Equilibrium

Balance. Stasis. One for one. Harmony. If but for a moment.

Supply equals demand. Price equals value. Moment to moment.

That is equilibrium in the study of economics.

There is always another moment, however; and balance is sought, over and over again.

Friday’s stock market adjustment was expected. Value and price was out of balance. By the end of the day nearly 666 points had been shaved off the stock market’s overblown values. Was that the final point of equilibrium? By definition it was for Friday, February 2, 2018. But Monday, February 5 welcomes a new day and equilibrium will either be or not; likely not. [Note: is was down 1175 points]

The thoughts of value when paired with price will cause the balance to be fought over and moved to another point. As it always has been.

Whether the sell-off of stocks continues Monday will be known on Monday; the toll for the day will be reported at day’s end. My hunch is it will be lower still. And then we look to Tuesday’s open and price skirmishing for day’s end again.

I have stated in this space earlier that I think the market is overpriced by about 5000 points. Whether that is accurate or not depends on millions of others buying and selling stock on any given day. If more than half the traders feel the same as I do, then market prices will fall accordingly. Where it lands is where it lands. No person can actually determine that ahead of time.

With federal spending out of control and heading for a fiscal year deficit of $1.7 trillion dollars, the sale of treasury notes, bills and bonds will have to be brisk. If folks are willing to buy at current low interest rates, fine; but indications are they are not. Hence, interest rates on treasuries are rising. If that continues. The value of stocks will be challenged; that is another downward pressure on stock prices.

Interest rate markets and investor markets in stocks compete for one another’s dollars. A balance is sought, another equilibrium. Those are the two indices to watch in the coming days. Will interest rates rise to fund the federal debt?

Another aspect to watch are the withdrawals from the federal treasuries; will maturing T-bills and notes remain in the treasury market at higher rates, or will foreign buyers cash-in now and move their funds to other global markets where return on investment is stronger? China is the notable investor in American debt; so eyes will watch China’s US treasury moves.

A caution on this interest rate watch: $5 trillion in cash is awash in the American economy; mostly held by corporations booking excess profits. They will either use this money for fresh investment in their own operations, or they will buy other companies. The former will boost economic activity; the latter will simply move money around without creating fresh values. Nothing new will have been created. The result? A continuing pressure to maintain low interest rates.

Add to that the $3 trillion of US cash owned by investors now held in foreign banks. These dollars are being wooed home by the recent tax reductions. Repatriating the surplus dollars held abroad will only add to the pressure to keep interest rates low.

The key question always being asked by investors – “What alternative investments can I make with my cash that will maximize my return?”

This question is the stimulus to move money and seek higher returns. If stock market returns are declining – repricing in adjustment to bubble prices – money will be cashed out with stock sales and the cash deposited in other places where return is believed to be safer and adequate or higher.

Markets move with this stimulus. Which ones will drive change? Which ones will drive the most or least change? No one knows until it happens.

The primary factor is this: investors must feel their investments will earn them strong returns. If the economy is out of balance with expectations and reality, movements will occur to remedy the imbalance. Huge amounts of value will be traded accordingly.

Seeking stability; seeking balance. Labor markets, interest rate markets, infrastructure readiness, emerging markets or dying ones. All are in the pot for consideration.

I wonder where all this will lead in the next few months. Something to think about.

February 6, 2018