Capital Flow Watch

Capital Flow Analysis uses national flow of funds accounts to explain supply and demand in capital markets. The system was developed by John Oswin Schroy and published on the Center for Capital Flow Analysis in 2004.

The goal is to forecast price trends for broad categories of securities, such as equities or bonds, over the medium and longer term. Capital Flow Analysis also refers to the study of national flow of funds accounts or similar statistics, but specifically the information regarding activities of issuers of securities and investors.

Capital Flow Analysis is a technique, with axioms and methods. The purpose is to forecast general trends in securities markets. Capital Flow Analysis, is based on the assumption that longer-term trends in securities markets are not random, but are the result of capital flows that can be described and, to a certain degree, predicted.

Capital Flow Analysis enhances Modern Portfolio Theory by ‘explaining’ price trends that would otherwise be unexplained. By combining Capital Flow Analysis and Modern Portfolio Theory, an investor may improve returns. Capital Flow Analysis bears some similarity to behavioral economics in that it departs from neoclassical economics assumptions regarding rational behavior. The CFA Irrationality Axiom resembles the ‘bounded rationality’ of behavioral economists.

Capital Flow Analysis, however, is a practical technique rather than an economic theory. It is based on market observation rather than academic economics.