Q: If the money is fleeing the stock market, bond yields down, where is the money flowing?
A: Nowhere
More precisely, the premise is invalid. Money does not and cannot flow out of equities into bonds or anything else.
Nor can there be rotation from technology stocks to value stocks.
Mythical Rotations
The question is related to the sideline case myth.
Someone must own every share 100% of the time. For every buyer there is a seller. Those selling today found eager buyers.
Money exchanged hands. But the amount of money on the sidelines in equities is the same as before. There was no “flow” out of stocks.
The same holds true for bonds.
At the individual level it is possible for a person to “raise cash” or “buy bonds” but at the aggregate level there is no flow.
Repricing Events
What is happening today (and everyday) is a mass repricing. The value changed.
It’s is possible for values to change without a trade even taking place,
Housing Examples
- In 2006 people were standing in lines around the corner to buy a condo. The next week the lines were gone and prices crashed. What happened?
- In a subdivision of 300 homes what happens when a single person drops their price by $40,000? Poof. Every similar house in the neighborhood is instantly worth $40,000 less before a sale is even made. Mass repricings can happen with few or no transactions taking place.
Attitude Adjustment
What is frequently perceived as a “flow” is really an “attitude adjustment”. With stocks, attitude changes or repricing events happen in seconds rather than weeks or months.
Repricing is much slower with houses than equities where prices change every second.
And unlike equities, money to buy houses (credit) is created out of thin air. But the repricing constructs are similar.
Musical Tribute
I happen to have an appropriate musical tribute.
Mike “Mish” Shedlock
The premise is false, money IS flowing from perspective on who has the hot potato on the way down. I am a pessimist in this area, so I am not even trying to catch a falling knife. I’d rather ride the knife down.
The two key points here are:
1. For each seller, there is a buyer so on net there is zero flow out
2. If a few stocks sell at an increased or decreased price, all share are repriced to that price.
Thus we can conclude that all money flows from the Fed and from debt.
Does this analysis apply when someone is selling short or covers a short sale?
It seems to me that when one sells short that additional shares are electronically created, and when those positions are covered the shares are electronically destroyed.
The logic applies any time there is a buyer and a seller because the money flows from the buyer to the seller, but not to the market or from the market. In a short sale or cover, there is a buyer and a seller, so yes, it applies.
Nothing new is created during short selling. Just borrow the shares from someone and sell them. Then buy the shares later from someone else and “return” them to the lender.
In case of naked short selling you sell shares you don’t have but you have to deliver by clearing time. No additional shares are created.
Woe to the chap who has borrowed money against a repricing asset!
Woe to the chap who has provided a hedge against such assets.
Woe to the holder of derivatives during a mass repricing!
Disagree. I sold my stock and reinvested in physical gold, thereby not keeping my cash in equities. On the margin, their is less cash in the market. Now if everyone did that until there was one investor left, call that investor Buffet, then all investors will have rotated out of stocks, except Buffet.
When you sell a stock, someone else’s cash becomes your cash. No such thing as cash being “in the stock market.”
“Disagree. I sold my stock and reinvested in physical gold, thereby not keeping my cash in equities. On the margin, their is less cash in the market.”
100% guaranteed WRONG!
You did not read closely – This is what I said
At the individual level it is possible for a person to “raise cash” or “buy bonds” but at the aggregate level there is no flow.
A owns the bond issue, B owns the cash. Cash moves from B to A as a result of a transaction. The same amount of cash is in bank accounts.
Introduce the Fed (Government) and they purchase the bond issue from A with printed money. Now there is twice as much cash in bank accounts and the government has an asset on its balance sheet it previously didn’t have. So effectively no debt. -:)
Bingo Scooot. Because of Central Banks financial engineering, IMHO, there is no aggregate. In theory yes, but in reality no. What CCR explained is happening in Japan. Normally when you have more sellers than buyers, an asset price goes down. As an investor you want to be the first to sell an asset that everyone is going to bail out on. Well JCB, in theory, at this rate, will own all of the NIKKIE stocks in about 15 years. So Just like CCRs example. There will be one investor.
