Oct. 21/23, Weekly Summary Analysis

 

Politics are not separate from the investment universe; market economies exist because legislators create spending-laws (sovereign currency-creation) and taxation-laws (currency-cancellation). It, therefore, is important that Congress ends its self-harming clown-show and gets back to its most important duty--to deposit money in private bank accounts by passing spending laws.

The herd continues to be fixated on the monetary policy of the Federal Reserve, but at this point it is a distraction; the important factor is the fiscal (spending) policy. The market is saying that the Fed has paused the rate hikes.

 

 

 

Powell always does what the market tells him to do. Rates will stay where they are, for now.

The fear of recession has started to stir the herd again after having faded over the summer. As the chart below demonstrates, recessions tend to occur 6-18 months after the second 10-2 inversion (on the monthly scale) and with unemployment unambiguously rising. According to this correlation, the latter half of 2024 is the earliest we could expect increased recession probabilities.

 

In addition, this is a presidential election-year (which rarely see austerity) and once Congress gets over its tantrum, the two wars will require increased spending, and the elevated rates will continue to deliver interest-income. The current weakness is temporary.

 

Fund-Flows

So far in October, there has been a net-drain of -$15B, compared to a net-addition of +$33B at the same time last year. This is the result of October's tax-take that removed $80B (net) from private bank accounts, compared to only $30B in October 2022 (pink boxes below).

 

 

So far, only $25B has been returned to private bank accounts. This drain of funds is the main reason for the weakness in stocks.

Thursday's net-transfer was a positive +$8.9B. The 20-day average is now +$3.70B/day (compared to +$5.6B/day at the same point in 2022) 

We are monitoring the rate at which the tax money flows back into the economy; the slower it goes, the slower the recovery in the SPX.

 

The SPX has dropped down to the $1T net-transfer rate, but if the deficit-spending stays above that rate, the SPX will not fall much further.

Interestingly, our liquidity model registered a small increase even with the $80B tax-drain. The correlation with the SPX is reverting back to the normal (green arrow) which should mean the SPX will firm up as the liquidity increases. The war-spending and interest-income will increase the liquidity.

 

 

Spikes in the ROC (rate of change) of the government "debt" (stock of Treasuries) correlate with SPX rallies (green lines). Since Treasury sales match net currency-creation, the recent tax-take caused a net-destruction of currency and a negative ROC of "debt" which has weakened the SPX (red arrows). The SPX will rally when spending replaces the currency destruction of the tax-take.

 

Aggregate bank credit, the other "money-creating machine", has been weak since the start of the calendar-year, and was unchanged in the latest reporting week ended October 11. All major loan-types were lower, except for residential real estate, commercial and industrial loans, and credit card debt.

 

 

The HY spread has manged to stay below the prior high (horizontal dotted blue-line) and could be set to drop back into its bullish trend.

 

 

The financial stress indicator has been within a low-stress range since the start of October. There is still room before the indicator reaches a dangerous level.

 

The "other" reserves model is showing the normal SPX pullback (green rectangle) that tends to occur shortly after the local lag-low .

 

 

The reserve model is once again not being properly predictive; currently in a tailwind, but behaving as if in a headwind. Perhaps over the next week-and-a-half it will rally.

 

 

The foreign reverse repo model has done a good job of forecasting the SPX which has reached the predicted local-high (pink box) and is now close to the predicted local-low (green box) from which it should move higher.

 

 

The SPX rally will resume when the fund-flows return to a positive net-transfer.