This page has been archived and commenting is disabled.

Europanic Trumps Debtmageddon

Submitted by ilene on 07/28/2011 16:06 -0400

Courtesy of Lee Adler of the Wall Street Examiner

[this article has been updated since originally published]

One of the macro liquidity indicators that I track in the WSE's Professional Edition Fed Report shows the apparent reason why US financial markets, both stocks and bonds, had retained their bouyancy until the last couple of days.

I won’t bore you with the particulars of the proprietary formula used to calculate this. It uses publicly available weekly data and is based upon the theory that as cash moves between money market funds and the banking system, there’s a relationship between that movement and the movement of stock prices. As you can see, it has correlated well with stock prices over the past couple of years.

This is just one of a number of such indicators that I cover in the WSE's Professional Edition Fed Report. The most important of those is Fed Permanent Open Market Operations (POMO), which is turning bearish due to the ending of QE2.

It seemed that virtually every market observer expected that event to have a bearish impact. My expectation was that it would not be felt until mid July due to technical factors having to do with the Treasury supply settlement schedule. But over the past month, the indicator shown above began to surge, boosting support for the market just as the Fed was ready to step away.

Hysterical media pundits have been loudly proclaiming that the sky is falling as a result of the approaching US Debtmageddon. In fact, until Wednesday, July 27, the opposite of their dire predictions had been occurring, with both stocks and bonds remaining resilient. The Treasury market even rallied on Tuesday 7/26 after the uber depressing Obama Boehner show on Monday night night. You gotta laugh.

The chart above makes clear the reason for this market resiliency. Money has been flooding into the US banking system over the past month. The source is apparently capital flight out of the Eurozone. While I don’t track the data at the source of those flows, we know from anecdotal reports that there’s been capital flight out of parts of Europe. Other US banking system indicators suggest that this is the source of the surge of cash into US bank accounts. The cash account balances of US based foreign banks have been surging in recent weeks. So have their trading accounts. Deposits in domestically chartered banks have also surged, but their trading accounts have not. It would appear that that the resiliency in the US equity market has been driven by foreign private buying. The Fed’s data shows that foreign central banks have not been a factor. This is coming from the private sector.

The markets no longer have the Fed keeping a bid under prices. Likewise, Foreign Central bank buying has been far below the levels needed to keep prices levitated. Primary Dealers are having their problems, having been short the Treasury market for months as prices rose. It would appear that the market’s only prop keeping prices elevated now is this miracle panic out of Europe and into the US. As a result of this surge of cash, US banks have even been forced to start buying Treasuries again, after months of avoiding them like the plague.

How long this surge of capital into the US will last is the question. It is not driven by the US being such a great place to invest. It is driven by the fact that regardless of all its apparent problems, the US appears to some marginal increment of investors to be the least bad of a bunch of lousy options. It only takes a relatively small increase in cash at the margin to impact prices.

All this could change in the weeks ahead. Likewise, as total worldwide systemic liquidity shrinks, it may not matter how much of it flows toward the US. US financial system indicators should tell us exactly when those flows are becoming inadequate to continue this levitation act. The best indicator may be the stock market itself. From the looks of things in recent days, it is unlikely to reward those investors who were panicked into US assets as a refuge from the troubles of Europe.

This report is an excerpt from The Wall Street Examiner Professional Edition Housing Update. Click here to try WSE’s Professional Edition risk free for 30 days!

- advertisements -

Mon, 04/23/2012 - 03:17 | 1717587 meltonk

My head had been filled with problems, but after reading the answer to the same on your web site, I came across peace and your article was surely a refuge and also the one to enliven the fighting spirit.

Wed, 09/14/2011 - 02:09 | 1666690 chinawholesaler

Promotional Products

Top China Wholesaler-Buy Wholesale Promotional Gifts Promotional Products from China.
Our main products are consumer electronics, gifts and souvenirs, health care products, beauty products, automobile parts, household items, plastic products, metal products, kitchen supplies, stationery, sports goods, toys, watches, leather products, etc.

