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Market Transition from News Flow to Funds Flow

For more than twenty-four months financial markets including housing markets have been news flow driven as funds have been on a constant inflow with some exceptions. But in the last couple of months, it has transited to a funds flow market with constant outflow.

This can be seen in the past forty-eight hours since Federal Reserve made its most hawkish policy decision in recent times. On the day of the announcement S&P 500 (USA Index) was up by 3% and yesterday it fell by 3.55%. These moves on both ends were driven by derivative flows in an illiquid market with ETF outflows.

The past couple of months have seen billions of dollars being withdrawn not only from equity markets but bond markets as well and this is a global phenomenon.

So is it because of inflation or the Russia-Ukraine conflict that the flows are being reversed at an accelerated pace? No, it is simply because the central banks are reversing the massive liquidity, and in such a delicate environment capital safety will be eth priority for all intelligent investors.

The probability is very high of a crisis and recession in the next six to nine months. Thus, keeping the money invested that is not only exposed to asset risk but currency risk will be very dangerous.

As of yesterday USA banks have $1.87 trillion with Federal Reserve earning now 0.83% under reverse repo and it was $1.65 trillion a couple of months ago. This will come to the markets but only when the worst has occurred and the repair phase is about to start. And yes repair phase is referred to as another round of global money printing and this time it might not stop soon.


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