I'm going to tilt at this windmill because it's important and illustrative of the incredibly poor quality of the financial news media.
No money "flows into" or "flows out of" the stock market or the bond market. Every security must be held by exactly one person until it is retired. (Let's set aside new issues, buybacks and mergers for now. They are a small percentage)
There is no money in the market at all. When you buy a share of stock, someone else is selling it to you. Your $100 becomes their $100.
The effect of recent monetary policy is that we now have a huge amount of zero-interest money sloshing around the economy. So your counter-party needs to do something their new $100. Putting it in zero-interest T-bill is not appealing, so maybe by another stock? Maybe real-estate? Crypto?
So we ave all this new money flowing though the system pushing up all asset prices.
It's also a big driver of the startup boom. Because not only do startups potential provide good returns, but they actually use the money to create jobs and build things.
If a company issues $1000 of new stock, then that's an inflow of $1000 into the company. And if it buys back $1000 of stock, that's an outflow.
This kind of analysis is commonly applied to ETFs, for example, because ETFs will manage their outstanding shares by the issuance/redemption of creation units. https://www.investopedia.com/terms/c/creationunit.asp
You can certainly apply this analysis in aggregate, and you can also compute the net flow. I don't know if that's what the article posted here is doing.
Also, people talk about monetary policy as driving this, and that's wrong. Fiscal policy drives this (we've had a lot of new government debt issued in the last few years). Even though it's orthodox economics to attribute this to monetary policy, it's flat out wrong. Monetary policy does not impact net assets of the private sector. It's neutral in that regard. Fiscal policy definitely impacts net assets of the private sector. If you want to learn more, you can read "Where Do Profits Come From?" https://www.levyforecast.com/assets/Profits.pdf
It's not a given that a startup is a net job creator--not even close. Amazon, for example, put a lot of retailers and their staff out of work. If the startup is "disrupting" an existing market, it's going to destroy some jobs in the process. That's not to say the disruption can't bring good things with it, but the "create jobs" pitch is pretty much overused by everyone, everywhere.
That’s true, in the sense that there are never more total jobs than there are qualified workers, although there can be less. Once full employment is reached any job creation is a zero sum game.
You're forgetting that a lot of the new investors are probably playing with options. You are right the the stock with 10 Million value can only be bought for 10 Million but options can be bought infinitely.
There has been a huge rise in #FinTwit groups on discord or other social media. Last weekend there was a group asking for 100$ per month subscript where they would tell you on discord voice chat what option to buy and which to sell. They are not the only ones.
I get that someone is buying someone else's stock but your comment seems to ignore the basic fact that even though there might be a limited amount of stock to buy or sell, there is an unlimited amount of potential transactions, which could result in an increase or decrease of the flow of money in and out of the market.
Also, as another commenter mentioned you omit IPOS, SPACS etc...
Central banks have been buying up treasury bonds, thereby lowering the yield. They are basically saying
"Hey rich people with cash, if you want to get a return on your money, you have to stop investing in risk-free government bonds, and start investing in businesses in the real economy"
The Fed has basically 'pushed' investors out of bonds, and into equities and real estate. This partly explains the absurdly higgh gains we saw recently in those asset classes. But now that inflation is getting out of hand, the Fed might reverse someday it to slow down the economy and keep inflation low.
How much money is flowing into any businesses that matter? I don't imagine shoving more money into the S&P is having that much of an effect on 'the economy'
It's a good question, but we must consider downstream effects. When one buys SP500, it pushes up the price in price/earnings for those companies, making them slightly less attractive investments and therefore other small companies slightly better investments. When, residually, some of that money flows to increasing the price of a struggling $1b company (efficient market hypothesis), they're now able to be capitalized better in investing in a second factory, or affording their debt as to not go bankrupt and have further knock-on economic effects.
> Many economists are skeptical. Andrew Hunter, senior US economist at Capital Economics, said the relationship between the money supply and inflation has “in reality” been “pretty weak or arguably non-existent for a few decades now”.
> “We had these same concerns back in 2008/9, that it was going to trigger a surge in inflation. Clearly that didn’t happen.”
High stock prices aren't considered inflation by economists, they're considered asset bubbles.
They're not wrong, they're just speaking a different language than you are and don't agree with the definition of inflation.
This is because asset bubbles tend to pop over the long term and come back down to ground.
