The availability of money is the most important driver of the economy and the stock market. In this article, we report on the flows of money in the economy and the effects on the stock market.
Silver it is what frees up real resources like labor and raw materials, and government spending is how money is added to the economy (private sector bank accounts). Treasury budget deficits represent the money that was left in the economy (i.e. not clawed back and written off).
FEDERAL GOVERNMENT DEFICITS = PRIVATE SECTOR SURPLUS
Treasury budget deficits are good for the economy, but almost everyone on this planet has it upside down!
Biden brags about cutting the deficit. Imagine bragging about your success in reducing the amount of money transferred to private bank accounts. Fortunately, the the deficit increases again. It is the only thing that will prevent a recession if the Fed insists on further increasing the UBI (risk-free return) for bankers.
The two blue columns (January and April) below, represent fiscal surpluses (private deficits) and are the reason for the weakness in the stock market since the beginning of the year. Growing deficits (private surplus) will support the stock market over the next two months.
The blue dotted line below is the slope (rate of change) of the SPX that occurs when net transfers (budget deficits) are between $0.6T and $1.0T/year. The red dotted line shows the slope of the SPX during the pandemic when net transfers were $3,000,000/year. We are now back to the pre-pandemic net transfer level and the SPX should trend higher in the same general direction as the blue line.
The 20-day average of daily net transfers (from the Treasury into (+) or out of (-) the economy) increased to an average of +$6.37 billion/day; this corresponds to more than +1.5T$/year. This will support the stock market.
Aggregate bank credit is the other channel through which money enters the private sector. Note, however, that bank loans to have to be reimbursed and cancelled, while the expenditures of the Treasury have be taxed and canceled – it can be left in the economy (private bank accounts) – making it more powerful than bank credit.
Although overall bank lending has been at a standstill for two months, the main types of loans, which have the most impact on the economy, have all increased (chart below).
The reason why AGGREGATE credit has stalled is that banks don’t invest as much in treasury bills now that interest rates are rising – treasury bills are treated like bank credit despite being sequestered money which does not have the same impact on the economy as other types of loans (graph below).
At this point, we need to clarify what Treasury securities are. These are a form of dollar accounts, often referred to as “yellow dollars” (after the color of the paper certificates), which pay a return like bank savings accounts do – but “risk free”, since the US government can never be forced to default like a private back could.
These “yellow dollars” are, in fact, a holdover from the gold standard when the government tried to avoid dollar dilution (when it needed to spend in deficit) by pretending that it was not printing really more dollars, but rather “borrowed” dollars from the economy (like a snake biting its own tail). Since 1971, when Nixon completely removed the dollar/gold link (to fund the Vietnam War), the value of the dollar has been determined in the FOREX auction, and Treasury sales have been unnecessary. However, the practice of matching budget deficits to Treasury sales continues to this day as it benefits the financial sector (risk-free return) and provides the Federal Reserve Bank with an interest rate management tool.
Cash does not need treasuries to spend since he is the creator of sovereign money and does not need to “borrow” what he creates at will. In fact, depositing dollars into a treasury bill account requires the dollars to be created first, just like paying taxes requires the dollars to be created first before they can be taxed and canceled.
Although banks are holding fewer treasury bills (chart above), the stock of treasury bills (“debt”) has increased. Leading to the question, “Where did all the Treasures go?” (Table below.)
Alan Longbon and I have looked at this and the following chart may be part of the answer…money market funds may have picked it up.
Money market funds had to buy Treasuries but sell other debt because institutional funds did not rise, and retail funds only rose a few hundred billion dollars. It was just an asset swap, not a net increase (chart below).
Regardless of where the missing Treasures are, the fact remains that the stock market tends to rise as “debt” (blue line below) increases…even when SOMA (pink line below) tightens.
Net flows of funds into the economy suffered a huge decline in liquidity (+$3,000,000/yr, to +$1,000,000/yr) in 2022, but liquidity levels have stabilized and our liquidity model shows that the market will rise for the next month or two (blue lines on the chart below).
We suggest investors take long positions in broad-spectrum ETFs such as SPY, QQQ, DIA, and IWM.