Tuesday, August 4, 2009

The Debts of the Spenders: Zero Hedge Analyzes the Sideline Retail Money Flow Theory

I received some criticism for posting the mutual fund inflows as being net bullish. To put things in perspective, here is a piece from Zero Hedge, the uber bear.

Just to clarify, I do agree on Zero Hedge on many points - especially his trading analysis of what goes on behind the scenes of exchanges and esoteric computer order flows. However, I have also disagreed w/him in the past. Most notably on the duration of the inflationary effects of the Chinese bubble and on the Eurodollar futures Commitment of Traders reports.

Most interesting is the correlation between Money Market totals and the listed stock value since the March lows: a $2.7 trillion move in equities was accompanied by a less than $400 billion reduction in Money Market accounts!

Where, may we ask, did the balance of $2.3 trillion in purchasing power come from? Why the Federal Reserve of course, which directly and indirectly subsidized U.S. banks (and foreign ones through liquidity swaps) for roughly that amount. Apparently these banks promptly went on a buying spree to raise the all important equity market, so that the U.S. consumer who net equity was almost negative on March 31, could have some semblance of confidence back and would go ahead and max out his credit card. Alas, as one can see in the money multiplier and velocity of money metrics, U.S. consumers couldn't care less about leveraging themselves any more.

The truth is that money market accounts, which currently hold about $3.6 trillion dollars, will not decline much more, as this is the only perceived safe haven for U.S. household capital. The U.S. consumer has seen how volatile the equity market is and is unwilling to transfer substantial amounts of capital from safe to risky investment vehicles. The fact that household equity has declined by 94% is also a very critical concern. And, even if Money Market accounts get depleted and all capital moves to stocks, it is obvious that without Federal backing the market will never even get back to 2007 levels purely as a function of capital flows.

The only motive the households would have to invest more freely in the markets is if their underlying debt were to decline. And as the Z.1 indicates it has been flat at $13 trillion for over 2 years now. Of course, banks would have no interest in taking impairments on household debt as that would mean their balance sheets are solidly capitalized - a lie that is being perpetuated by the likes of the GAAP, the FDIC, the regulators and the Federal Reserve. So while U.S. consumers and U.S. banks are stuck in this vicious loop, it is foolish to make any judgments that the money on the sidelines will spark any additional rallies.

If pundits wish to find out where any new equity buying interest will come from, they need to look at the same place that was responsible for the market move over the past 4 months - the New York Federal Reserve.

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