Understanding the Fear in the Markets

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by Robert Wenzel: The
Hindenburg Omen: The Real Thing or HotAir?

With renewed economic uncertainty, American investors have withdrawn a staggering $33.12 billion from stock market mutual funds so far this year, reports NYT.

Over all, investors pulled $151.4 billion out of stock market mutual funds in 2008. The Flash Crash on May 6 of this year resulted in investors pulling $19.1 billion from domestic equity funds in May.

Investors withdrew $14.67 billion from domestic stock market mutual funds in July, the third straight month of withdrawals, according to the Investment Institute.

These withdrawal numbers support the Hindenburg Omen indications that the stock market has been climbing with less and less cash flow to support the advance. This, of course, suggests the potential for severe downside action in the stock market.

Most intriguing however is that much of the flow of funds from investors out of the stock market is moving into fixed income investments. If price inflation begins to creep up, then the fixed income investors will experience some of the greatest losses ever experienced in the fixed income sector.

The money that is now moving into fixed income has to be considered unsophisticated hot money. Remember, this is money that was in the stock market and was scared out by the "Flash Crash" and the ensuing decline in economic indicators. In other words, these are people that watch the news and act quickly once they see what is in front of them. Further, they are very jittery. This is not your great grandmother as investor, who won’t move her funds out of bonds, even if Tim Geithner declares them worthless. This, I repeat, is hot, frightened money. If this money is spooked again, it will run again.

Fed chairman Ben Bernanke is not yet pumping enough money to create the type of price inflation that will spook these investors, just yet, but he is getting close. Given the bizarre set of "tools" