Subject:
capital flow analysis 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.
'Defined Benefit' Pension Plans
By John Schroy, on February 26th, 2006 | 
The sponsors of ‘defined benefits’ pension plans controlled, as of December 2004, about US $2.5 trillion in equities. Common stocks, even after the crash of 2000-2001, were substantially over-valued. In order for stock prices to reflect values that were customary before the advent of stock buybacks, prices would have to drop between 20% (earnings basis) and 50% (dividend yield basis).
In the case of ‘defined benefits’ pension plans, this would represent a loss of between US$500 billion and US$1.2 trillion in market value of pension portfolios.
US Bond Market
By John Schroy, on February 20th, 2006 | 
This article describes the factors that influence the four primary US bond markets: Treasuries, Agencies, Municipals, and Corporates.
The analysis indicates that a high percentage of the supply side of the bond market is opportunistic and sensitive to interest rates, which explains why long-term interest rates have been relatively stable, despite increasing demand.
This analysis also suggests that should the flow of funds from the trade deficit suddenly dry up, the first impact would be a rapid reduction in the size of the residential mortgage market, rather than a sharp increase in interest rates.
Research notes
By John Schroy, on October 23rd, 2004 | 
Capital Flow Analysis is a technique for interpreting flow of funds accounts developed by John Oswin Schroy over the period 1998-2004 and published on the website, “Center for Capital Flow Analysis”.
This article provides background notes that describe how, where, and by whom the methods of Capital Flow Analysis were developed.
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