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Discussion of Fed Liquidity’s Impact on Equity Markets
Posted on 6/28/20 at 9:55 pm
Posted on 6/28/20 at 9:55 pm
I am looking for resources that explain, in detail, how Federal Reserve liquidity injections work their way through the economy and where to look to track the cash flows (both WHEN they enter the economy and WHAT they go towards when they do)? Looking to understand the various paths of the cash flows in detail.
For instance, this article talks about the Fed’s massive liquidity injection from March (encompassing a number of different programs). Where would you go to monitor if/how those funds are flowing through the economy? Many are saying the stock market recovery that began in March was in large part due to Fed liquidity, but I’ve seen no one actually prove out the causal link. Where could one look to confirm whether or not the Fed’s money (either directly from the Fed or from those the Fed provided the money to) ended up in various asset classes?
So, two-part question: (1) what Grad school level or higher resources can one read to learn more about these cash flows? and (2) what resources could one review to monitor the cash flows themselves?
I feel like this would be the perfect topic for a charticle that illustrates the various flows.
ETA: Adding some relevant charts to aid the discussion:
M2 Money Supply:
Value of the M2 Money Supply (includes hard currency in circulation + cash equivalents (M1) + savings deposits + small-denomination CDs + retail money market mutual funds):
Year-over-year percent change of the M2 Money Supply:
Velocity of M2 Money Supply:
Fed Balance Sheet: Total Assets:
For instance, this article talks about the Fed’s massive liquidity injection from March (encompassing a number of different programs). Where would you go to monitor if/how those funds are flowing through the economy? Many are saying the stock market recovery that began in March was in large part due to Fed liquidity, but I’ve seen no one actually prove out the causal link. Where could one look to confirm whether or not the Fed’s money (either directly from the Fed or from those the Fed provided the money to) ended up in various asset classes?
So, two-part question: (1) what Grad school level or higher resources can one read to learn more about these cash flows? and (2) what resources could one review to monitor the cash flows themselves?
I feel like this would be the perfect topic for a charticle that illustrates the various flows.
ETA: Adding some relevant charts to aid the discussion:
M2 Money Supply:
Value of the M2 Money Supply (includes hard currency in circulation + cash equivalents (M1) + savings deposits + small-denomination CDs + retail money market mutual funds):
Year-over-year percent change of the M2 Money Supply:
Velocity of M2 Money Supply:
Fed Balance Sheet: Total Assets:
This post was edited on 7/1/20 at 9:34 am
5
Posted on 6/29/20 at 8:10 am to RedStickBR
I've never seen a publication that assembles the data you're asking about. There probably is something out there but I've not looked for it nor come across it.
You might try going to the Fed's own website ( LINK). They release tons of data about money supply and other economic data so it may have something for your research.
Sorry I couldn't be more helpful.
You might try going to the Fed's own website ( LINK). They release tons of data about money supply and other economic data so it may have something for your research.
Sorry I couldn't be more helpful.
Posted on 6/29/20 at 9:05 am to RedStickBR
Velocity of M2
FRED is the best source for that kind of economic data. Some people look at velocity of M2 as a proxy for what you're looking for.
FRED is the best source for that kind of economic data. Some people look at velocity of M2 as a proxy for what you're looking for.
Posted on 6/29/20 at 9:08 am to LSURussian
Okay, I was afraid of that. This topic appears to be something of a black box outside of simply confirming that the Fed’s balance sheet has expanded. I suspect when people say, “The market is only going up because of Fed liquidity,” they don’t have a clue how to prove that. Even if you say that the Fed is only injecting money into the repo and Treasury markets and then it is the primary dealers through whom cash into equities is flowing, I don’t think they could prove that either. But if Fed liquidity really can cause temporary dislocations from fundamental value in the equity markets, it’s something I’d like to become smarter on.
This post was edited on 6/29/20 at 9:09 am
Posted on 6/29/20 at 9:17 am to RedStickBR
Bank of International Settlements
This is a good source as well.
Do you think buyback desks would be very popular if they weren't suppressing rates for as long as they have? Go look at the record breaking quarter in debt issuance. $1.3T YTD between just 5 PDs. Where is that cash going if you're not at risk of insolvency i.e FB, MSFT, GOOGL, AAPL?
It is much more complicated than just muh Fed, but they are essentially suppresing volatitlity so money flows to the riskiest assets.
This is a good source as well.
quote:
“The market is only going up because of Fed liquidity,”
Do you think buyback desks would be very popular if they weren't suppressing rates for as long as they have? Go look at the record breaking quarter in debt issuance. $1.3T YTD between just 5 PDs. Where is that cash going if you're not at risk of insolvency i.e FB, MSFT, GOOGL, AAPL?
It is much more complicated than just muh Fed, but they are essentially suppresing volatitlity so money flows to the riskiest assets.
