This post is in response to Greg Mannario’s recent post, but it’s not specific to just that one. Also, it’s not a post to say that he is wrong. In fact, I would say that Greg is one of the best at what he does and anyone who wants to make money trading the markets, you should definitely check out his Steemit account @marketreport
So I want to write about what I see is missing from Greg’s analysis. I think that he is completely correct and focusing on money flows (capital flows). He is always pointing out that to try and figure out what is happening and going to happen in the stock market that one needs to pay attention to the bond market. That is because money coming out of the bond market may very well make its way into the stock market and vice versa. I agree with all of that.
However, there is one important thing that I think is missing. As with most people, we tend to focus on where we live, starting with city and then state and finally the country. It is only natural because that is what we tend to see and hear when we turn on the news or talk to our friends. What we tend to forget (and Americans especially, since I lived there most of my life) is that there is a whole other world out there. I finally realized this once I moved to Asia.
So how does this affect capital flow analysis? If you only focus on America and if America were closed off from the rest of the world, then Greg’s analysis would probably be 100% correct. But we live in a global society and capital can flow in and out of the US markets from other countries. If you introduce this variable into the equation, things start to change. It is completely possible to have interest rates declining while the stock market keeps going up if foreign capital comes to the US. And I think that’s exactly what’s been happening.
As stagnate as the US economy may be, it’s actually one of the best in the world and especially compared to Europe, whose banking system is on the verge of collapse. I’ve read that large institutions have been moving money from Europe into the US, not because that they see the US grow exploding, but because they’re just trying to survive and park money where there is safety. (See: http://www.zerohedge.com/news/2017-02-09/swiss-national-banks-us-stock-portfolio-hits-record-634-billion) And you may be laughing at the notion that the US markets provide safety, but actually step back and think about it: if you had $100billion and needed to park it, where would you go? This is where you have to use relatively rather than straight objectivity in your analysis. The US may just be the prettiest of the uglies.
I can tell you from personal experience being here is that the rich are doing all they can to get their money out of China. Most of that money has gone to or is headed to the US, Canada or Australia. I rarely hear of anyone moving their money to Europe or Japan. Of course, you have heard about the housing bubbles that have resulted from Chinese buyers of real estate in these countries.
Thus, going back to the US markets, I actually do agree with Greg that the US markets need a small correction before it can blast higher. But when it does go higher (DOW 40,000), it will be because of foreign capital as well. We can see interest rates fall at the same time, although I do think the bond market bubble will burst sometime next year as well. In conclusion, I’m just saying that there is another variable at play here, and we must acknowledge it and plan for it. We must view each market as part of a whole global financial system rather than purely domestic.
Thanks for reading.
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