China Wholesale

Wholesale Flag Wholesale Binoculars

Stress Reliever

Wholesale MassagerWholesale WatchWholesale WalletWriting Instrument
Wholesale Mug

Wholesale FlagWholesale BinocularsWholesale Pen Money Bank
Silicone Bakeware

Tue, 09/13/2011 - 23:50 | 1666352 chinawholesaler

Safety Products Patient Care Products
Money Bank

Sport Support Products
Wholesale Cards Sport Support Products
Wholesale Helmet

Wholesale Speakers
Wholesale Compass Wholesale Whistle
China Wholesale

Audio Video Equipment
Wholesale Flashlight Wholesale Helmet
Wholesale Mp3

Wholesale lable
Wholesale Tie Wholesale Radio
Wholesale Candle

Poncho Raincoat
Wholesale Dartboard Wholesale Lanyard
Wholesale Toys

Wholesale Tellurion
Eye Mask Wholesale Coaster
Digital Photo Frame

Photo Frame
Advertising Material Wholesale Camera
Arts Crafts

Electroluminescent
Poncho Raincoat Wholesale Mp3
Wholesale Glasses

Wholesale Mobile Phone
Wholesale TelePhone Wholesale Keyboard
Wholesale Speakers

Wholesale Binoculars
Health Care Products Wholesale Hardware Tools
Recorder Pen

Wholesale Pin
Wholesale Mug Wholesale Mat
Wholesale Shoe

Wholesale Toys
Giveaway Material Wine Set
Promotional Products

Wholesale Badge
Wholesale Stationery Inflatable Products
Name Card Holder

Wholesale Raincoat
Wholesale Puzzle Wholesale Massager
Wholesale Furniture

Wholesale Tableware

Thu, 07/28/2011 - 18:05 | 1502492 automato

Say what you will about the USA but smart investors throughout the World still consider the US Markets relatively HONEST! I know it may not seem that way but how long do you think GITMO prisoners would have lived if they had been Siberian Gulag prisoners, or Tianamen Square prisoners, or Cambodian "killing field" prisoners? The list goes on and on.

The smart investor remembers that if it sounds too good to be true...so they act accordingly and do not buy Chinese IPOs, or Venezuelan anything, or Iranian anything, not if they think they may ever have to sue in a court of law! At least in the USA most laws are upheld and most institutions try ro follow the letter of those laws most of the time. If the relative honesty of the US Markets ever do come into serious question then WATCH OUT! It really will be all over then because everyone will bail.

Fri, 07/29/2011 - 05:15 | 1503724 AnAnonymous

Say what you will about the USA but smart investors throughout the World still consider the US Markets relatively HONEST! I know it may not seem that way but how long do you think GITMO prisoners would have lived if they had been Siberian Gulag prisoners, or Tianamen Square prisoners, or Cambodian "killing field" prisoners? The list goes on and on.

Another day, same propaganda.

The reason why people flee to the US currency/market is not about honesty. It is about who is the most efficient at skinning people alive and the way to protect oneself from. The US is that most efficient candidate.

Pushing your money in countries that the US relentlessly skin alive is the surest way to lose it. It is like putting your assets in countries the US regularly bomb. No matter how bad the Iraqis were, until the coming of the US, they had not managed the same amount of destruction as the US have been able of in a few years.

People are seeking protection for the most efficient extorter of the weak, farmer of the poor by putting their interests on the one place the extorter/farmer will loot in the end, and that is the US territory.

Pushing their money into US assets is buying protection from the biggest fleecer in human history: the US.

PS: your story about the US camps is funny. It could have value if the US had not subcontracted the usage of torture to a certain number of countries.

GB is just a facade, a camp set up to give the US a kind of moral ground on non existent ground. GB is what the US performs officially. Unofficially, the US have been sending prisoners to countries so that they can be tortured at will by US trained, supported, paid and empowered executioners.

Just the clean of the shady torture business venture the US runs all over the world.

Thu, 07/28/2011 - 18:05 | 1502488 automato

Thu, 07/28/2011 - 18:00 | 1502463 Buck Johnson

There's no place to go but he US. But the issue with that is when they aren't able to get their money out of the US when liquidity dries up.

Thu, 07/28/2011 - 17:52 | 1502432 ViewfromUnderth...

Mmmm....USD returning home to die. Not good. ref Martin Armstrong & current account.

Thu, 07/28/2011 - 17:59 | 1502461 Clint Liquor

The US has been exporting it's inflation in the form of the reserve currency for decades. It is inevitable that all that currency will be returned at some point.

Thu, 07/28/2011 - 17:37 | 1502387 Troublehoff