This post was edited on 6/29/20 at 9:18 am
Posted on 6/29/20 at 9:36 am to wutangfinancial
That’s what I’m trying to get at. When the Fed buys Treasuries from PDs to lower rates, that could have an indirect impact on equity markets as equity yields must also adjust down to maintain the same equity risk premium, all else equal. That makes perfect sense to me, and would be more of an indirect impact that you perhaps wouldn’t be able to trace.
What also makes sense is newly created money being used for buybacks as opposed to being deployed in the real economy.
Both of the above would seem to involve PDs. I’m curious how to track the funds once they’ve already made it from the Fed to the PDs, as that is most likely the port of entry to then make their way into (eventually) equity markets if that is in fact what’s happening.
What also makes sense is newly created money being used for buybacks as opposed to being deployed in the real economy.
Both of the above would seem to involve PDs. I’m curious how to track the funds once they’ve already made it from the Fed to the PDs, as that is most likely the port of entry to then make their way into (eventually) equity markets if that is in fact what’s happening.
Posted on 6/29/20 at 10:12 am to RedStickBR
They have guys attempting to model global money flows and it's nearly impossible. Also remember passive flows. I'm probably annoying bringing this up again but most market participants do not care about price. As that trend continues along with an active, dovish Fed policy and most people assuming that inevitably they have to step in and buy equities you have a massive amount of support on risky assets.
Now wether those nominal returns actually hold any value is really what people are starting to question.
Most of the new M2 was used to suppress bond volatility and to stabilize treasury and dollar funding markets. The plumbing is so damn complicated that we all know it's not just Fed buys treasury for cash and PD buys equity. The buyers are large funds front running mostly. They aren't just YOLOing on their asset purchases either. They aren't anywhere close to what they said they could purchase. I would guess that international inflows are a huge portion of that as well for flight to quality.
Everything that I'm reading indicates money market funds are breaking records for inflows and the net equity inflows are very light compared to dollar denominated bonds. So the support in stocks I'd guess is just due to a thin market. I know some good traders and they laugh at how thin and jacked up the SPX futures trading has been since March.
Now wether those nominal returns actually hold any value is really what people are starting to question.
quote:
Both of the above would seem to involve PDs. I’m curious how to track the funds once they’ve already made it from the Fed to the PDs, as that is most likely the port of entry to then make their way into (eventually) equity markets if that is in fact what’s happening.
Most of the new M2 was used to suppress bond volatility and to stabilize treasury and dollar funding markets. The plumbing is so damn complicated that we all know it's not just Fed buys treasury for cash and PD buys equity. The buyers are large funds front running mostly. They aren't just YOLOing on their asset purchases either. They aren't anywhere close to what they said they could purchase. I would guess that international inflows are a huge portion of that as well for flight to quality.
Everything that I'm reading indicates money market funds are breaking records for inflows and the net equity inflows are very light compared to dollar denominated bonds. So the support in stocks I'd guess is just due to a thin market. I know some good traders and they laugh at how thin and jacked up the SPX futures trading has been since March.
This post was edited on 6/29/20 at 10:20 am
Posted on 6/29/20 at 11:49 am to wutangfinancial
The plumbing you reference is exactly what I’m trying to understand better. Not master, just understand a little better. Maybe we can cobble together a number of resources in this thread and attempt to develop a framework of sorts. This article from late last year scratches the surface on a number of the topics you’ve raised. I’m looking to dig much deeper.
LINK
Also, this article re: Druckenmiller gets into some of the issues I want to understand better. Here’s a quote:
What is he looking at to measure the injections into the equity markets and where does he expect the eventual mopping up to appear in the data?
LINK
LINK
Also, this article re: Druckenmiller gets into some of the issues I want to understand better. Here’s a quote:
quote:
However, while liquidity is very strong now, that’s only because the Federal Reserve has bought trillions of dollars in assets over the last couple of months, pumping money into markets. All that excess liquidity won’t last. The US budget deficit has soared and so the Treasury must issue trillions more in debt over the next few months. This will mop up everything the Fed has already injected and more.
What is he looking at to measure the injections into the equity markets and where does he expect the eventual mopping up to appear in the data?
LINK
Posted on 6/29/20 at 12:31 pm to RedStickBR
quote:
What is he looking at to measure the injections into the equity markets and where does he expect the eventual mopping up to appear in the data?
He is going to have access to way more data and information than I ever could dream of. But think of it this way, the flows into most mutual funds, ETFs, actively managed money are all flowing into the safest assets. Portfolio managers typically have mandates on asset allocations, so if I have to be 50% equities at all times, I'm going to rotate into the highest quality when the forward outlook is so uncertain. Right now you have like 5 names driving up indexes, market breadth is weak AF.
Infinitiv
US Fund Flows Data Services
I linked an article you can check out. It breaks down net inflows/outflows for asset classes. Most of the net inflows to all equity ETFs are going to our Fab 5 that make up 50% of the SPX and QQQ because they are cap weighted. Add on top of that record high speculation via open interest on calls, you have dealers hedging their gamma and delta exposure so that means more support in equity prices (this is a new concept for me). Add on top of that all the degenerate volatility traders there's just so much going on lol.
quote:
What is he looking at to measure the injections into the equity markets and where does he expect the eventual mopping up to appear in the data?
