Why Stocks Went Up in October
MBMG IA Flash - Why Stocks Went Up in October
by MBMG Investment Advisory in Flash Posted on
01/11/2021 17:34
Liquidity Driven by Debt Ceiling Woes
Post 2008, the key driver of asset prices since the Global Financial Crisis (GFC) during 2008-9 has been central bank credit creation. We believe that the boost in liquidity given by the US Fed by shuffling US government funds in early October in the run up to concerns about the debt ceiling being reached, increased liquidity by around $300 billion (in just a week) and this has very likely been what has, in turn, spearheaded the boost seen in stock prices. This boost is likely to be temporary or until the debt ceiling issues are resolved or not, in December.
Wall Street Offers Higher Returns than Bank Lending
Since GFC, the majority of broad new money has been minted by the US government who (until last year) had difficulty feeding it directly to businesses and citizens and so routed it through the Fed, via banks, to Wall Street with the intention of them pump priming businesses and people in need of capital. But Wall Street, quite logically, chose to steer away from feeding bank lending because the banks had found that demand (and therefore pricing power) for credit had reduced, and that Wall Street could command better returns on this money by feeding it into asset markets including stocks and property. Pre-2008, Main Street banks were the main driver of liquidity.
What Does that Mean?
It means that (for now) the direction of asset prices depends predominantly on US government feeding Wall Street and Wall Street continuing to feed the markets (and for asset prices to increase, the volume of money that needs to be absorbed has to continually grow at a faster rate). As the Fed created so much new money last year there was even a surplus lying around for this year so there was a buffer for when they stopped creating additional money at a faster rate which was from 1st July to 1st October 2022.
Why Stocks Went Down in September
Sometime in September, the surplus must have been mopped up (it’s very hard to measure) causing the volume of funds being absorbed to start to slow. Capital markets didn’t like this - after all they no longer have any other equally compelling reason to go up (yes, earnings have been relatively good but that doesn’t matter as much as liquidity does in driving markets continually higher).
So, markets fell, and the US dollar strengthened and economic activity, which is fragile, took fright.
Debt Ceiling Effect
Mid last month, the debt ceiling nonsense was postponed until December and the money taps turned back on again and the total deb(i)t that needs to continually increase to feed the markets (at least until after the buffer is exhausted) and the stock of which fell by $100 bn (from $27.5 trillion to $27.4 trillion) from 1st July to 1st October, suddenly ramped up by $300 bn in a week (to a new high of $27.7 trillion) and the markets were all happy again (you can see the turn up in the chart line).
And while this was happening, China, more stealthily also turned on the taps again.
Less Meaningful Valuations
Until/unless something changes, then the biggest factor in capital market pricing is the rate of change in liquidity absorption- right now, that’s positive again but unless $300 bn keeps getting made to keep markets happy when they have a tantrum, then at some point it will turn negative again.
That driver dwarfs every other consideration right now, and certainly valuations which in a number of cases appear to have less meaning, as far as theory tells.
MBMG Investment Advisory is licensed by the Securities and Exchange Commission of Thailand as an Investment Advisor under licence number Dor 06-0055-21.
For more information and to speak with our advisor, please contact us at info@mbmg-investment.com or call on +66 2 665 2534.
About the Author:
Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner.