Here you will fin:
- The Real Economy and the origin of all asset valuations
- Why the fiscal deficit is a constant injection of liquidity
- The flip side is a financial surplus in the private sector
- The probabilities of rate cuts, which come from the futures market
- New. Full intermarket analysis. We track capital flows across categories and assess their strength.
- Full Technical Setups will be sent on Wednesdays. We want to showcase in depth the type of analysis we do by giving it a dedicated section.
The Real Economy and the current disconnect with the markets has a clear origin. We want to understand where this link comes from, how it evolved, and how it may affect the different sectors that make up the economy.
The Real Economy: Why are we trading at these price levels?
Regardless of the type of trader you are — whether in equities, real estate, crypto, cars, trucks, or even appliances — you’ve been trading at historically high prices lately. Operating at these levels and under these “ecosystem” conditions is nothing like trading on flat ground. The impulses and reactions are different, and so are the risks.
The Real Economy, Markets and their interaction with liquidity.
For three decades, the U.S. has run chronic fiscal deficits — public spending consistently exceeding revenue. That deficit acts as a steady injection of liquidity into the economy. The TGA account is the faucet through which it enters — the first bucket of liquidity. The flip side is rising debt to finance it.
You could change the name to this graph to private sector surplus with the extra push that privates do not deal with this debt interest directly
The Real Economy and Liquidity: Fiscal Deficits
When the Treasury spends more than it collects:
- It pays salaries, subsidies, contracts, pensions, interest, and more.
- These payments credit private sector bank accounts — companies, households, and funds.
- In turn, banks see an equivalent rise in reserves.
In accounting terms
Government Deficit = Private Sector Financial Surplus
In other words, one sector’s deficit is the other’s net income.
The Real Economy and Liquidity: Infinite Q.E.
A second liquidity source came from Quantitative Easing (QE), active —in various phases— for about 14 of those years:
- QE1: 2008–2010
- QE2: 2010–2011
- QE3 (“Infinite QE”): 2012–2014
- Pandemic QE: 2020–2022
Altogether, QE ran almost continuously from 2008 to 2022.
The Real Economy and Liquidity: Rates
Lastly, falling productivity and demographic shifts anchored interest rates at historic lows.
In short, we’ve had 30 years of constant liquidity injection — driven by deficits, reinforced by QE, and sustained by near-zero rates.
This real economy is built on 30 years of constant liquidity injection —which, obviously, set all of this in motion.
The Real Economy: What could go wrong in this context?
Over the past decades, we’ve seen the largest wealth transfer from those without assets to those who hold them.
Real Productivity and Asset prices
Liquidity hasn’t boosted production but fueled demand for financial assets — stocks, bonds, real estate, and commodities at record highs. Valuations reflect excess money, not productivity. This is financial asset inflation.
The Real Economy
Productivity and real wages have been stagnant for decades. New money benefits asset holders, not workers.
Liquidity ≠ prosperity
The Real Economy Structural gap
Deficits + low rates mean constant liquidity, but without productivity gains, wages lag. The gap between nominal and real growth widens — wealth grows, prosperity doesn’t.
Monetary abundance drives financial growth, not real progress.
Liquidity can prop up prices and sustain them for a while , but not fix unprofitable business models — adding more only deepens losses.
Since 2023, rate-sensitive sectors like real estate, materials, industrials, homebuilders, and financials have weakened, while consumer sectors suffer from inflation and stagnant real wages.
This disconnect between the real economy and the markets — born from an excess of liquidity — gives rise to the phrase:
“Markets can stay irrational longer than you can stay solvent”
The Real Economy and Probabilities
Whether we agree or not, this is the dominant macro narrative driving the market: two rate cuts, the end of QT, and a return to the usual system of constant liquidity injections — with a very real chance of going back to QE.
What could possibly stop this madness?
- Corporate earnings
- Adjustment of expectations
- A credit crisis
We’ve already seen the sectors that can’t sustain themselves in this ecosystem. The credit crisis has already begun, and its core doesn’t lie within the small banks (small banks), (4 major banks 90% market share of consumer loans) — as we’ve discussed here (consumer credits)and here (delinquencies across every credit type, including mortgages). Events are starting to surface at the far end of the chain; however, defaults climb step by step until they reach the original lender — and probably the lender of last resort.
Intermarket Flows around the world
Junk Bonds
AAA Bonds
Yield Curve
The category saw and inflow across all types. Credit quality and durations. Rates are coming down across the yield curve with special emphasis put in long term dates. That said, the move is not massive, actually quite weak as volume shows.
Commodities and Emerging Markets
Putting aside gold and silver expected correction, commodities receive flows both in energy (mainly geopolitical) but agricultural and industrial metals. We are gonna follow this trend because it has potential implications about growth expectations.
FX
Commodity currencies reflect commodities week, Europe currencies got hit and especially strong weakness in Yen once again. Big winner of the week, US dollar.
U.S. Markets and Sectors
Positive week for all except defensive sectors. Take a look at Financials, Real State, Discretionary, Materials and Construction. All of them achieved positive returns in declining volume. We have been talking about them for a while now.
US Markets
Positive returns not supported by volume. This is especially notable for the Dow Industrials.
Conclusion
- Markets did what they were expected to do
- Bonds big winners of the week, no matter type nor duration.
- Yen weakness keeps going and in a strong way. This is a big supporter of the yen carry trade.
- Equities went up as expected in weakness especially on those sectors we have been following for a while. We do believe this move to have short legs and weakness is there!
See you!
Marin
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