Smart Capital Flows

Could smart capital flows be our best clue where prices are heading?

In a hyper financialised market, with trillions of dollars of liquidity from the major central banks, the fundamentals have become irrelevant. Moreover, the technicals as a price guide can be useful, but it’s shortfall being that this type of chart analysis is  based on historic prices, so it too has limitations.

Trillion of dollars of central bank liquidity is driving assets prices upwards. 

Assets are now 5.6% more than GDP, which gives us an idea just how financialised markets have become.

In short, the price of bonds and stocks have been fixed by the central banks, well above their price discovery level. So using the price-earnings as a way of gauging value for stocks doesn’t make sense, or work anymore with central bank price-fixing. 

Equally, negative-yielding debt in the world has ballooned to $15 trillion in 2019.

Front-loading the central banks’ asset purchase program, quantitative easing QE continues to be the game with smart capital flows giving investors a clue to where asset prices could be heading next

Smart Capital Flows

Smart money is the capital that is being invested or withdrawn from the market by those with knowledge about financial markets. Hedge fund dealings would be an example of smart capital flows. 

A recent research paper entitled, “Which Investors Matter for Equity Valuations and Expected Returns?”, adds weight to the view that smart capital flows do influence the trajectory of asset prices.  

So hedge funds exert far more influence on stock prices than most other investors, according to the research paper. Small active investors have the second-largest impact on asset prices. Capital flows from large passive investors have the least impact on asset prices. 

What about central bank capital flows, surely this smart capital flows should be ranked above hedge fund investors

Surprisingly there is little or no mention of central banks being major players in influencing asset prices and that is odd, bearing in mind that price discovery has been replaced with central bank price-fixing. 

But maybe the central banks have just allowed their buddies in the hedge fund industry to fix prices for them. 

Central banks have propped up the hedge fund industry with $100 billion injections, according to a piece in the FT, dated May 3, 2020.

Smart capital flows, created by the central banks and funneled to hedge funds is now what could be driving asset prices

Put simply, smart capital flows from the hedge funds, free gambling chips given to them by the central banks, means that a handful of hedge fund titans are the new price fixers. 

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