U.S. Financial Balances Rise A Healthy $275 Billion, Pointing To Better Markets In January

The purpose of this article is to examine the US sectoral flows for December 2023 and assess the likely impact on markets as we advance further into January 2024. This is pertinent as a change in the fiscal flow rate has an approximately 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.

In December 2023, the private sector recorded a surplus of $275B and this is a positive result for asset markets as financial balances in the private sector have risen and driven aggregate demand and the demand for investment assets.

From the table, one can see that the $275 billion private sector funds surplus came from a $136 billion injection of funds by the federal government (and this includes the new injection channel from the Fed of around $8B from interest on reserves that went directly into the banking sector), less the -$67B 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 took an even larger leap forward than last month and printed a strong $206B contribution. This is the strongest bank credit creation result since December 2021.

The components of the rise in bank credit creation are shown in the chart below.

Aggregate bank-credit continues to recover from its year-long decline. All loan types increased, except for commercial real estate loans and car loans which had small declines.

(Source: Mr. Nick Gomez, ANG Traders, Weekly Report for Subscribers the Away from the Herd SA Market Service).

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.

Last month the chart predicted a continuation of the rally into December and that December would close higher than November and this did indeed happen.

This month the lead of the private domestic sector balance over the SPX predicts that the SPX will finish January only modestly higher than it began. A positive but weak result. Please see the seasonal stock market index comments below for more information on short-term stock market movements.

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.

The blue line shows the fiscal impulse from federal government outlays plus bank credit creation and less the current account balance and leads by up to four quarters. Short term, the financial aggregates, and following co-variant factors, are rising into 2024 whereupon they come down sharply. The chart is already showing that they recover later in the same year. There is more detail on this later in the article.

The chart below shows the five-year average of the seasonal stock market patterns for the SPX (SPX), NDX (NDX), Dow (DIA), Russell 2000 (RTY), and Biotech (IBB) market indexes.

Last month (trading day 246 at the time of writing) the chart predicted falling markets to about trading day 255 (late December) and then rising into the new year until trading day 30 (the first week of February). So far this is what we have received. The fall was very minor as compared to the 5-year seasonal average and this was because of the strength of the fiscal flows in November and the one-month lagged effect driving markets up in December.

The orange line on the chart below is the 5-year average of the SPX and shows some initial weakness going into January until about trading day 10 (12th of January) and then rises in steps up to about trading day 25 (2nd February) whereupon it falls to a local seasonal bottom at around trading day 30 (about the 9th of February). Given the underlying strength of the fiscal flows, the highs will be higher and the lows will be higher than the seasonal average indicates might happen. There is a bias to the upside.

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.

The table shows that total outlays were a decrease over the previous month but still a strong $2.4T+. Federal taxes, fees, charges, and bond turnover allowed $136B of that spending to remain in the private sector and form the federal deficit which is dollar for dollar the private sector surplus.

The chart above, top panel, highlights in red and green the financial relationship between the currency creator (red area and the federal government) and currency users (green area the private sector). One’s loss is the other’s gain and vice versa. The key 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. This information has the treasury churn removed and is a truer representation of federal outlays going into the private sector than the official ones.

The net-transfer for fiscal-2024 (started Oct. 1/23) is +$441B, compared to last year’s +$422B; a +4.5% increase.

During the first three days of January this year, the net-transfer was only +$47B, compared to +$129B last year. Hopefully this is not a trend for the rest of the year, but it could contribute to the weakness we are expecting as we approach the mid-January income tax-take.

We also have to consider the Jan. 19 and Feb. 2 end-dates for the budgetary Continuing Resolutions which will require Congressional work to either extend the resolution or, preferably, a full budget agreement. As much as the Congressional majority would love to cut spending, in an election year, it would be political suicide to cut social programs, and since most of the spending is non-discretionary, the political risk/reward of cuts is very unattractive. I expect there to be a lot of noise, but in the end no significant cuts will be made.

If there are delays in the agreement process, the Treasury has $300B more in the TGA (Treasury General Account) than it did last year with which to weather the storm (black boxes below).

(Source: Mr. Nick Gomez, ANG Traders, Weekly Report for Subscribers the Away from the Herd SA Market Service).

Mr. Nick Gomez, the author of the above comments and the two charts above and below, came second place in the Seeking Alpha 2023 Market Prediction Contest. This shows the power of using fiscal flows as a trading and investment tool.

The next major fiscal milestone is a fiscal contraction from a large federal taxation event in the middle of this month. In mid-February, there is a fiscal injection from a treasury interest payment and then in mid-April there is another large fiscal contraction from a federal taxation event.

The chart above shows the general conditions of the stock of treasuries rising and the SOMA (Fed balance sheet) falling.

Generally speaking, December is a big spending month and this generally results in a strong January stock market result as a seasonal pattern.

At the White House in the last month, a large defense spending bill was passed that authorized some $886B of military spending. The logjam over other spending authorizations continues and as noted in last month’s report will most likely be resolved to the upside when the time comes.

As Winston Churchill noted about the USA’s reluctance to help out in World War One and two:

You can always count on Americans to do the right thing – after they’ve tried everything else.

Winston Churchill

The next Fed meeting is at the end of this month where most likely rates will be paused or raised slightly. The article I wrote last month covers an in-depth look at the impact of a rate rise or pause. At the last meeting, they paused but I do not think they are finished though the rate of increase is slowing. There is a new article coming out later this month on the same subject to cover the upcoming FOMC meeting.

It is important to review the housing market regularly because the housing cycle is the business cycle and is nearing its 2026 peak.

The chart above again shows aspects of the housing market. In this instance, we have the price of lumber (orange line and that tends to rise in a boom) appearing to bottom and be close to a local low. Now all rising are the home-builder ETF (NAIL), Home Depot (HD), housing starts, and permits. Important to note though is the purple government expenditure line that is due to put in a local bottom in early 2024 before rising through most of the rest of 2024 before dropping and rising again into 2025. This line is the fiscal carrier wave that sets the overall trend for all other waves that follow in its wake.

For this reason, we can expect a change of trend in all the co-variables shown in the above chart. This means that the home builder ETFs, Home Depot, and the construction industry, in general, will fall in synchrony with the G5 fiscal flows in the near term and then follow the purple line back up into the rest of 2024.

On this subject, Mr Robert P Balan wrote the following Tweet on Twitter (now known as X) that sets out strategic market moves based on the G5 fiscal flows. Mr Balan runs the Predictive Analytic Models investor group at Seeking Alpha.

In the chart above it is the brown line that represents the G5 fiscal flows and the other lead co-variables such as treasuries outstanding and movements on the Feds SOMA account. These then lead asset markets such as those listed and include the SP500, crypto, and gold. China is a major fiscal agent in the world economy and it too has rising fiscal flow rates at the same time as the G5 which gives the upward trend even more impetus.