Yet, the price JCP will pay will be triple the total market cap value when they started buying. Why, because the JCB can name their price. They just printed some money. So each seller makes more money the longer they wait to sell. JCP has the assets on their balance sheet but if all the stocks go bankrupt. No worries. Crazy but smart idea. It keeps foreign companies from buying controlling interest in your sovereign stocks.
Maybe they bought a load of Gold with printed money as well in the past. The big futures sale of gold last night could have been them offloading some at a nice high price. The $/Jpy apparently fell at the same time, presumably someone selling the proceeds of the Gold Sale for yen?
Watching trillions of fiat inflation being instantly annihilated POOF! makes me SMILE.
Great post Mish, and I had forgot that song completely. I’ll be doing it this weekend at the Green Woof. THANKS.
Fed will never let “markets” fall….ever,they can print infinite amounts (and they will)of Fed bucks,and continue to buy the dip…forever…until they can’t!
Here’s a different view.
The FED will do whatever it can to stop a collapse, but in reality, there’s only so much they can do.
I think the world is about to figure out the difference between money and wealth.
Money is not wealth. Money is an exchange system. Assets are wealth. Money is the way of pricing assets.
You can’t print wealth. You can print money.
Well, true, but the government can print an “IOU” promising that if the lender gives the government money, in exchange for the “IOU”, that the government will do good things, like build interstate roads, or win the US Civil War, and in 20 or 30 years will pay off the “IOU” with money interest and/or grams of gold. Instead of an “IOU” the government can print greenbacks (paper fiat money). That’s exactly what happened with loans in the US Civil War (when printing money without any backing was legal, nowadays you need some sort of backing for your fiat money, like housing or commercial assets, which is not hard to find) , and loans in the 1950s (Eisenhower era). In both cases the loans were successfully paid off. I am not so sure the USA can make history repeat itself however.
The money never existed. Everybody just pretended it did by using the highest price… but that only works if you’re the first to sell
They say a broken clock is right twice a day. Well, today, and not just today, Mish is right as rain (and I dare say he’s right more often than wrong, in his day job). We’ll see what tomorrow brings…I’m out of the stock market (by chance, renovating an apartment building in Greece) since last fall.
Bonus trivia: “Real estate is the biggest asset market in the world. The value of residential property in America—at around $34trn—rivals the market capitalisation of all listed American companies. Throw in commercial and retail property, together worth around $16trn, and its value easily eclipses that of public firms” (Economist, Feb. 2020). Houses were “overvalued” in 2006-2007. Might the same be true of stocks today? Bubbles go ‘pop’?
The value of real estate, at any given moment in time, is no more reliable than the value of stocks. As for comparing real estate market cap with stocks, why? What is the point? It’s like saying there are more leaves on the trees than there are stones on the ground – or something equally inane.
I keep wondering how many companies will change their supplier location to avoid these types of problems in the future?
Quite a few of these companies will be bankrupt before they can establish new suppliers. Consider how few companies have more cash than debt. AAPL, KHC, NFLX, mostal real estate companies. Three months of sales down 50% is minus 12.5% revenue for the year. That has knock-on effects for employees, shareholders, suppliers, retailers, etc. What is the scrap metal value of a cruise ship? Value as a floating hospital where everyone gets infected?
Wouldn’t that just move the problem from point A to B?
There are buyers and sellers but the question becomes where did they buy or sell. And where did the money go – to cash/money markets, bonds, gold, etc. In the aggregate it is all a zero sum game yes but the question is how the pie is divided at the end of a day like this.
