Ultimately, all financial roads lead to Wall Street. The big investment banks and trading firms known as Primary Dealers all play in one worldwide money pool. When the ECB prints money, it’s not just available to Europe, it is also instantly available to Wall Street.
Growing European bank deposits have always strongly correlated with US Treasury note prices. However, that correlation has broken since mid 2016. Instead, European bank deposits have correlated strongly with US stock prices. That suggests that capital flows from Europe have been a key support to the US stock market rally.
European deposits have grown as the ECB has pumped trillions of Euros into their banking system. Deposit growth has not kept pace with the growth of the ECB’s balance sheet. This also suggests that money has been leaving the Continent and heading to Wall Street.
But that could all be about to change…
First things first – I hope you’re having a splendidly festive time with your friends and family.
I recently enjoyed a holiday party with my colleagues at Money Map Press, one highlight of which was a vigorous conversation with Shah Gilani about the impact of Trump’s tax cuts on the markets. I have deep respect for Shah’s analysis (and his excellent track record). He actually has an uncanny knack for finding bearish trades in a bullish climate, which the contrarian in me appreciates, and his writing is always incisive and entertaining.
However, on this issue, he is a confirmed bull, while I am a confirmed bear.
We enjoyed our argument immensely.
Then – after taking a bit of a break for some eggnog – I visited my comments section on Sure Money and lo and behold, a smart reader named Jesse had asked me the very same question…
Kismet! It was meant to be.
So without further ado, here’s my response to Jesse (and to Shah), followed by several other incisive reader questions as a nice holiday round-up.