Number 1 macro misunderstanding 101 - a short thread. When tweeting about tax selling I noticed a number of my followers making a basic mistake in their questions and comments. It's extremely common. Simply put when someone decides to sell a stock for any reason
They demand someone else who may not have had any interest in the stock to either use available cash or leverage and raise cash to buy the shares. Typically the motivated seller is more "inelastic" than the buyer. For instance tax selling results in selling motivated by
The sellers specific basis and is almost orthogonal to the "value" of the stock. The seller pays a concession to the buyer. So I get it. What if buyers are highly elastic and topped up on their risk and begin to demand a larger and larger concession. Well prices fall.
But what is often ignored is the seller now has Proceeds from their sale and joins the crowd of buyers of somebody else's tax sale in a different asset/stock. Every sale in markets raise proceeds for the seller and in general gets reinvested immediately or over some time
Of course some sellers use proceeds to pay down debt. BUT debt is someone else's asset and now THEY have to reinvest. Sellers can also use proceeds to consume. BUT consumption adds to corporate and hard commodity owner savings and as wages which then flow through to savings
Even risk off selling has this feature. A risk off seller sells asset. A buyer gets a concession to take on that risk and now the seller has proceeds and becomes a pent up reinvestor. So how does this go bad
Money is created by commercial banks. The availability of credit to new buyers impacts their elasticity. If they have no access to credit they can't bid at any price. But is this true today! Not at all. In addition the Fed swaps bank reserves for assets (sorta prints)
And when they do they actually are the buyer of assets and are inelastic and pay the seller a concession (reduced risk premium) and now the seller has a deposit which they need to invest and join the other buyers of assets. QE is tapering but still happening. QT is death
But a long way off. Two points. All of this is timing. Motivated sellers show up for market related reasons and orthogonal reasons like tax planning or consumption. They may not reinvest the proceeds immediately. Secondly the Fiscal side of the government sells asset
Inelastically and most of the proceeds are handed to the private sector and some of that is saved (creating elastic buyers immediately) or consumer (creating elastic buyers over time). All this stuff is hard to track. But the concept needs to be in your mind IMHO
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