Dave Gonigam – June 14, 2012
- The mother of all financial bubbles, now playing at a fund family near you: Investors flee stocks, rush for the “safety” of bonds
- The sneaky way the government will pay down its debt… how it hurts you… and the legal means you can use to escape (for now)
- The “hopium” rally? Traders drive up stocks in the expectation the Fed will deal their next QE fix
- How the government proposes to solve the problem of fewer tourists coming to America (seriously)
- Seven days of The 5… Two methods of defending against zombies… One reader’s guess at what Bernanke has up his sleeve… and more!
Would the last investor in stock mutual funds please turn out the lights?
When last we checked up on mutual fund flows two weeks ago, we suggested the “Facebook effect” might be at work.
Hard to say if the resulting evaporation of trust was responsible for investors rushing to the exits. But the stampede is still on: They pulled $1.73 billion out of stock funds in the week ended June 6, according to the Investment Company Institute.
If you zero in on U.S. stock funds, the picture is worse: an outflow of $3.08 billion. Charted from the start of the year, it looks like this.
There was an unexpected inflow the last week of May… but it evaporated as soon as the Dow took a 275-point dump on the day the May unemployment figures came out.
Total outflows from U.S. stock funds in 2012: $48 billion.
So if investors are bailing… and they clearly are… where are they putting the money? In days gone by, stock-skittish investors would park their cash in money market funds.
Not now. Holdings in retail money market funds are down 7.7% this year, according to ICI figures.
Little wonder: Before the Federal Reserve opened up the monetary spigots in 2008, a typical money market fund yielded 5% a year. Since late 2009, yields have been near zero.
Bond mutual funds pulled in $1.60 billion in the same week that stock funds lost $1.73 billion.
Indeed, bond funds have seen rock-steady inflows nearly every month since late 2008… when big-money investors sold anything that wasn’t bolted down, just to stay liquid.
So we see that in the main, retail investors are fleeing stocks and embracing bonds.
But ICI’s numbers don’t tell the whole story. Let’s focus on that most-liquid and allegedly “safe” sector of the bond market.
Retail investors bought more U.S. Treasury debt in the first quarter of 2012 than the Federal Reserve and foreigners combined.
New figures from the Fed show households loaded up on $170 billion of AA+ graded U.S. Treasuries. In contrast, foreigners upped their holdings only $110 billion. And the Fed’s holdings fell a bit.
“The conventional view,” says a research note from Capital Economics, “is that 10-year Treasury yields have been pushed down to 1.5%… by the actions of the Federal Reserve and the safe haven demand from foreign investors. The reality, however, is slightly different.”
We’ll throw in a caveat that the “household” figures are a bit slippery and might include other categories of buyers; as with many numbers issued by the Fed, this one’s a bit opaque.
But the big picture is clear: Investors are fleeing stocks, and instead of parking cash in zero-yield money market funds, they’re assuring themselves of some kind of return in Treasuries. The mother of all financial bubbles, as Addison has called it for the last eight months, is unfolding in real-time.
Indeed, yesterday the Treasury auctioned $21 billion in 10-year notes. They flew out the door at a record-low 1.622%.
And for their trouble, Treasury buyers lose ground — even by the government’s jimmied numbers.
The Bureau of Labor Statistics is out this morning with its monthly reading of the consumer price index. It fell 0.3% in May, thanks to falling gas prices. This brings the year-over-year increase down to 1.7%.
So let’s get this straight: People are lending their (presumably) hard-earned money to Uncle Sam for 10 years… and getting a return that can’t keep up with the cost of living, even after the cost-of-living figure has been tortured by statisticians beyond recognition. (The real-world reading this morning from John Williams at ShadowStats.com is 9.3%.)
“This,” Addison says, “is no accident. It’s policy (even if, in the end, we discover it is accidental policy). ‘Negative real interest rates’ are how the federal government will try to pay down some of its staggering debt.”
So if you’re among those skittish about stocks… and you don’t want to park your money in Treasuries where you’re still a long-term loser… you have to seek other avenues.
Indeed, you have to seek what our publisher Joe Schriefer calls “escape routes.”
“There are,” he says, “a handful of easy moves you can make… without leaving your home office… that shield your wealth from the greedy hands of our government.”
Heads up, though: This “handful” has the potential to shrink rapidly. Every one of these moves is legal right now. But already Congress is moving to change that. It’s in your interest to give Joe’s new presentation your full attention… before it’s too late.
U.S. stocks are improbably rallying today. The Dow has zoomed past 12,600.
That’s despite nothing changing materially about the eurozone situation. In fact, it’s getting worse. Moody’s downgraded Spain three notches late yesterday. As a result, yields on 10-year Spanish debt crested 7% this morning.
7% is thought to be the point of no return beyond which the interest costs pile up too quickly to have a prayer of paying down any principal. It was the breaking point for Greece, Portugal and Ireland — all of which ended up seeking bailouts.
Real bailouts, that is, not the money sink for Spanish banks that took place last weekend.
No, to listen to the cable chatter (sometimes it has entertainment value), the rally today appears driven by a perverse brand of conventional wisdom.
At issue are two economic reports: The aforementioned consumer price index, which fell month over month… and first-time unemployment claims.
The latter rose last week to 386,000. And yes, the previous week’s figure was revised up. The number has been stuck in a range of 360,000-400,000 since last October. That’s not bad by post-2008 standards, but it’s also setting the bar mighty low.
