Images By Tang Ming Tung/DigitalVision via Getty Images This article aims to examine the US sectoral flows for June 2024 and assess the likely impact on markets as we advance into July 2024. This is important as a change in the fiscal flow rate has an approximate one-month lagged effect on asset markets and is a useful investment forecasting tool. Other macro-fiscal flows can point to events months or years ahead.
The table below shows the sectoral balances for the US, which are produced from the national accounts. US Treasury There was a positive private sector result for June that just ended but nothing special. Last month should have been a rising stock market based on the strong fiscal flows and indeed that was the case.
This month, the flows are not nearly half as strong but are still positive and point to flat to weakly rising markets. In June 2024, the domestic private sector recorded a surplus of $147B. This is a positive result for asset markets, as financial balances in the private sector have risen by this much.
From the table, one can see that the $147 billion private domestic sector funds surplus came from a moderate $79 billion injection of funds by the federal government (and this includes the new injection channel from the Fed of around $6B from interest on reserves that went directly into the banking sector), less the -$79B billion that flowed out of the private domestic sector and into foreign bank accounts at the Fed (the external sector X) in return for imported goods and services. Bank credit creation made a solid contribution and printed $147B and this largely led to the positive overall balance as the federal government contribution was offset exactly by the external sector and but for the contribution from bank credit the private sector would have printed a zero rise for the month. The chart below shows more detail on the bank credit creation components.
Just about every facet of credit creation was up except for car loans. ANG Traders Not surprisingly most of the credit growth comes from real estate related activities. This is where rising land prices provide the collateral for extending more credit if the demand for it is there.
There is more discussion on this topic further into this article when the Fed is discussed a few paragraphs down. The chart below shows the sectoral balance data plotted in nominal terms. The calculation is federal government spending or G, plus the external sector (X and usually a negative factor) to leave that amount of money left to the private domestic sector, or P, an accounting identity true by definition.
US Treasury and SPX Last month the chart predicted the SPX would follow the private domestic sector balance upwards and finish the month higher than it began and this did indeed happen and was a good trade. This month the news is not so cheery. The private domestic sector flow is exactly zero because the federal govt contribution was canceled out by the external sector deficit on the current account.
The only plus was the bank credit creation which in accounting terms is the private domestic sector going into debt and spending more than it is earning and the credit is offset by the debt and nets to zero. While bad and unsustainable overall it can be good for markets as it is still a spending source and adds to aggregate demand and so cannot be ignored and for this month provides a weak upwards bias. The following chart emerges when one graphs the change rate of the information in the US sectoral balances table above and adjusts for impact time lags.
This is like a long-range market radar set. Mr Robert P Balan The chart above shows that US fiscal flows [blue line] are spiking up from now and into the end of 2025, which tends to push asset markets up and provides a strong undercurrent upwards, and goes some way to explain why markets have gone so well this year even though the fiscal flows from month to month have only been moderate at best. The table below shows the total federal government withdrawals from their account at the Federal Reserve Bank.
A withdrawal by the federal government is a receipt/credit for the private sector and therefore a positive for asset markets. US Treasury The table shows that total outlays decreased over the previous month and $2.3T+ down 25% from last month.
Large month-over-month decreases like this one have large monetary velocity and acceleration effects on asset markets in a negative way. In June a small deficit was met with a correspondingly small overall federal spend. ANG Traders The chart above, top panel, highlights in red and green the financial relationship between the currency creator (red area) and currency users (green area).
One's loss is the other's gain and vice versa, the difference is that the federal government creates the money via its central bank while the private sector does not have this luxury. Federal taxation removes spending power from the private sector but the federal government does not "need" the money as it can create, ad hoc, as much as it needs at any time via its central bank. This information removes the treasury churn and is a truer representation of federal outlays going into the private sector than the official ones.
The three panels below the first are a series of analytic models that track sentiment, liquidity (money flows), and lastly bank credit. Now that the June federal govt tax collection is out of the way the good news is that there are no more such events until September later this year. This provides a four-month run of uninterrupted growth in private sector financial balances.
Mr Robert P Balan This four-month run can be seen in the 5-year averages shown in the chart above. The green line shows how the SPX generally, on average, has a strong upward bias from May until August. At the White House in the last month, the only fiscal event of note was negative in that a range of import tariffs were raised.
This results in higher prices locally and more dollars being taxed out of the private sector. The next Fed meeting is in the middle of this month where most likely rates will be paused or a small raise might come. The fed has entered a twilight zone now where due to the sheer size of the stock of treasuries (over $34T) when it raises the policy rate there is so much interest income automatically generated that it is reinforcing inflation back upwards.
Even the mainstream recognizes this factor now. The table below shows how year over year [marked in red] the interest on Treasury Debt Securities has risen as old lower-yielding bonds are rolled over for new higher-yielding bonds. This is on top of a growing stock of treasuries and the interest amount would increase on rollover even if the stock of treasuries remained the same.
US Treasury One important internal change at the Fed was the following: the government-sponsored mortgage finance agency Freddie Mac filed a proposal with its regulator, the Federal Housing Finance Agency, to enter into the secondary mortgage market, otherwise known as home equity loans. This was a smart move by Freddie, and the FHFA will do a lot of good by approving it. Despite the more than $32tn in equity on homeowner balance sheets, very little of it has been tapped through home equity loans.
Source: Property Share Market Economics Even if this change unlocks only 10% of the $32T in wealth built up in US property it will provide a massive boost from the bank credit side of the fiscal flow sectoral balance model. This is the same sort of internal bank regulation change that was made in the lead-up to the 2006 housing boom-bust. It unlocked billions of dollars of bank credit creation with real estate as its collateral.
For a good 18 months, this self-reinforcing process produced a torrent of new money from credit creation that drove all asset markets to new highs. Twenty years later the cycle is set to repeat as set out in the diagram below. Mr Fred Harrison You need to note 2026 in your diary.
On the larger world macroeconomic side, we have the G5 chart below. The chart shows the level of money creation by the top five world governments (the G5) in a change rate format, along with a host of other indexes. This chart gives a sense of important inflection points and direction.
Mr Robert P Balan The chart shows that the brown G5 fiscal flow is generally rising upward into 2025 and this provides a strong financial undercurrent for asset markets going forward. This combined with the stronger national-level fiscal flow background provides a firm ground for national asset markets to advance. Interestingly the chart shows the all-important brown line declining after 2025 which links in with the forecast for a major boom-bust in the housing market within a year of that time.
The blue line on the first chart in this article points to the same phenomenon. Tactically, there was practically no dip to buy as a result of the June tax collection, perhaps one or two days of weakness and markets kept on rising and are likely to keep on doing so into September and the expectation is that markets will generally rise into 2025 as well with only minor seasonal dips along the way. Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.
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