The White House, the Fed, Inflation and Fund Flows for June 2022
The purpose of this article is to examine US sector flows for May 2022 and assess the likely impact on markets as we move forward into June. This is relevant because a change in the budget flow rate has a delay of about a month lagged impact on asset markets and is a useful tool for forecasting investments. There are other macro-fiscal flows that may indicate events several months ahead.
The table below presents the sectoral balances for the United States and is produced from the national accounts.
From the sector balance table above, we see that for May 2022 we have a positive nominal flow of $112 billion to the private sector and a positive month-to-month rate of change. For the markets, the rate of change tends to be more important than the overall figure, and in this case both are positive and this supports the asset markets.
The current market drop is part of a seasonal pattern occurring at this time, caused by the institutionalized pattern of spending and taxation and compounded by year-over-year fiscal contraction and tighter monetary policy. strict from the federal government.
The chart below shows the five-year average of seasonal stock market trends for the SPX (SPX), NDX (NDX), Dow (DIA), Russell 2000 (RTY) and Biotech (IBB) stock indices. The black circle shows roughly where we are [trading day 116 at the time of writing and the end of the green line on the chart below] and the general seasonal trend now is for markets to rise in September after the end of the mid-June federal tax collection event.
It’s this tight streak of federal tax collections at this time of year that lends credence to the stock market axiom “Sell in May and walk away”.
The -$112 billion is made up of a cash injection of over $68 billion from the federal government, plus impressive credit creation of over $116 billion by commercial banks and minus the -$72 billion and more that were paid into foreign bank accounts at the Fed in return. for imported goods and services.
The following graph appears when one graphs the rate of change of information in the US sector balance table above and adjusts the impact lags.
The blue line is the crucial factor and leads by about five quarters and indicates a recovery in the next quarter which is now lagging. The end of the orange line is where we are now. One would expect the markets to move up along the blue line in the rest of the year in the near future. This model is not granular enough to say exactly when this will happen.
The table below shows that overall federal spending was higher than last month and a 16% increase from last month.
The rate of change in both charts is to the upside, pointing to stronger markets over the next month, but that’s tempered by the year-over-year fiscal contraction we’re going through right now.
The chart below compares the past few years of federal spending deficits, and you can see the huge difference between 2022 and 2021.
The fiscal contraction is so severe that Professor William Mitchell had this to say in his daily economics blog which highlights the situation well.
Asset markets found this advice far from good and inflation was falling on its own as shown in the chart below.
The percentage of companies planning to raise wages has plummeted and the Core PCE has already rolled and all before any of the Fed’s actions had time to take effect. More patience was needed.
Supply shock inflation is not resolved by interest rate hikes, but rather by a resumption of supply via the end of lockdowns and adjustments to meet a lack of supply from of Ukraine and a now heavily sanctioned and embargoed Russia. Monetary policy cannot do any of this.
The table below graphically shows the relationship between the federal government (money maker) and the private sector (money user) and is taken from the ANG Traders of the Away from the Herd SA Marketplace service. The bottom panel highlights in red and green the financial relationship between the creator of the currency and the users of the currency.
The daily average net transfer is +9.3 billion dollars per day. The Treasury account balance has $758 billion that needs to be spent to exist, which should mitigate the reduction in the Fed’s SOMA balance sheet by keeping net transfers positive to the private sector (chart below).
(Source: Mr. Nick Gomez, ANG Traders, Away from the Herd SA Market Service Weekly report).
The chart above shows the stock of Treasuries, red line, (AKA National Debt) flattening as liquidity dries up across the board. Remember that for all intents and purposes, the stock of treasury bills is the money supply, and a growing economy needs a growing money supply to enable all the transactions that take place in it and to grow the assets. financial. On the bottom panel, notice the red boxes where the private sector has gone into deficit. The fiscal stance is now moving back into the green zone where a private sector surplus can occur.
There is a major federal tax collection in mid-June, which will bring the budget balance back into the red danger zone. The good news is that this is the last until mid-September and in this fiscal space the private sector surplus can grow and asset markets can grow.
In the White House, there have been no noteworthy fiscal events that have any market-moving capacity. In fact, the recent year-over-year cut in budget spending is still celebrated as a big event.
The Fed is ending QE this month and QT is starting in earnest. The Fed raised the interest rate by 50 basis points at its last meeting and looks set to do the same at the next meeting. There is an FOMC meeting in mid-June that coincides with another major federal tax collection month in which a rate hike and additional QT are expected to be announced. These are not market-friendly events.
The chart above shows the Fed’s balance sheet juxtaposed with the SPX. The black line shows the end of the QE and the red line shows the projected trajectory of the QT that follows it. Also note the decreasing rate of change of SOMA on the bottom panel. None of these trends are good for the markets. Coupled with federal spending cuts and large federal tax recoveries, the actions of the federal government and the Fed have combined to undermine both asset markets and the economy since before last Christmas.
Another factor that indicates markets remain weak going forward are NIPA earnings, as seen in the chart below.
NIPA corporate profits are falling, which directly affects stock market asset valuations. Markets cannot be expected to rise until NIPA earnings rise to reflect rising stock market asset prices in the future.
NIPA earnings are strongly correlated with the Equity Bond/Price ratio and therefore logically with the S&P 500 index itself. The basic relationship: cash flow drives earnings and earnings drive stock prices.
NIPA earnings need to rebound before equity markets take their lead and rebound as well. This strategic turning point has not yet taken place.
Total corporate cash flow comes from total spending, and with the massive year-over-year reduction in federal budget spending discussed above, that has fallen and with it corporate earnings.
On the global stage, the chart below shows the likely expected trajectory of asset markets based on global macro level fund flows.
The table below is from Mr. Robert P. Balan of Predictive Analytic Models and is part of his SA Marketplace service information for subscribers. The chart shows the level of money creation by the world’s five major central banks in an exchange rate format, as well as a host of other indices.
A good takeaway from the chart above is that in general, at a very macro level, the year-over-year percentage change in total federal government spending worldwide is increasing and will do so until at least 2026, as shown by the dotted black line.
Liquidity models still point to another market bottom in mid-June, but these models are better at predicting dates than the magnitude of price movement. So now we’re not even sure we’ll see new lows, given how equity market fundamentals are changing – with the recent rally providing a nice positive feedback loop, in addition to the spike in inflation, falling expectations from the Fed QT, from falling yields, from the Shanghai lockdown down ending, China’s promise to do what it takes to revive the economy, recession fears are waning.
(Source: Mr. Robert P Balan, WFP chat, June 2022)
The graph above shows the real year-on-year liquidity evolution of the main major economies and, in this format, gives an idea of the magnitude of the evolution. We can see that in this case, the amplitude is much lower than it has been in the recent past, so we cannot expect the exceptional stock market results of last year. Windfall stock markets ended with windfall federal spending.