Still, to traders jonesing for another QE fix, both of these items are evidence of a slowing economy that will have to prod the Federal Reserve to launch some new easy-money scheme at its meeting next Tuesday and Wednesday.
If this is what’s propping up stocks as an asset class — of course, there are always individual shares that offer good values — we’re in sad shape, indeed.
Curiously, precious metals traders aren’t buying that argument. Gold sits at $1,618, right where it has most of the week.
And silver sold off this morning. It’s down about 1%, to $28.56.
The U.S. State Department has come up with a way to combat the impression among foreigners that it’s a pain in the ass to visit the United States.
See, the government knows that all the post-Sept. 11 rules have put a hurt on the tourist trade. The United States attracted 17% of the world’s tourists in 2000; now it’s only 12.4%.
So what is State doing about it? Well, it’s not actually making the visa process any easier. It’s not pulling back on the requirement that visitors from many countries be “interviewed” before coming here. Nor is it opening more visa offices to make those interviews more accessible.
No, it’s putting out propaganda videos telling people that visiting the United States is “easier than you think.”
Judging by most of the comments at YouTube, it’s backfiring: “Yes,” says one, “make an appointment at the one U.S. consulate in your country, pay the fees, travel all that way to the capital city of your country, then get a denial of your visa application.
“Even wives and children of U.S. citizens are routinely denied visas or U.S. passports because they failed to convince the bureaucrat in the consulate that they followed the exact procedure.”
He might have added they’re taxed on their income, no matter where they earned it.
“As chief audit executive of a major semiconductor company in Silicon Valley,” writes a reader after we picked apart Jamie Dimon’s testimony, “I take exception to your comment regarding Sarbanes-Oxley and the implementation of risk control … and that it is not completely accurate.”
“If you make bad investment or business decisions but they are adequately reflected and disclosed in your financial statements and related footnotes to the financials, then you have complied with the act and Section 404.”
“Sarbanes was about failure to disclose correct financial statement information, off balance sheet transactions, etc., and not about making bad investment or business decisions.”
The 5: Never said otherwise. Perhaps we should have been more direct.
“It seems,” in the words of the trading veteran who blogs as “Jesse” at Jesse’s Cafe Americain, “that JPM was misrepresenting and mispricing their risks, egregiously to the point of making false statements to the press, the public and probably the regulators, and they were doing so with public funds and government-guaranteed deposits in the pursuit of outsized income for their traders and management.”
By the way, did anyone else notice Dimon’s cufflinks yesterday? They had the presidential seal. Yeah, this one…
“The White House,” reports CBS News, “has not responded to request for comment about the cufflinks and if he received them from the president or his aides.”
An intimidation tactic? Who knows, but it was one sorry sight, those senators falling all over themselves seeking Dimon’s advice for how to regulate the banks.
“I know I am a simpleton,” a reader writes humbly, “especially on the macroeconomic scene, but it does not appear to me that Mr. Bernanke wants more stimulus, at least directly.”
“It strikes me that his prime objective is to ‘kick the can a bit further down the road,’ in other words, continue to move short-term debt to long-term to keep the future payments on the debt as low as possible.”
“Second, why would he need stimulus? He has to finance $1.3 trillion in extra debt currently, and for as long as possible, at the cheapest rate.”
“Third, if he could create real inflation at 5% or 6%, he would love it.”
“Extend the long-term debt, devalue at a higher inflation rate. Heck, he owns all kinds of mortgages. If he can wait it out and get the asset prices up though low interest rates and increased value, he will be a hero. He says he wants to cap inflation at 2% — right, that’s a nice sound bite. If he could get 10% and quit printing, he would sleep soundly.”
The 5: We don’t dare attempt to read the mind of Ben Bernanke or anyone else at the Fed.
All we know is there are unstoppable forces at work that will drag down the value of the dollars in your pocket… and there are — for the moment anyway — protective measures you can still take legally.
“Somewhat of a newbie to your service,” a reader writes. “Very refreshing, understandable and to the point. Keep it coming.”
“I’ve been hoping for seven days of The 5,” writes a gracious reader after our announcement yesterday. “Guess I wasn’t alone in that hope!”
The 5: If you missed the announcement, here’s the story: Starting this weekend, you can expect two new emails as we expand our service.
Saturdays, we’ll bring you a “top 5” list of takeaways from the week’s 5 Min. Forecasts. It’s the ideal way to catch up if you got busy and missed an issue or two. (Hey, we understand.)
Sundays, Addison will write you directly an intriguing and/or profitable insight to get the new week off on the right foot.
If you already receive The 5, you’ll automatically receive these new emails starting Saturday… so be sure to keep an eye out.
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. “The zombies are everywhere,” wrote Bill Bonner this week at The Daily Reckoning. “Lobbying. Spending. Getting disability and bailouts. Every U.S. government program is full of zombies.”
Bill spent part of the week “zombie-fighting” — an activity you might know better as “consulting with a tax accountant.”
“We were fighting back,” he says, “by using Subsection 16 b, Part 5, Paragraphs g-l… against Rule Number 1,456 as applied to foregone earnings of a limited partnership that invests in unallocated, unamortized, unappealing properties subject to Section 3612, as amended in the Tax Act of 1997 and re-amended in subsequent acts and deeds of which we have either lost tract of or were totally ignorant of all along.”
Well, that’s one means of zombie defense. Addison recently came upon another…
He promptly posted it at his Facebook page. Have you been there? You can subscribe to his page, or friend him. In any event, it’s worth a look… because you never know what you might find!