Ownership transition model for interpreting flow of funds in Capital Flow Analysis The Ownership Transition Model for Flow of Funds

Explaining Flow of Funds

The Correct Model: Ownership Transition

Rather that revealing 'money flows', as the name implies, the Federal Reserve flow of funds accounts show changing patterns in ownership of financial assets.

There is no flow of assets, but instead patterns of shifts in ownership.

Flow of funds tables are based on accounting concepts and debits do not 'flow' to credits, or vice versa, but occur simultaneously.

Change in ownership of financial assets occurs instantaneously at the moment of the transaction. There are no "flows".

The buyer becomes the owner of corporate stock in the same instant that the seller ceases to be the owner.

With respect to a given sector, ownership of various assets flicks on and off, increasing and diminishing from quarter to quarter.

The focus in Capital Flow Analysis is not upon the direction of the 'flow of ownership' but rather on the relative strength of motivation of the sectors involved.

When observing the net disposal of equities by U.S. households over the last generation, we do not have enough information to form an opinion unless we know which sectors were buying the stock that households were selling and the trend of prices over the period.

In this case, the flow of funds accounts show that while households were selling stock, corporations were buying and prices were rising.

This allows us to conclude, from the Motivation Axiom, that corporations were more motivated to buy stocks than households were to sell and therefore were primarily forces causing the upward movement in stock prices.

To fully explain the upward trend in the price of equities over this twenty year period, we would need to know what caused corporations to buy back their own stocks. (See lesson 15, Buybacks and Options.)

The 'Ownership Transition' model takes into consideration changing patterns of buyers, sellers, and price trends, with regards to specific financial assets, whereas the 'Hydraulic' model focuses on a single sector and illusionary 'flows' between different kinds of financial assets.

Putting Sector and Instrument Tables Together

If you are using Firefox, Opera , or other modern browser that permit you to keep multiple windows open for side-by-side comparison, you may simultaneously examine the 'Last Quarter Summary' pop-up windows for an instrument table and its related sector tables.

In doing this, some reasons for price trends may become apparent.

Note: To use pop-up windows, you have to configure your browser to allow pop-ups.

The diagram shows two 'Last Quarter Summary' pop-up windows for the equity instrument table and the household sector table.

Net purchases of equities by Households shown in the Equities instrument table matches the corporate equities item in the sources of funds on the Household sector table.

We see in this example that the $441.0 billion net sale of equities shown against a red background in the equities instrument table on the household line, matches the $441.9 billion net source of funds, shown against a yellow background in the household sector table on the corporate equities line.

The left column of the Equities table refers to the Households sector table, while the left column of the Households table refers to the Corporate Equities instrument table.

This relationship is logical, since the sale of equities by households should appear as a net source of funds in the household sector table.


Before proceeding, check your progress:


Flow of funds accounts show:
Choice 1 Flows of assets.
Choice 2 Flows of liabilities.
Choice 3 Shifting patterns of ownership.
Choice 4 The direction of fund flows.
The focus of Capital Flow Analysis is on:
Choice 1The direction of flows of ownership.
Choice 2 The relative motivation of sectors.
Choice 3 Stock prices per money flow per quarter.
Choice 4 Technical analysis of price charts.
Sector tables and related instrument tables usually have:
Choice 1 No elements in common.
Choice 2 All elements in common.
Choice 3 One matching element per period.
Choice 4 Five matching elements.

Investment Tutorial: Capital Flow Analysis   How to Interpret Flow of Funds : continued >

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