Money is probably going to cover long positions that are, at least for now, not go investments. Money is also going to cover margin calls. Bound to be tons of them. One day the world will finally wake up from its debt induced high and realize it is broke, bankrupt, out of money. Dow at 2000 makes sense to me. I hope it does fall to 2000. I pity Trump in November. Maybe by than he will decide to release his tax returns and we can see how much income the Donald really makes?
If you’re poetic, you would wish for the DJ-30 to fall to the same level it was on December 13, 1979, when Business Week ran the infamous “Death of Equities” cover. The DJIA was around 1000; 2000 for the DJ-30 is at 1988 levels, which is not poetic justice. So hope for a fall to 1000. But if that happens, it would mean the Covid-19 is more like Ebola than the seasonal flu, so likely you’d have bigger problems than just losing money in stocks.
Peter has $1,000 cash. Paul has $1,000 in stock. Paul sells Peter half his stock for $1,000. (The price doubled). Now Peter has $1,000 in stock and Paul has $1,000 in stock and $1,000 in cash.
In aggregate the amount of cash didn’t change but the proportion of “wealth” went from 50/50 to 67/33 stocks/cash. That’s what is called money flowing into stocks.
That was a good way to explain “POOF” in the other direction.
Peter has $500 cash. Paul has $1000 in stock. Paul sells Peter ALL his stock for $500. (The price halved). Now Peter has $500 in stock and Paul has $500 in cash. Oh, and Mary HAD $1000 in stock, as well. Now valued at $500. $1000 (valuation) vanished … no “flowing” anywhere.
Value / Price IS NOT Money.
Haven’t both got half the original stock and $1000 in cash. In other words if the stock totalled 100 shares they both have 50 shares each and a $1000 in cash.
I hope you realize that you picked a very poor example, which makes the argument nicely that there is no “money flow” at all, except for a flow from one person to the other. At the beginning of your example, there is $1000 cash, and some stock. At the end of your example, there is still $1000 cash, and the same stock. No cash flowed into the market or out of it. If flowed from Peter to Paul is all.
In your example, no money flowed into the market. All that happened was that the market revalued the shares, essentially creating “wealth” out of thin air. When the market goes down, “wealth” is destroyed by the same process, but buying or selling stock never makes money flow into the market or out of it.
There are things that can make money flow into the market, such as IPOs or secondary offerings. There are also things that can make it flow out, such as dividends or liquidations.
“That’s what is called money flowing into stocks.”
Yes, but it’s at best a confusing metaphor for repricing events. Because stocks are not containers for cash. Cash moves from one person to another.
Money does not and CANNOT flow into stocks without some perverse definition of “flow”
What about bonds bought by Governments… Haven’t investors been fleeing EU bonds? Who is holding the bag? The ECB… Governments are the ultimate bag holders.
The S&P is up almost 1000 points in a year.
400 in the past quarter.
A 100 point drop is just minor noise.
Its telling though that so many think its a big deal.
Why do people think China basically closing for a month won’t be a huge deal economically???
How is that even conceivable?? That’s where the attitude adjustment needs to come.
“What is happening today (and everyday) is a mass repricing. The value changed.”
No, the PRICE changed. The value is fixed. Pricing is supposed to reflect the value, but, unfortunately is highly malleable due to intentional manipulation.
Example: A house is wood placed on dirt with utilities hooked up and that’s its value. Now, give money to everyone to buy such a thing (while patting yourself on the back for exercising such magnanimity) and the price will skyrocket. The wood didn’t turn to gold; no, just the price changed. A price no longer reflective of the underlying value, but the price honest schmuck bagholders and the taxpayer will have to pay, later on!
Now just rinse and repeat the above formula for healthcare, higher education, and automobiles. Will Wall Street & Washington run out of things to game?
Stay tuned…
What exactly is “value”? Value is in the eye of the beholder … and what price (in the case of money, $$s) that person will pay.
Just because someone willing to pay 6 figures in cash for a banana stuck to a wall … does not mean that someone (anyone?) else willing to value it at that level.
Value IS NOT money.
