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California Is Going to Drop a Liquidity Bomb on The Stock Market

edited July 21 in Fund Discussions
So an unknown number of Californian tax filers are going to have a big tax bill coming due on Oct. 16, 2023, as they have to file their 2022 returns plus put together what would have been all of their quarterly estimated payments that they have not had to make thus far during 2023. That is going to be one giant windfall in October 2023 for the Treasury Department.

But here is why this event matters to the rest of us. Those California late payers are going to have to raise the money to make sure that their big October 2023 checks to the IRS clear. That is going to mean selling some stock, cashing out of money market funds, shifting money from savings to checking, and otherwise generally sending waves through the banking system to get their money organized so that they can cover those deferred payments. Writing a check to the IRS means that a bank then has to cover that check, and move money all around the system as the IRS cashes those checks.

The entire financial system has grown accustomed to that type of turbulence taking place in April every year. But this anomalous Oct. 16 for rich taxpayers in the most populous state is a non-standard type of ripple in the liquidity stream.

There is no way to quantify how much of an effect this will have, as we cannot see into the hearts and the bank accounts of all of those delayed filers in California. But it is going to have some meaningful effect that is an irregular feature of the normal calendar for banking and liquidity. By late October, all of the dust should have settled, and all of that moving around of money to cover tax payments will have simmered down, so stocks can get back to their normal seasonal strength starting by late October.
Background to this upcoming event (October):



  • Follow up on this...
    The stock market in 2023 has been tracking the Annual Seasonal Pattern (ASP) really closely, that is until a late October 2023 extra dip in stock prices that was not on the ASP's program. Since that dip, stock prices have been rallying hard to get back on track. But why did that dip happen?

    Blame Californians. I wrote here back on July 21, 2023 about how the IRS had changed the tax filing and payment deadlines for most of California, because of flooding rains in January on previously burned areas that led to a lot of flooding. This led to disaster declarations, and a ruling by the IRS that taxpayers in 51 of California's 54 counties would get an extension to October 16, 2023 for filing their 2022 taxes. That extension also included a delay in having to pay any amounts owed for 2022, plus all quarterly estimated payments in 2023.

    Because of this extension, smart Californians held onto their money and their tax returns until just before the deadline, presumably earning at least money market interest rates on it, but denying those tax dollars to Uncle Sam. California has 15% of the US population, but it also has more than its share of millionaires who have the wherewithal (and the accountants) to do this sort of tax planning.

    Why this relates to the stock market is that we have learned from the Fed's QE and QT episodes that having money in the banks is helpful for boosting stock prices. But when a bunch of Californians all wrote their tax payment checks to the IRS in October, that created a sudden drain in the liquidity pool. The result was an extra dip that the Annual Seasonal Pattern did not forecast
  • Interesting analysis! Thanks, @bee!
  • Interesting. But wonder how big the numbers were to back up. Could be pure coincidence but what makes it more interesting is they wrote before it happened
  • Are rich people keeping money in bank accounts, especially medium to large banks that pay zero % interest?
  • I’m highly skeptical of this report. It’s hard for me to believe that “an unknown number” of wealthy Californians would have a significant effect on stock prices that are essentially a global market these days.
  • Tarwheel said:

    I’m highly skeptical of this report.

    It’s over… it happened… it is no longer actionable… may have been a coincidence.

    No one here at MFO pick up on the July post and this follow up seemed worth posting.

    I do like the author’s technical view of the markets.
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