Nov. 11, 2023, Weekly Summary Analysis

Nov. 11, 2023

Nov. 11, 2023

Weekly Summary  Analysis


Government spending comes before taxation in the floating-exchange-rate monetary system.

Treasuries are not "debt" but provide risk-free income to those with excess tax-credits.

Fund-flows and net-transfers into private bank accounts are increasing, which will continue feeding the bull market.

Money growth - US paper currency



In the current floating-exchange-rate monetary system:

Government spends first, then taxes back at a later date (one cannot pay taxes until the currency exists to pay with).

Government destroys tax dollars (removes them from the economy) upon collection.

Government has never had to tax back the full spending amount (balance the budget) and nothing has broken, in spite of 80-years of "debt-bomb" hysteria.

The government does not need to sell bonds (or tax) in order to spend.

Bond sales are not borrowing, and the stock of Treasuries is not "debt". The dollars to buy bonds with have to exist first (see #1 above).

The dollar is a transferable tax-credit, and Treasuries continue to be sold because they provide risk-free income (for no work) to those with excess tax-credits.

The recent "panicking of the herd" over the sale of nearly $500B worth of Treasuries, demonstrates the lack of understanding of how the monetary system works. There are lots of tax-credits (dollars) sitting in the ONRRP (overnight reverse repurchase) facility where the Federal Reserve "rents out" Treasuries on a temporary basis--because there is a demand for assets that pay 5% risk-free income (for no work). The selling of Treasuries is facilitated by shifting from overnight accounts to outright owning of Treasuries. In other words, it is just an asset swap. Note the inverse relationship and that there remains just short of $1T in the ONRRP.


The fear that "no-one will buy the Treasuries" on auction is another manifestation of ignorance. Through the NYFed, the Primary Dealers are obligated to buy the Treasuries that come up for sale--using Fed loans at below prime which guarantees they will not lose money. There is no way an auction of US Treasuries will fail. Before that could happen, the Fed would simply slow there balance sheet reduction (QT) program and could even reverse and do QE again.

The herd also displayed its ignorance by panicking after Powell's comments Thursday afternoon. Powell, trying to make up for his less-than-tough talk at the FOMC presser, sounded hawkish in his speech in Europe, and the herd 'threw itself off a cliff' in response. I told subscribers (the traders in our community) they could buy the dip since the World did not change after Powell's words.

It is all about the fund-flows, not the monetary-policy.



Friday's net transfer of +$11B pushed the 20-day average up to +$7.22B/day, compared to +$8.29B/day average at this time last year; The gap between last year and this year continues to narrow.

In the first 7-days of November, +$155B has been net-transferred into private bank accounts, compared to +$139B last year. And with the nominal spending coming in $77B above last year, it won't be long before the net-transfers will exceed last year's. Higher fund-flows will feed the bull market.



The SPX has jumped up to the $3T net-transfer rate (black line) just like it did last year.  And just like last year, it will likely come back down to the $2T rate (green line) before the end of the year and then take off again (pink-indication).


Aggregate bank credit (the other money-creator) continues its year-long decline, but it was slightly higher again in the latest week ended Nov. 1/23, for the second week in a row. All major loan-types were higher except for car loans and credit card debt. It is encouraging to see commercial and industrial loans trending higher since mid-September.


Our liquidity model is up for the fourth week in a row and its correlation with the SPX is back in positive territory. Over the next month, liquidity should grow further due to the positive net-transfers we are seeing (see above) and the SPX should follow; there is a quarterly interest-payment next week (Nov. 15), and no more tax-dates until mid-December.


The HY-spread has made a local high which signals a low in the SPX (red verticals). It is possible for the HY spread to move even lower (and the SPX higher) over the next few days as the quarterly interest payment is made, but then we could see some weakness as we enter the December tax-period--especially if we don't get a continuing resolution to fund the government. After that, however, we should continue with the rally into the new year. 



The financial stress index is low and continues to improve


Maxima in the reverse repo model (pink boxes) and minima (green boxes) correlate with the SPX with a 1-3 week lag. The SPX continues with its bounce off of a minimum, and, according to the model, has yet to make a top (which is lagged 1-3 wks).



The reformulated reserve model fits the data better than the old one, but it is still not as accurate as the repo model (above). The SPX has risen strongly inside the model's predicted tailwind period, and after such a strong bounce, we could see some profit-taking at the end of next week, according to the model.



The "other" reserves has a repeating pattern where it makes a low (black verticals) near the middle of each quarter as a result of the quarterly interest payment. The SPX tends to weaken shortly after the interest payment and then makes its own low 1-4 weeks later (yellow verticals).



The net-transfers continue to fund the stock market. The balance of probabilities is that we get a local top in November as we approach the December tax-take, and even sooner if there is a government shutdown.