There's the idea of Cantillon effects where there's inflation in the kinds of things that rich people spend their money on. But that theory has attached to it the notion that inflation necessarily trickles down from there as the wealth trickles out, and economists will object to that because like the quote says it just hasn't been observed to happen (consistent with the fact that the rich keep getting richer and the poor keep getting poorer in this economy, and we're doing the opposite of "raising all boats").
My understanding is that the basket is based on what consumers actually spend their dollars on. Maybe there's a better way to do it, but I'm not sure what that would be.
Based on this same logic I could see someone saying, in 2005, “despite loosening lending requirements back in the late 1990’s, we had these same concerns of instability in mortgages that would result in a housing collapse. Clearly that didn’t happen.”
Do housing prices actually reflect inflation at this point in time? The underlying hypothesis is that institutional investors are dumping their cash into real estate as an alternative to low-rise investments that recently started to pay negative interest rates.
In fact, we are starting to see places around the world whose local government started blocking real estate purchases from institutional investors as they were pricing families out of the market.
Can you buy stocks with central bank reserves? I get that QE drives yields down on treasury bonds and this makes them less attractive but are you sure this isn't about regular people selling their bonds and getting stocks instead?
I personally cashed in >$1m in CD's and bought stocks because of my fear of being left behind because of inflation. Many of my CD's were callable, so I really had no choice.
Technically "reserves" only exist to insure against loans the banks make.
Money is generally added to the economy by the banks when they trade cash for debt (i.e. make a loan). The whole idea behind giving banks more reserves is so that they can make more loans, which are capped by the government at some % of the bank's reserves.
So really the government is tweaking things for banks to get around their own rules... but none of this matters if banks aren't near their cap in loans, which none of them are. So it really is just political theater to make it seem like things are getting done.
Once you understand that, the supression of interest rates makes a lot more sense, because it is another way to encourage new loans (and keep existing ones manageable).
Are there any inflation protected CD's ? I know of TIPS from my time on a trading desk that was a few rows away from the inflation desk, but curious if there are any retail products like a CD with some level of inflation protection
That kind of depends on who you are. If you are a central bank, and particularly one of the central banks that doesn't, by policy, not buy that class of securities, yes, you can (e.g., the Bank of Japan does.) If you are not a central bank, you can't buy anything with central bank reserves, and if you are, say, the Fed, you could, but you've made a policy choice not to.
I'm not sure on the numbers here but would be interested if others' on the site have input.
I'd be interested to know how much the stock increase will come from younger investors putting their inherited wealth into more aggressive mutual funds. If the majority of people with wealth followed the idea to go more conservative as they aged, then it would make sense that as those people died and passed on their wealth it would be invested more aggressively.
This would naturally happen over time, but COVID would speed it up.
That ignores the case of feedback loops where the person who got money out of the market then turns around and re-invests at the increased price (iterating several times). Your double-entry accounting is technically correct, but that metric easily misses any “mania” where people’s expectations are highly asymmetric, and they make repeated speculative bets on that basis.
Nobody gets money "out of the market". They sell to someone else, and use the proceeds of the sale to buy another asset. But the original buyer could also have used the proceeds too buy another asset in the first place. No money is created or destroyed in this transaction.
In fact these transactions have little to do with the real economy at all, they are merely pricing assets. You can buy and sell something 100 times or 10,000 times and none of that will have any bearing on the real economy or even on things like inflation.
This is true, but that is not what this article is about, because in terms of net issuance, the stock market has been negative for some time, with buybacks outpacing new issues.
Right, every _share_ purchased is also a share sold (in principle), but that price will not usually be the same price that the current seller originally purchased the share at themselves. As a result, you can have inflow/outflows in dollar amounts. For individuals stocks, with increasing/decreasing market caps, but of course there can be more money in the market overall.
You misunderstand. Money doesn't flow into or out of markets on net. Every time a share is sold for $X, a share is bought for $X - they are two sides of the same transaction.
This misses that the share is an asset _with a monetary value_ even though it's not money itself. It's true but not relevant that various measures of the money supply, M0, M1, etc. are unchanged.
The chart in the original article is of Annual Equity Fund flows, which are net values _considering both sides since it includes negative values_ -- a measurement of this supposedly nonexistant flow. While money remains constant from a trade, the stock of equity (in both senses of the term "stock") changes.
