www.chrismartenson.com/blog/money-stampeding-out-market/7452
Subscribe to this feed Saturday, October 18, 2008, 12:56 pm, by cmartenson While the myth is that the stock market is a discounting machine, the reality is that it is mostly a liquidity measuring device. What I mean by this is that the gigantic machinery of Wall Street, which includes all the people working at brokerages, as well as all of the buildings and infrastructure involved in operating a market, are not cheap, and the money to operate all of that has to come from somewhere. It is safe to say that just keeping the machinery well-oiled requires several billions of new money each month to keep it fed at a subsistence level (for the pin-stripe crowd, I mean). Yes, we could look at stock's p/e ratios and scrutinize annual reports, but the sad truth is that if more money is leaving the market than entering it, prices will fall. It's very simple: * More sellers than buyers = prices fall * More buyers than sellers = prices rise So for all the fancy analysis of stocks and earning and such, the most important measure is how much money is entering vs. It is in that sense that the stock market is, first and foremost, a liquidity measuring device. First, I have been watching the mutual fund money flows pretty carefully, because the constant flow of "retail" money from ordinary citizens (much of this via automatic 401k contributions) is the lifeblood of the industry. Up through August it has been, well, disappointing, with up months and down months, but adding up to a net outflow for the year of more than $67 billion. This outflow is the primary reason there are so many articles in the mainstream media cajoling and sometimes berating people into "investing for the long haul" and "not making the unfortunate mistake of selling at the lows."
The reason, for such articles, I believe, has little to do with helping people make wise investment decisions and everything to do with helping out Wall Street by keeping retail money in the markets to provide essential nutrition to the money machine. Otherwise we would expect to see the counterpoint to these articles advising people to sell when new highs are reached, but I can't recall ever reading any such article in a mainstream media source. At any rate, as bad as the August data was, the early read on the September data is even worse.
"We have never seen (monthly) outflow figures like this," said Jeff Tjornehoj, senior research analyst at Lipper. The data did not include flows of exchange-traded funds. No wonder they trotted out Warren Buffet to calm the crowds - this is a disaster for the investment community. Now, I have to point out that my two data points are a bit of "apples to oranges," because the first data applies to stock mutual funds only and the second to ALL mutual funds, of which stocks are only a part.
Hedge funds' assets off $210 billion in third quarter SAN FRANCISCO (MarketWatch) -- Hedge funds saw a record $210 billion drop in assets under management during the third quarter as investors redeemed an unprecedented amount of money from the industry after poor performance, according to a survey released Friday. Net capital redemptions totaled $31 billion in the quarter, also a record, the firm added. Withdrawals came during a period of dismal performance for the funds. When a retail investor pulls money from a mutual fund, that is what we call "unleveraged money." A dollar pulled out represents a dollar that was in the market (for the most part). Hedge fund money is typically leveraged up, so the $31 billion withdrawn means that more than that was withdrawn from the the asset investment markets. Hard to say, since hedge funds use such widely varying levels of leverage, ranging from 12x to more than 30x. Bottom line: Money is fleeing the markets, and this means we are not yet near a bottom.
If the retail investor pays down debt (or indeed, is not able to pay down debt), is potentially out of a job if things get really bad or is in a home that is in negative equity, the desire and ability to save may be academic for the next few years. As a rsult, surely the money going into funds, of whatever type is going to become and remain curtailed? Unless the uber-wealthy take advantage of the situation and pile in?
Also its hard to keep putting money in when it takes everything you earn and more just to get by. That is if you aren't recently unemployed and living off your 401K.
The 17 years of Yen-carry trades are unwinding and there is nothing the US can do to stop it. When a country no longer honors its debt, its money becomes worthless. What are the nine banks doing with $250 billion soon-to-be-worthless dollars? My best guess is they are doing what Lehman did before it went belly up. They are buying stock on the open market trying to prop it up.
Rather than wait until you have the whole Section 20 completed is it possible you could break it up into smaller sections like you did in Section 17? As things are changing very rapidly in the financial world I would like to have some of your suggestions sooner rather than later.
For now, I'm cutting unnecessary expenses and I've reversed my traditional assumption that the market is always going to rise on average over the long term. I'm one of those who pulled money out of the market (ahead of the recent drops) and I paid off a lot of debt - thereby saving a bunch of money 100% risk free. That was the first and the last time I ever buy a car with financing! Yet just yesterday I got two emails pushing cheap credit, one from my mortgage broker offering ARMs and one from the car dealer offering 0% financing. It hasn't sunk in yet we need to completely change our way of thinking.
From what I read, other savvy folks are split 50-50 over whether we are heading for deflation or inflation in the short term, though inflation in the long term seems apparent. The US has kept all of the plates spinning in the air for years, with the help of other countries. Maybe they will slow their rate of buying but that still could be a long time. The long term path may be clear but the short term path holds opportunity cost dangers, as well as not having some fat deflated dollars to survive that period.
It seems to me that all the destruction of credit/debt is short term deflationary, as it destroys fungible "money." But, it also seems that the only recourse the central banks will have is to try to inflate through various avenues that equate to "printing." So, deflation short term, reversing quickly to inflation.
Things that are 'must have' in your lifestyle and physically limited in supply will eventually inflate, 'nice to haves' will deflate. Also, whatever the average inflation/deflation rate is you probably won't experience it, few people are actually average. Depending on your age and circumstances you shouild be able to tell whether you are more vunerable to inflation or deflation.
I often chuckle when I see people say "I sure am glad I didn't buy gold and silver", because we're headed for deflation in the short-term. In the same paragraph, they also state their belief that deflation will be followed by inflation eventually. My question for those folks is, why are you glad you didn't buy gold and silver? Were you planning on selling it at its low during deflation? Obviously nobody who owns gold or silver is going to sell it during a deflationary collapse - unless they're in dire straits and they have to. Are you certain that you'll be able to acquire some at that magic point in time - just when deflation is ending and inflation is about to take off? If gold and silver are this difficult to find in our current market, do you think there will be an abundant supply when inflation kicks in?
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