HAVING SOME FUN WITH FLOWS
David Rosenberg’s thoughts on the recent fund flow data:
We are struck by the Investment Company Institute’s (ICI) mutual fund data, which show increasingly that this $3.5 trillion of “dry powder” is being diverted to bond funds, not equity funds. This is not to suggest that we are seeing outflows in the data — indeed they ended when the stock market found its bottom in March. Since that time, U.S. equity funds have attracted $26.5 billion of fresh net inflows versus $124.3 billion for bond funds and in fact, when equities that are really “bonds in drag” are included (ie, growth & income, hybrids), the total since March is over $140 billion. In other words, despite a very flashy 60% rally, driven by short-covering, technical momentum and program trading, the retail investor is not allowing greed to overwhelm his or her long-term resolve. This is fascinating.
Some may point to whether the fund flow data are still useful as a contrary indicator going forward or whether there is a real fundamental psychological shift taking place among retail investors in terms of their assessment of risk, having been burnt by two bubbles seven years apart. I recommend that everyone have a look at Now Even Millionaires See the Benefits of Budgeting on page B5 of the Saturday NYT (a must read on what is transpiring at the upper echelons of the income strata). The article quotes a high net worth financial advisor who said “many of our clients are very happy to be sitting on bond portfolios and cash reserves.” This is certainly a recurring theme I have picked up on from most of the meetings with our client base and the prospects I have visited.
Source: Gluskin Sheff
The article quotes a high net worth financial advisor who said “many of our clients are very happy to be sitting on bond portfolios and cash reserves.”
TPC –
What can go wrong with “bond portfolios and cash reserves (MMF)” as I have been hearing this a lot too – I hope wall street is not looking at this to screw people for their next bubble (profit making)?
Well, the biggest risk to bonds is rampant inflation. Thus far deflation remains the bigger risk which means bonds should continue to perform well. I’d keep an eye on the money multiplier. A big spike in consumer borrowing and the velocity of money and inflation could destroy paper assets. Personally, I don’t see that happening, but I also never underestimate the stupidity of the Fed.
Check this out if you’re interested in laddering some bonds:
http://pragcap.com/whats-a-conservative-investor-to-do
Must mean inflation is about to kick and and wipe out those bond funds.
Link to NYT article:
http://www.nytimes.com/2009/09/19/your-money/19wealth.html
I agree with TPC that inflation is highly unlikely in the near future as both supply of and demand for credit will be down for some time. This is exactly what happened in Japan while the private sector delevered. Interestingly, as demand for bonds increase and yields decrease we could also see savings rates increase well more than would normally be expected due to the low and decreasing yields. This, in turn, hurts the economy and we are stuck in a terrible vortex down which is the counter to the ‘lower savings rates because equities and real estate will make me rich’ mentality we have seen the last decade. In a nutshell, this is George Soros’s ‘Theory of Reflexivity’ in action.
“many of our clients are very happy to be sitting on bond portfolios and cash reserves.”
such as baby boomers with short time horizons to retirement.