Who’d have believed that small investors have deserted the stock market in droves this year? We’d thought just about everyone but Larry Kudlow was out of shares by early 2009, and that the only players left were the high-speed trading computers maintained by the likes of Goldman Sachs and J.P. Morgan. Apparently not. Investors pulled $33 billion from equity mutual funds so far in 2010, according to the New York Times. If they keep up the pace, it would be the biggest run on mutual funds in more than two decades, not counting the panic stirred up by the banking crisis in 2008. The little guys appear to be “losing their appetite for risk,” a spokesman from Credit Suisse told the Times, putting it mildly.
They’re in good company, it would seem, since money managers appear to have thrown in the towel on shares too. Take a gander at the chart above if you want to see where all of their cash has been going. The chart should hearten those who are worried the U.S. Government’s recent decision to embark on a second round of quantitative easing will require a blowout of printing-press money. In fact, the demand for Treasury debt from sources other than the Federal Reserve seems all but insatiable at the moment. Are we being churlish to suggest this mania will not last forever?
What Scares Geithner
Keep in mind that the T-Bond rally has occurred even as China has turned net seller. You heard that right. Their holdings peaked for the year in April at $900.2 billion, down from a record $939.9 billion in July of 2009, when Europe’s supposed debt crisis was peaking. China reportedly held $843.7 billion worth at the end of June, but what is most significant – or perhaps scary if you are Tim Geithner — is the pace at which the blowout has accelerated. “In the ten months between July 2009 and April 2010, Chinese holdings fell by $US $39.7 billion,” reported the Australia-based Privateer, one of our favorite newsletters. More recently, though, Privateer editor William Buckler notes, the selloff quickened at an alarming rate. “In the two months between April and June 2010,” [the reserves] fell by $US $56.5 Billion.”
No one could accuse the Chinese of being indecisive. In the meantime, domestic buyers have taken up much of the slack, as we noted above. Is it possible the Chinese know something that they don’t?
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When the work stops, the rest go up in smoke. Today I feel very fortunate that I have work to do… Robert
And the work is stopping because of the nature of fractional reserve lending which destroys credit money as loans are repaid and not replaced with new loans.
Austrians consider deflation good but they’ll change their minds when their jobs are eliminated, I’d bet.