U.S. Macro Fiscal Flows Point To Rising Markets For February And Into March 2019

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by: Alan Longbon
Summary

The US budget surplus is $9 billion in January 2019; this is a net reduction of income and savings in the private sector.

Dollars removed from the economy by the federal government allows the private sector to post a $9 billion deficit.

Private credit growth has rebounded this month and made a $74 billion contribution to aggregate demand and fiscal flows.

Further, income flows from the national government impact investment markets with a one-month lag, and so can be a useful predictive tool.

The purpose of this article is to assess the macro fiscal flows for January 2019 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 flush of funds now from government spending or credit creation by banks will lead to a boost in investment markets one month later.

Due to the recent partial federal government shutdown, the financial figures are late. It is now the beginning of March 2019, and the budget figures for the federal government just released are for January 2019. Usually, the budget data is available within one month and provides tradeable information due to the lagged impact effect.

To understand the fiscal flows, one has to look at the balance of sectoral flows within the US 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.

A table of recent sectoral balance flows is below:

USA sectoral balances

(Source: FRED 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 below shows the sectoral flows at critical times in the past by way of comparison.

The chart below shows the newly released budget data:

USA fedgov budget jan 2019

It shows a surplus (blue) for January 2019, which in reserve accounting terms means money deleted vertically from the economy by the currency issuer that now appears on no measures of money supply, such as M1, M2, and M3. This money has been deleted at a keystroke.

The chart below shows credit creation over the same period:

USA credit creation January 2019

Credit creation also added to the money supply in January 2019 - over $74 billion. A strong result. This is money added horizontally by banks at interest that must be paid back as a debt liability and so adds no net financial assets to the private sector.

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

USA current account January 2019 The US current account deficit widened to USD124.8 billion, or 2.4 percent of GDP. This result shows that America swapped US dollars (that it can create on a keyboard at the central bank at practically no cost) for real foreign goods and services. The stronger the dollar, the more real foreign goods and services one can have virtually for free. This is a sovereign privilege few understand.

Impact On Fiscal Flows

This month, the balance of account looks like this for the private sector balance:

[P] = [G] + [X] is an accounting identity true by definition.

Inserting the numbers:

[P] = [-$9 billion] + [-$41.6 billion*]

*Estimate: The current account deficit is -$124.8 billion for that last quarter, and this works out to -$41.6 billion per month.

[P] = -$50.6 billion net drain.

To this number, one can add the impact of credit creation for January 2019 to work out the net change in the money supply and aggregate demand.

P + C = Net Money Supply Change = Domestic Aggregate Demand

-$50.6 billion + $74 billion = $23.4 billion net add.

This is a positive addition to aggregate demand overall and is why the market has rallied through February 2019. Macro fiscal flows of this sort have a one-month flow-on effect on the stock market.

Hopefully, the federal government will catch up with its budget release routine so that one can get an idea of the market action in March 2019 based on the flow of funds from February 2019.

One clue going forward is the flow of funds from the Treasury cash balance shown in the chart below from Mr. Robert P. Balan and his PAM service, and in this article.

G5 M2 money supply to January 2019 What the Treasury cash balances show is that we can expect a general fall in the markets due to a net extraction of funds from the economy up to April 2019. This coincides with the remittance of tax at "tax time." The subsequent rise after April is the refund of overpaid tax once newly lodged tax returns have been processed. It is likely that over half a trillion dollars will be extracted from the private sector in a short space of time, as the Treasury table (below) from last year shows.

Monthly treasury statement January 2019

The stock market normally recovers from this net drain in May and June. Until then, it is likely we will see flat to falling markets, and a lot of volatility in the stock market (SPY, DIA, QQQ) as households and businesses hold spending back in anticipation of the forthcoming tax payment in April and then remit the payment and have less cash to spend on real goods and services on Main Street. Until after April 2019, one might want to sit out the volatility in cash (UUP) or bonds (TLT).

Other factors that may add to the April stock market low would be:

  1. Failure of the Trump trade discussions with China or at the least only a mediocre outcome and more tariffs for China and our other trading partners. Just this week, Turkey and India had their special trading status removed, which means goods and services from those countries will cost the US consumer more and the difference deleted as a tax tariff at the federal level.
  2. A federal government shutdown at the end of March 2019 if the federal debt ceiling is not raised in time. Most likely the Mexico wall issue funding will be used for not signing off on the debt ceiling, and our president will once again be proud to shut down the government until it is. This will be more serious than the last partial shutdown as it will be a full shutdown. One can see from the Treasury statement above that the last partial shutdown had little or no effect on government fiscal flows as compared to the same time the year before.
  3. Tabling of the Mueller report and the political fallout that will have.

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.