Value is not fixed. Value is individually subjective. What worthless to you may be valuable to me. The value of a financial asset is slightly different in that they typically have little sentimental value – it’s real value is something that gets discovered in the fullness of time.
It amazes me that many perfectly intelligent people reject the fact that there is no “rotation,” real or imagined, associated with the re-pricing of anything of value, including stocks and bonds.
Those compelled to think of it in those terms may find it convenient to simply visualize any delta down in price as value rotating into the crapper and being instantly annihilated.
The remaining value, post-crapper rotation, remains a standalone entity for subsequent consideration, totally independent of any and all prior crapper rotation(s).
Sorry Mish but your logic is flawed. Money can flow out of stocks as an asset class.
Yes, there is a buyer for every share but if a seller sells shares at a lower price or any price and moves their money out of stocks and into cash or some other asset, money has ‘flowed out of the stock market’.
The number of shares remains the same and investors, funds, etc. still own 100% of all shares in existence but money can still flow out of stock markets and into other asset classes.
The same would not necessarily be true of bonds if yields drop. The value increases but the amount of money flowing in or out of bonds may or may not change.
The only way for money to flow into stocks as an asset class is when new shares are being created. Otherwise, it’s just repricing.
“Money can flow out of stocks as an asset class.”
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Sure. But not necessarily on an 1:1 basis. If current low holds S&P will lose ~ $1 trillion in market valuation today. Some of that due to $$ re positioned, but much of that value went Poof.
Prices (value) set On The Margin.
A specific person’s money can “flow” out of stocks, and into some other asset class, but, in the process, some other person’s money must flow out of the other asset class and into stocks, resulting in no net “flow”.
“but if a seller sells shares at a lower price or any price and moves their money out of stocks and into cash or some other asset, money has ‘flowed out of the stock market’.”
That money came from a buyer who put an equal amount INTO the market, if that is how you want to look at it. So based on that, net “flow” is 0.
Looking at that individual transaction does not explain the so-called total “flow” out because a new lower price gets applied across ALL the other shares, which are not being sold but have dropped in value. The same applies to “total flow in” if the price is higher. Pricing that occurs at the margin cannot really be used to compute wealth or what a company is worth.
The market wealth figure is an unrealized leveraged fantasy number, at least as long as the Fed does not step in and be willing to buy every share in existence.
There were more sellers than buyers, thus reprising the market.
I am a long advocate that liquidity in this ‘recovery’ has been a mile wide and an inch deep.
In the near term I will find out whether true or not.
TB; I think there is something else going on. I believe that in the depths of the GFC the financial powers that be changed the accounting rules which is a fact, from mark to market to mark to make believe. That recognized all that fraudulent, extremely leveraged junk at face value so they could put on hold the losses rather than be recognized as a loss at that time. Many companies went under and many MANY more were threatened by the prospect of failure because they had that total crap on their balance sheets. What do you think then happened to that garbage?
Nothing, it did not go anywhere, it is still sitting right where it has all along, or in some cases has been bought for fresh new cash from the central banks, but it did give those companies the breathing space to stay alive and not post a loss on it, at least till the maturity date which was 10 years and longer for probably most of it. They could not simply erase the entries from their books, that would be straight up fraud and illegal as hell.
So, instead of having to recognize a loss in 2008 or 2009, 2010, they just buried the toxic rubbish for a decade giving the Fed and ECB and the rest of the planet a decade to figure out what to do, to change policy. And clearly what they decided to do was NIRP. Negative REAL rates after inflation, that way when the toxic crap does mature and has to be recognized they have the opportunity to refinance it at a rate that actually pays them rather than putting them out of business. And all the while they get to count all that worthless junk as assets.
It also allows central banks a chance to inflate the whole economy out of insolvency triggered by the remaining total dreck on balance sheets.
