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Weekly Summary Analysis, Part 1: Fund Flows, Fear, And Advantages

Mar. 31, 2021 5:44 PM ET
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Summary

  • The Treasury deficit continues to increase the private sector surplus, and the banks continue to create loans.
  • The mainstream misunderstanding of deficits and the causes of inflation, gives us an advantage since the misplaced fear allows us to enter long positions at lower prices.
  • put:call ratios and the AAII survey make it look like bullish sentiment is high, but there is still a significant level of fear when looked at in a historical perspective.
  • In addition, the fear of rising rates and of hyperinflation are obvious fear responses.
  • Proof that the deficit is a transfer to the private sector is visible in the increased corporate taxes (increased earnings).

Here is part of this past weekend's summary analysis.  Join us and let us help you stay on the right side of the market and Away From the Herd....

The basic conditions required for a bull market:

  • a private sector surplus,
  • sufficient fear among market participants.

Our current conditions:

  • a record-breaking government deficit (which is set to get even bigger,
  • lots of fear about the deficit and inflation.

Since GOVERNMENT DEFICITS = PRIVATE SECTOR SURPLUSES, we have all the conditions required for a bull market

The fear of deficits results from a misunderstanding of how a fiat monetary system functions.

Only monetary sovereigns can create money out of thin air (chartered banks can do this also, but on a temporary basis), and there is no physics that limits the quantity of money that a currency-creator can create. (How much currency can a currency-creator create if a currency-creator can create currency?...my apologies, I couldn't help myself).

The only non-self-imposed limit to currency creation, is inflation (price increases beyond GDP growth). And because inflation is caused by shortages, especially energy or food, it means that the economy is working at full resource utilization--labor, financial, physical resources--and is unable to meet demand.

Increasing the private sector surplus at that point would increase inflation because the economy could not increase supply enough to meet demand. When supply cannot be increased, demand needs to be reduced; taxing money out of the private sector reduces demand and restores the supply/demand equilibrium.

Currently, there are pockets of supply-shortages--big, profitable tech stocks, and real estate in certain locales--but there is little risk of generalized inflation, and certainly no risk at all of "hyperinflation". Capacity utilization is only at 74%, which provides plenty of slack to increase supply when demand grows (chart below).

Capacity Utilization

Personal consumption expense increase is still below 2%, and since GDP growth is at least double that rate, why are so many investors panicked about inflation (chart below)?

PCE Inflation Rate

The answer lies in the 'deficit myth'; the idea that the budget of the Federal government is like a household budget, and that the stock of Treasuries is actually the National "debt". The fact that the mainstream investor and economist communities misunderstand what a deficit means, gives us an advantage; the deficit will allow the economy to grow, corporate profits to increase, and the stock market to reach levels most investors cannot even imagine.

As long as fiscal policy remains stimulative, the primary trend will be bullish.

Money

The Treasury and the Federal Reserve

The 20-day MA of the daily deficit continues at a healthy $23.9B/day, and the deficit year-to-date is a staggering $1.55T; this means that $1.55T has been added to the private sector in the past 6-months. The fact that the Biden administration is moving ahead with trillions more in infrastructure spending, means the stock market will remain in a bullish trend (chart below).

Note: The only danger we see is if the Senate somehow forces a debt ceiling for the 2022 fiscal budget which starts in September. That would be economic suicide, but because of the wide-spread belief in the 'deficit myth', it is possible and a potential threat to the bull trend.

The TCB is being spent into the economy, and the SPX is rising along with the spending (black and green arrows on chart below). This should last until the end of March, at which time, the usual end-of-month TCB 'loading' (purple-rectangles) might cause some minor weakness in the SPX.

SOMA continues liquefying assets at the predicted $120B/month rate. While this is not "currency creation" since it is only as swap of already-existing money, it does free up money in the hands of the banks and investors (liquidity) which has always correlated with increased stock prices (chart below).

This money is showing up in the tax record; employment taxes are now $10B higher than last year at this time, and so far in March, the employment taxes are 12% higher than in February. This implies that March's NFP jobs data will come in above consensus which could light the fuse under the stock market (chart below).

Corporate taxes are 12.9% higher than at this time last year. Paying more taxes means that corporate earnings must be higher. This will translate into higher stock prices (eventually) (chart below).

The Banks

Despite the uncertainty surrounding the SLR requirements and their effect on bank function, aggregate bank credit continues to grow--it was up another $8B in the latest week (chart below).

Deposits continue to rise, and the SPX follows higher (chart below).

The Fed reinstating the required reserves in the SLR calculation was expected to cause a T-bond sell-off on the part of banks, but as the chart below shows, the banks continue to increase their holdings. The banks continue to function well, and are unlikely to cause problems in the near-term.

Institutional money market funds have taken in $156B since mid-February. This has coincided with weakness in the stock market, but as the fear of inflation and higher rates dissipates, money will shift into stocks again (chart below).

In Summary: The Treasury deficit continues to increase the private sector surplus, and the banks continue to create loans. The mainstream misunderstanding of deficits and the causes of inflation gives us an advantage since the misplaced fear allows us to take long positions at lower prices. Proof that the deficit is a transfer to the private sector is visible in the increased corporate taxes (increased earnings).

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