As a risk-averse investor, 38Packard wondered how much cash is on the sidelines. Cash is money that is liquid – it can be spent immediately and is not tied up in time deposits, bonds, stocks, real estate or other less-liquid investments.
M1, the liquid money supply, is currently $20.5 Trillion. This compares with GDP at $24.8 Trillion.
https://fred.stlouisfed.org/series/M1SL
https://fred.stlouisfed.org/series/GDP
That’s a lotta cash. But saying it’s “on the sidelines” implies that the owners of this cash could be tempted to buy assets such as stocks with it. Obviously, that’s not the case.
The total market capitalization of the U.S. stock market was about $48 Trillion on March 31st, 2022.
https://siblisresearch.com/data/us-stock-market-value/
U.S. fixed income markets, including U.S. Treasuries, mortgage-backed securities (MBS), corporate bonds, municipal securities, federal agency securities, asset-backed securities (ABS), and money markets is $52.9 Trillion.
https://www.sifma.org/resources/research/statistics/us-fixed…
The value of the stock market is supported by debt (margin buying). Currently, margin debt is about $700 billion. Not coincidentally, margin debt rose in 2020 - 2021 as the stock market bubble formed. It peaked and has dropped since 12/31/2021. This let some of the air out of the bubble but the level of margin is still high on a historic basis.
https://ycharts.com/indicators/finra_margin_debt
The USD is at a generational high.
https://www.wsj.com/articles/for-wall-street-a-strong-dollar…
**For Wall Street, a Strong Dollar Is Front and Center**
**Investors are increasingly concerned that the rising U.S. currency will strain other economies**
**By Julia-Ambra Verlaine, The Wall Street Journal, Sept. 11, 2022**
**...**
**Investors and policy makers are being forced to consider history’s unkind lessons. Currency shifts were behind the 1997 Asian financial crisis and played a role in the Russian financial crisis of 1998, which took down giant U.S. hedge fund Long-Term Capital Management....**
**A stronger dollar often makes emerging-markets currencies less valuable. That in turn exacerbates inflation in those countries, by making it more expensive to import goods and services.**
**Earlier this year, emerging markets remained resilient even as the dollar rallied. But that was largely because commodities prices were rising, boosting countries that export copper, soybeans and coffee. Now commodities prices are falling, and global economists say trouble could lie ahead for emerging markets....U.S. corporations involved in international business have cut earnings guidance since June, citing the dollar’s gains....** [end quote]
The Federal Reserve’s swift tightening is one reason that the dollar has soared this year. Foreign investors are attracted to relatively high Treasury debt yields and are exchanging their own currencies to buy dollars in order to buy Treasuries.
At the same time, the Fed is beginning to sell Treasuries and mortgage debt that were bought as an emergency measure during 2020. This is Quantitative Tightening, or QT. It’s just a tiny fraction so far but the pace will double this month. Starting this month, the Fed will allow up to $60 billion of Treasuries and $35 billion of mortgage bonds to roll off its balance sheet as the debts come due, twice as much as the past three months.
https://fred.stlouisfed.org/series/WALCL
https://www.nytimes.com/2022/09/11/business/fed-treasury-mar…
**Fed’s Exit Puts World’s Biggest Bond Market on Shakier Ground**
**Some traders worry that the $25 trillion U.S. Treasury market is becoming more fragile, and the Federal Reserve’s removal of support could make it worse.**
**By Joe Rennison, The New York Times, Sept. 11, 2022**
**...**
**Even small wobbles in the Treasury market can generate huge worries. At its worst, a Treasury trading breakdown could cause the value of the dollar, stocks and other bonds to tumble. Economies that borrow a lot in dollars and hold Treasuries in their reserves would teeter. Crucially, the U.S. government could find it hard to finance itself, even up to defaulting on its debt, the financial equivalent of an earthquake.**
**“While this sounds like a bad science-fiction movie, it is unfortunately a real threat,” Ralph Axel, an interest rate strategist at Bank of America, wrote in a research report last week. He sees emerging strains in the Treasury market as “the single greatest systemic financial risk today,” with the potential to do more damage than the housing turmoil that preceded the 2008 financial crisis....**
**The Treasury market has doubled over the past decade, to around $25 trillion, as the government’s financing needs have grown. All that debt needs to be bought by someone, and not just the Fed....** [end quote]
The Treasury yield curve has risen consistently over the past few months. Interest rates will probably continue to rise as a combination of the rising fed funds rate and QT. If inflation doesn’t subside, the market’s forward estimate of inflation could rise, adding further upward pressure to yields.
The markets showed a slight turn toward more risk-on, as stock markets and junk bonds rose relative to the UST. Oil and natgas prices dropped slightly. The Fear & Greed Index was Neutral.
The METAR for next week is partly sunny. The markets are uncertain and could quickly turn around but for the very short term the stock market has stabilized.
Wendy
https://stockcharts.com/freecharts/candleglance.html?VTI,$SP…
https://stockcharts.com/freecharts/candleglance.html?$IRX,$U…
https://stockcharts.com/freecharts/candleglance.html?$SPX,$U…
https://www.cnn.com/markets/fear-and-greed
https://stockcharts.com/freecharts/yieldcurve.php
Wendy