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Total Reserves Leveraged = Value Of SP500

|About: S&P 500 Index (SP500)
Summary

Banks first leveraged gold.

Then interbank credit.

Now they leverage Central-Bank-Money i.e. Reserve Coin. It is the ultimate liquidity.

Since April 2019, the value of SP500 correlates to Total Reserves x 16.66 which is leverage ratio commercial banks operate under in the US.

SP500 could go to 3500-3600 by mid April as the Fed creates new Reserves by buying bills (Not-QE).

What am I talking about?

Let me start with an example to explain the concept:

Say there is an island where a coconut-processing company is the only business. If the business closes, everyone will leave their homes and migrate off the island. It is safe to say that the worth/value of the whole island is that one company.

Say this island has a gold standard and only one bank, with a total of 100 gold-coins deposited (all the gold on the island).

The bank is regulated and must have 6% reserves minimum. This means that for every 100 'paper-gold-coin' they lend out, six gold coins or more must sit in their vault. The maximum lending they can do is 100 x 16.66 = 1666.

Over the cycle, the bank grows its money-lending, and the coconut-company gains in value. When its value reaches 1666, the company is fully priced, because that is all the money that can possible exist on that island (unless they lower reserve-requirements or become more gold from outside).

Banks first leveraged gold.

Then inter-bank credit.

After 2008 they leverage Reserve Coin.

What is Reserve Coin? (the origin)

In May 2007 banks stopped growing their loans to other banks. Inter-bank credit was extended mostly with a 3 months duration with no collateral but the promise to pay back. Libor was the cost of inter-bank credit.

Banks, not having new funding, ended up with higher leverage (this grew to over 100x at some big banks towards the end).

In September 2008 all banks withdrew completely overnight loans to Lehman Brothers. Lehman failed to make good on their payments and went bust (the Fed refused to loan them money to keep them going).

To avoid that the same should happen to other banks, (even JPM would have been insolvent within the span of two years), the Fed gave them 800B of Reserve Coin (in exchange for mortgages that was not worth the full price).

Ok, but what IS Reserve Coin?

It's money on par with the dollar (in the US) that the Fed pulls out of their hat and which can ONLY be held by commercial banks with Fed accounts (not for broker/dealers unless they have a commercial bank incorporated. Separating broker/dealers from their commercial bank unit would do America a lot of good).

Before 2008 there was only a few billions of Reserve Coins which banks sent back and forth to settle payments with each other. In September 2008 they held on to them for dear life. When, in early 2009, banks had collectively 800B of them, they relaxed and continued business, but unsecured inter-bank credit was DEAD. (September 2019 was similar in that there were too few Reserves, but this time around, banks were flush while those without a Fed account suffered) 

Banks in the US, like on coconut island, have a 6% reserve requirement.

They could hold HQLA (high quality liquid assets) like AAA bonds (Treasury paper), but they prefer Reserve coin because it is always accepted by other banks no matter what. The economists at the Fed really expected banks to hold Treasuries over Reserves and where surprised to discover the opposite last September.

So, finally, how do we calculate the target of SPX?

Total Reserves, monthly:

https://fred.stlouisfed.org/series/RESBALNSLC

As with coconut island; productioncapacity = the nations worth, all else is auxiliary. The numbers fit the SPX and not the Russel 3000 (why IDK).

Examples:

End April 2019 Reserves 1559B x 16.66 = 25.97 trillion =SPX at 2984

April 30th SPX (total market cap) = 25.76 trillion =SPX high 2959

End July 2019 Reserves 1513B x 16.66 = 25.20 trillion =SPX at 3026

July 25th 2019 SPX (public float) = 25.23 trillion =SPX high 3028

End Dec. Reserves 1630B x 16.66 = 27.15 trillion =SPX at 3259

Jan 1st SPX (public float) = 27.16 trillion =SPX high 3260

End March Reserves (1630B+180B)??? x 16.66 = 30.15 trillion = SPX at 3618 (could it be this easy?)

Total market cap is the estimated value of all outstanding stocks of the 500 companies, =SPX/120

Market float counts only stocks that are free to trade, meaning total stock minus those held by their own company, =SPX/114.8

Every new 60B now adds 120 points of market float capitalization

www.newyorkfed.org/...

The Treasury has a Reserve account with the Fed, its level goes up and down as taxes and payments move around. This directly influence the Reserve level held by banks:

US government deposits: General account balance at Federal Reserve

In addition, there is IMF, World Bank, the UN ect with Fed Reserve accounts:

Liabilities and Capital: Liabilities: Deposits: Other: Week Average

If the Fed stops their current QE in mid-April, the market should top out.

This correlation migh also break beforehand, watch Total Reserves level when these are published around the 5th of every month. SP500 should be at par.

Big banks are rapidly growing prime brokerage and asset management loans with securities as collateral, enabling the market to quickly catch up with the dilution of money (it's a dilution because these new Reserves are not growing production through commercial and industrial loans).

Given an end to not-QE in April, bank's trading desks will earn good money on the (supposed) coming volatility and depressed asset prices (like in Q4 last year), unless the Fed initiates a standing repo facilit, which should not increase SPX but will prevent hedge funds ect from ever having to force-sell their assets.

I'm a total noob, been trading stocks for 18 months only. I would LOVE for people to point out where I'm off the mark and lack understanding, but so far, not many people are talking about this on SA so I take the plunge.

(If anyone should care to know: I'm in gold since thanksgiving, it keeps up with SPX so far, and I plan to stay in gold and gold miners for the next 18 months or so. If SPX tracks Reserves until April and the Fed does not announce a continuation of QE, I will short unprofitable companies with high valuations using <5% of my portfolio.)

Disclosure: I am/we are long GLD.