people out of work.

At some point, the sundry bifurcations which typify late-stage capitalism will have to be resolved, and if that resolution’s going to be peaceful, it has to be in the direction of more egalitarian outcomes. In 2019, during a 60 Minutes interview, Ray Dalio warned that “the American dream is lost.” “You can call it a wealth gap, you can call it an income gap — it’s unproductive and at the same time, it threatens to split us.”

The next day, CNBC’s Joe Kernen took Dalio to task on the idea that American capitalism’s broken and needs to be reformed. Dalio wasn’t impressed with Kernen’s defense of a system which made Ray one of the world’s richest men. “I honestly don’t understand what it is we’re arguing about,” he told Kernen. “One way or another, you’ve got to engineer the goddamn thing to get results.”

Fast forward five years and the country’s never been more riven. And stocks have never been higher.