Is The U.S. Stock Market About To ‘Super Nova?’

ETF flows tend to be a good contrary indicator when they become extreme, so the buying frenzy doesn’t bode well for U. S. equities. – David Santschi, CEO of TrimTabs
If the Federal Reserve were a private corporation and did not have a money tree, it would be technically insolvent – i.e. bankrupt. As of its latest balance sheet the Fed was reporting a book value (net worth) of $40.4 billion. But the Fed does not have to mark to market its assets. Given the recent 100 basis point move in the 10-yr Treasury, if the Fed were forced to mark to market its $3.8 trillion Treasuries and mortgages, it would be forced to reduce the holding value by close to $400 billion, taking the Fed’s net worth to negative $360 billion.
This is the most conservative valuation scenario. The Fed has other holdings, on and off balance sheet, that would likely take the Fed’s book value well past negative $400 billion if mark to market accounting were applied.
Think about this for a moment: the U. S. dollar is backed by a Government and Central Bank, both of which are technically bankrupt. The only difference between what happened to Greece and the U. S. is the U. S.’ ability to print money unfettered.
Just like water, markets eventually find their own level of balance. At this point the U. S. stock market, is the most unbalanced financial market in the world. A Trim-tabs report out yesterday revealed that the public threw $98 billion into U. S. stock ETFs between November 8th and December 5th. Compare this to the $61.5 billion that went into stock ETFs over the entire year in 2015. Currently the rate of cash flooding into stock ETFs for December is even higher than November.

This post was published at Investment Research Dynamics on December 20, 2016.