Germany ETF Annual Trading Opportunity From Fiscal Flows

by: Alan Longbon

The federal government budget pattern causes a fairly reliable stock market movement each year.

At the end of each calendar year, surplus budget months remove money from the economy and flatten markets.

In January each year, the federal government passes its new budget and a spending splurge occurs in the first quarter of each calendar year and markets rise.

The national budgets are austerity budgets and drain the private sector of funds. Background international fiscal flows play a role but it is the external sector that provides a positive flow of funds.

Strong credit creation is the mainstay of the current growth trend.

The purpose of this article is to assess the macro-fiscal flows for Germany in the lead-up to the new federal budget in February and determine what effect these flows will have on the stock market and the economy.

Macro fiscal flows impact investment markets with a lagged effect of typically one month. A flow of funds now from government spending or credit creation from banks will lead to a boost in investment markets one month later.

To understand the fiscal flows, one has to look at the balance of sectoral flows within the German economy using stock flow-consistent sectoral flow analysis.

Professor Wynne Godley first comprehended the strategic importance of the accounting identity, which says that measured at current prices, the government's budget balance, less the current account balance, by definition is equal to the private sector balance.

GDP = Federal Spending [G] + Non-Federal spending [P] + Net Exports [X].

As a percentage of GDP, all three sectors sum to zero and balance each other out.

The chart below the most recent federal budget information and goes to the last quarter of 2018.

Germany government budget

The chart shows blue quarterly surpluses for 2018, which in reserve accounting terms means money deleted vertically from the economy by the currency issuer that no longer appears on any measure of the money supply, such as M1, M2, and M3.

Germany is not sovereign in the currency that it uses; it has no legal right to put more Euros into circulation if it so chose. Germany uses the currency of the European Union (EU) and borrows Euros at interest from the European Central Bank (ECB). In effect, Germany operates on a fixed exchange rate system similar to a gold standard.

In the case of Germany, and the other EU members, a federal government surplus means that the government can save them in a bank account or repay outstanding debt to the ECB. Repayment of debt is also the destruction of Euros as the loan is reduced by the repayment and the money 'unprinted'.

The surplus reduces the money supply by about 1.7% of GDP each year.

The chart below shows credit creation over the same period:

Germany loans to the private sector

The chart shows that over US$90B was added to the economy by commercial banks in December 2018. Over the past calendar year, credit creation has been constructive and added 2.6% of GDP worth of currency to the private domestic sector. German banks have consistently added over US$50B in credit money each year since 2016. 2018 was a bumper year.

The following chart shows the current account over a similar period:

Germany current account 2019

Germany's current account surplus is about 8% of GDP and adds over US$242B per year to the private domestic sector.

Using the above information, one can calculate the sectoral flow balances, and these are shown in the table below.

The recent balance of sectoral flows for Germany are shown in the table below:

Germany sectoral balances (Source: Trading Economics plus author calculations)

*Estimate to be updated when the end-of-year numbers are known.

#Forecast based on existing flow rates and plans.

The table shows that the private domestic sector balance is positive but also in decline due to the falling current account balance and rising federal government surplus.

Private debt is the private sector's deficit, and it appears to be bottoming and rising again since the secular decline that began after the dot com boom-bust in 2000. Germany was hard hit in the Dotcom Boom, gained run down states from the collapse of East Germany, and also adopted the Euro at around the same time. This caused the domestic private sector to decide to deleverage.

Germany private debt to GDP The level of private debt is modest by advanced western standards where the norm is over 200% of GDP.

Impact on the Stock Market

Below is a chart of the stock market over a ten-year time interval set above a chart of the federal government budget.

Germany stock market 10 year chart

Comparing the charts above, one can see the impact on the stock market.

The federal government is the largest single agent in the economy. The federal government introduces its new budget at the beginning of each calendar year. At this time, the first quarter is either a deficit month or a small surplus month. Markets tend to rise or remain unaffected at this time. The second quarter tends to be a small surplus budget and this increases in the third quarter where the surplus peaks, the final quarter tends to be a smaller surplus.

German govt budget 10 year chart The stock market chart above shows that the general pattern is for a rising stock market at the beginning of the calendar year as either money is injected into the economy by the federal government or less is removed by a smaller than usual surplus due to government departments spending their newly allocated budgets in the federal budget.

After the first quarter, stock market performance is progressively worse as the federal government money extraction increases over the year; this first quarter is right now and can be traded with an exit around June.

It is quite clear to see what is going to happen next on the German stock exchange and how one can take advantage of it.

The federal government surplus budget in the last quarter of 2018 and most probably also January (based on the past performance) will cause the stock market to ease as funds are removed from the economy. This dip can be bought.

In February and March, spending from the new federal budget will make itself felt, and markets will tend to rise.

In the second quarter of 2019 markets will tend to fall or remain flat as the federal government removes liquidity.

The flow of funds from international trade also play a key role in the domestic flow of funds. The chart below shows the flow of funds from international trade over the same ten year period indicated in the above two charts.

Germany 10yr current account One re-reoccurring theme is that the first quarter of each year tends to be the highest and this combines with the better than normal federal government flow of funds at the same time interval and produces a rising stock market.

The international flow of funds plays a role as well and sets the financial climate within which the national flows occur. The analogy is to a global climate and national weather.

The chart below was produced for me by Mr. Robert P. Balan for the PAM service, of which I am a subscriber, and shows the flow of funds for the top five developed economies of the world.

G5 fiscal flows into 2019

The chart shows that international flows have bottomed and are about to rise into June 2019 and this provides a constructive background for the domestic flow of funds and their impact on local markets.

An investor wishing to trade these stock market movements could do so using the following German ETF funds that mirror the broad stock market index:


iShares MSCI Germany ETF


iShares Currency Hedged MSCI Germany ETF


First Trust Germany AlphaDEX Fund


WisdomTree Germany Hedged Equity Fund


iShares MSCI Germany Small-Cap ETF


Xtrackers MSCI Germany Hedged Equity Fund


Global X DAX Germany ETF


Franklin FTSE Germany ETF


Xtrackers Germany Equity ETF

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.