For every buyer, there is a seller. If you bought for $1, then other market participants sold for $1. If you sold for $100, then other market participants bought for $100. If money in your account went up, then money in other market participants accounts went down. The money went through the market - it didn't come "from" the market.
*obviously the story gets more complicated with dividends, shorting, share issuance, buybacks, etc. but the principle remains the same
Very often you cannot reason about the aggregate the same way you reason about an individual. The aggregate can never have more or less market exposure than average, even though individuals like you or me can.
The market is not the origin of money and it is not a closed system. I can invest my $100 anywhere, if I put it into the stock market that money 'flows' in, in a sense of psychological valuation. Yes, someone else receives the money in exchange for a share but that doesn't mean they are putting it back into the market.
The key idea is how people think about buying or selling. If I buy a stock for $100 I obviously think it is worth that or more. If the value of the stock crashes, at that moment in time I am out the difference should I sell at the new value.
Also, the market shouldn't be anthropomorphized nor averaged. Ultimately it is a bunch of individuals buying and selling and their exposure has practical consequences, especially when it is concentrated along different dimensions, like retail vs. non-retail. A 'rich' individual buying $1 billion worth of a stock is not the same as 1,000,000 'poor' individuals buying $1000 of a stock.
When the market crashes 20% just as much money flows in as flows out. When the market climbs 20% just as much money flows out as flows in. If you disagree, we must be using the same words to mean different concepts.
If we think about amount of money circulating in just stock market. That is not in other economy. Would it not be possible for money to flow into that pool? And increase in this would lead to increased prices. That is same money is being traded around and some new money flows into that amount?
Ofc, this is somewhat linked to valuations, but market could crash and it wouldn't decrease. Unless some people take money out of this circulation.
Which implies retail investors are valuing the shares higher than institutions. What could go wrong? I'll answer that, poverty for millions of people who don't know how to diversify their investments.
My opinion is the FEDs actions, while apparently well-intentioned, will backfire spectacularly at some impossible-to-determine point in the future because MMT only works right up until a feedback loop forms between between people and the central bank which destroys the intended effects of the policies. You can see it now if you look. People are shoving everything into risky assets because they are betting on the FED not allowing their investments to tank.. because The FED has stated they think boom and bust cycles can be prevented and are a thing of the past
If you’re asking how does it stop, as someone else mentioned: when the government decides to stop participating in the market.
If you’re asking what happens when this falls apart, my guess is in hyper-consolidation of wealth. That can mean the decreased wealth of the super-rich but with the far greater decrease of wealth of everyone else.
Why wouldn't the super rich be hit the hardest, aren't the majority of there wealth in stocks? Aren't middle class people more likely to keep there wealth in cash(a larger percentage at least), wouldn't they be the winners here?
In absolute terms, the super rich would be hit hardest. In relative terms, the super rich can afford to take a lot of probably losing plays that protect their assets.
Imagine if the super rich spend 2% of their assets to hedge risk (options, etc.). The average middle class person has most of their assets tied up in their house, and probably cannot afford to lose 2% of their asset base to protect against downturns. Certainly, there are few easily available hedges for a decline in the residential real estate market in (random town/city) as opposed to the easy ones for wealth held in stocks.
Well, in 2008 it turns out AIG was on the other side of a huge number of the trades. Or Lehman Brothers. So the answer is, ultimately, the US Government.
The wealthiest have minimal need to sell and asset when it's down. So the magnitude of the hit is the biggest, but if you don't use some of your wealth for diversification and the decent financial advice to get you there, you're just squandering wealth.
Depends what you mean by hardest. Is it worse to lose 10 million dollars but still have 15 million dollars remaining to console yourself with, or is it worse to lose your job that pays $50k?
No money "flows into" or "flows out of" the stock market or the bond market. Every security must be held by exactly one person until it is retired. (Let's set aside new issues, buybacks and mergers for now. They are a small percentage)
There is no money in the market at all. When you buy a share of stock, someone else is selling it to you. Your $100 becomes their $100.
The effect of recent monetary policy is that we now have a huge amount of zero-interest money sloshing around the economy. So your counter-party needs to do something their new $100. Putting it in zero-interest T-bill is not appealing, so maybe by another stock? Maybe real-estate? Crypto?
So we ave all this new money flowing though the system pushing up all asset prices.
It's also a big driver of the startup boom. Because not only do startups potential provide good returns, but they actually use the money to create jobs and build things.