Where does the money come from to buy stocks? Despite a veritable economic crisis and losses from the March crash – especially with the numerous leveraged portfolios – the stock markets have reached great heights in a short time. Surprisingly, there is still a lot of capital on the sidelines, as a study by US bank JP Morgan shows.
Stocks and the source of liquidity
The current crisis is opening the money floodgates to an unprecedented extent. A study by the major US bank in the “Flows and Liquidity” segment shows that. Despite the rally in stocks since mid-March, major investors are sitting on higher cash reserves with a price increase of over 40 percent. How so? Banks are increasingly granting loans with the support of central banks, which can then be shown as bank deposits. In addition, the FED and ECB are buying bonds from the banks, which in turn increases their cash holdings. Stocks and bonds are strongly supported by this policy. According to the study, the cash reserves of the large institutions are thus even higher than before the outbreak of the Corona crisis.
This is happening worldwide, including in the emerging markets. As a result, no less than 8 trillion Dollars of liquidity had been created worldwide by the end of May. 2 trillion of this was in China alone, according to the US bank.
Money holdings of households and corporations and their bank deposits with a maturity of up to two years, recorded under M2.
This is a flood of money as in the financial crisis of 2008/2009, but in a much shorter time. If there is no reversal in central bank policy, we can expect to see about $15 trillion in funds in a year’s time. This is not an assumption of the investment bank, but is based on figures from the International Monetary Fund.
To put it in perspective: the world’s national product in 2019 was 86.6 trillion Dollars. Before Corona, the stock markets had reached a market capitalization of about 90 trillion Dollars. According to the IMF, states and governments are currently providing aid programs of 9 trillion Dollars, which will increase global public debt from 88 to 105 percent. But only if global GDP does not shrink by more than five percent in 2020. On top of this, five trillion Dollars of private bank loans and corporate bonds will have to be added.
What a debt landscape. Does anyone else wonder why there have been no corrections in stocks yet?
Once again: “The tide lifts all the boats”, which is actually already being stated all the time, gets further fuel from this bank study. Capital is looking for investment and the bond market has worse cards. In our view, this puts the problem of overvaluation of stocks into perspective (for the time being). We have currently reached new heights in some key figures, but the flood of money rushing in is even higher. The loan boom is generating more and more liquidity. For months now, charts have been passed around with scissors, the gap between the real and financial economy. But that doesn’t help! If they print what they can! But it also shows you what could slow down the markets, what could slow down stocks: An ebbing of the flood of money and not even the famous “balance sheet reduction” of the central banks, because this is currently quite illusory.