To answer your question I would say he is just using conventional wisdom when he makes comments like that. I miss having access to a bloomberg terminal, it makes this kind of conversation much easier to navigate.
Edit: Here's a link on sharebuybacks that's pretty telling on what I mentioned earlier. As long as rates are suppressed coporations are incentivized to buyback shares.
S&P 500 Buybacks & Dividends
This post was edited on 6/29/20 at 12:45 pm
Posted on 6/29/20 at 5:38 pm to wutangfinancial
Posted on 6/29/20 at 5:42 pm to RedStickBR
The real vision guys are great. Mike Green is my favorite to listen to about macro and money flows.
Posted on 6/29/20 at 6:36 pm to RedStickBR
quote:
. I suspect when people say, “The market is only going up because of Fed liquidity,” they don’t have a clue how to prove that.
I don't know if there is a direct, causal proof.
Stock traders / market like stability and growth. They don't like instability and being unsure. Stock prices are an attempt to value a company based on current and predicted market conditions.
The fed generally only injects liquidity (to the extent like recent times) when there is major problems. The liquidity injection calms people down and helps remove some of the uncertainty. That allows prices to settle down, and since the market ALWAYS overreacts (positive or negative), it allows an oversold situation to become positive growth again.
quote:
But if Fed liquidity really can cause temporary dislocations from fundamental value in the equity markets, it’s something I’d like to become smarter on
I think when these black swan events happen, like Corona, the equity markets tend to lose sight of fundamental value. I don't think Fed liquidity causes the dislocations themselves, I think they help to tamp down the severity of the dislocations.
Posted on 6/29/20 at 6:52 pm to LSUFanHouston
quote:
black swan
Technically it's not a black swan. It's a grey swan. Not only did people understand the leverage, but we have experienced pandemics this century. I guess if you're referring to the draconian shutdowns than you may have a point.
Posted on 6/29/20 at 6:54 pm to LSUFanHouston
quote:
don't know if there is a direct, causal proof.
0.9 correlation since 2009 all the proof I need.
Posted on 7/1/20 at 8:55 am to wutangfinancial
quote:
Bank of International Settlements
There's a lot of good data there, though most is reported with a lag of a quarter or so, which mostly defeats the purpose of the exercise.
This post was edited on 7/1/20 at 8:56 am
Posted on 7/1/20 at 9:05 am to wutangfinancial
quote:
Infinitiv
This is interesting:
quote:
While conventional mutual funds have attracted some $798.8 billion year to date, the short-term asset class—money market funds—was the only recipient of net new money. These funds took in a record setting $1.1 trillion—beating any full-year estimated net flows in history. The only years that come even close were 2007 (+$720.4 billion) and 2008 (+$687.9 billion).
Overlay that chart against S&P500 performance and it tells an interesting story...
ETA: Seeing the flows into MMMFs also supports the dramatic reduction in M2 velocity now shown in the OP which, in turn, also supports your assertion that liquidity is thin in the equity markets. That doesn't bode well for if volume picked up on the bid side of the equity markets ...
This post was edited on 7/1/20 at 9:08 am
Posted on 7/1/20 at 9:17 am to wutangfinancial
quote:
US Fund Flows Data Services
This is a really good piece to the puzzle.
Posted on 7/1/20 at 9:54 am to RedStickBR
Ya BIS is a great source for data on money flows. I've seen a guy try and piece together how many dollar denominated assets he thought the CCP held offshore using BIS data. Really spooky stuff. But the lag you just have to accept, because there's too many transactions that occur in a day, let alone a month.
The only thing I can see taking us the second leg down would be another credit event. It seems to be the only thing that matters for risky assets. That seems most likely in 2021/2022 time frame. There is no way the fiscal stimulus rolls off on July 31st. The election is the catalyst that everybody is eyeing, but I think a Joe Biden victory is even more bullish, especially if they take the Senate. That would just equate to more fiscal stimulus, and in the event of a drawdown, we know what will happen. It's going to take years for the printing press to be taken away by the bond market if it ever happens in my lifetime. The way the developing world is setting up for next year, we are going to need to ease hard on the monetary side to prevent the Dollar from crushing the global economy.
The only thing I can see taking us the second leg down would be another credit event. It seems to be the only thing that matters for risky assets. That seems most likely in 2021/2022 time frame. There is no way the fiscal stimulus rolls off on July 31st. The election is the catalyst that everybody is eyeing, but I think a Joe Biden victory is even more bullish, especially if they take the Senate. That would just equate to more fiscal stimulus, and in the event of a drawdown, we know what will happen. It's going to take years for the printing press to be taken away by the bond market if it ever happens in my lifetime. The way the developing world is setting up for next year, we are going to need to ease hard on the monetary side to prevent the Dollar from crushing the global economy.
Posted on 7/1/20 at 10:09 am to RedStickBR
quote:
Overlay that chart against S&P500 performance and it tells an interesting story...
tried to tell em
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