The real problem is SOMEONE has to pay the bill. And that someone is the poor and middle classes, because to inflate the way they have without sterilizing nearly all of the inflation to Wall Street would mean hyperinflation and that would defeat the purpose. It was a case of inflation is good, too much is terrible. And that is why they cannot afford to be honest about what the real inflation rate is. They say they target 2% and rarely if ever meet that goal, but my own observation has been it is actually much more like 10-12%, but almost all of that is in categories that are either not measured or are considered volatile and thus removed from the calculations. It was also why the Fed and other central banks moved from the CPI to PCE, and not just PCE but core PCE.
Yet, much of the toxic junk still out there has much longer maturities than just 10 years. We are going to be paying it for a long time to come with falling living standards and more financial stress spread across the lower 90%. Because if that stress and loss had been absorbed by the top 10% they would have been BK in 2010. That is morally what SHOULD have happened, and economically as well since their own bad behavior is what caused it. They should have gone under so that more ethical players in the economy could rebuild.
EDIT: Meant to say also that as the crap matures and they have to recognize it only to find out there is no counterparty still in business to pay off those “investments” the ultimate counterparty is the Fed/ECB. So, when a company like State Farm has a tranche of toxic crap that comes due it is the big banks buying it, and the Fed ultimately buying it from them, a slow motion endless bailout and that is a mjor reason why the Fed cannot ever really lower their “assets” on their balance sheet, same with ECB. And those losses will absorb all new productivity probably for the rest of my life, so that the very well off can stay even more well off rather than pay the price of their scams. Insurance companies were very heavy buyers of all that shite. They have pools of capital in the hundreds of billions and it has to be invested at all times. It is the only way they can pay claims on the relative small premiums they charge, that is why insurance has doubled and tripled and quadrupled and will go still higher. And with NIRP their business model is broken beyond repair. That is a big part of why equities will not be allowed to fall. Stock buybacks mean if stocks ever hit the skids hard, say we went back to Dow 10,000 you would see a lot of firms unable to absorb that hit, they would die on the spot.
I agree with all of the above, with the exception of one sentence: ” Those selling today found eager buyers.”
The price goes up when the buyers are more eager than the sellers. The price goes down when the sellers are more eager than the buyers. I would call today’s buyers somewhat reluctant.
I would agree Carl, except there is one eager buyer that is ALWAYS ready to pay even when nobody else is eager, the Fed. Or, better put central banksters. They may tolerate a 1,000 point drop in a single day, because some occassional adjustments serve their purposes, primarily propaganda, since it allows them to claim they are not dirctly intervening in equities, most will even say they are not even indirectly proping up prices, but a percent here or a couple percent there can be passed off as a fluke as long as they step in the next day or two and buy using the unlimited power of monetary policy and the electronic printing press. Within a week or so we will see new record highs. The wealthy will be pleased. The rest of us will be convinced that we just whistled past the graveyard. Visa debit and Mastercard will continue to spit out cash at ATMs.
Economics is really very simple now, no more bothersome theories and conflicting inverse relationships. It is sort of like the difference between special relativity and quantum mechanics; one works really well when talking about the macro universe and the other fails at that entirely, while the other is great on the micro scale and yet explains nothing on the macro.
We have two economic systems, the under layer at the Main Street level, and the over layer at the Wall Street level. They no longer have anything in common.
There is only one company and that company does an IPO with 100 newly created shares at $100. Each share is 1% of the company. Everybody buys at the IPO price: $10,000 flows into the company. The market cap is $10,000.
Then I sell one share to you for $90, because nobody wants to give me more. There are no other sales. The new market cap is $9,000. Equities plunged and $1,000 has been “wiped off the market”. Everybody feels poorer. The original $10,000 is still with the company.
That is actually a fair (good really) description of the primary and secondary markets. Short and to the point. Why people just cannot understand it is baffling, but then in a nation where most people cannot actually balance a checkbook not very surprising.
“What is happening today (and everyday) is a mass repricing. “
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Thank you.
Many many people can not wrap their heads around this notion.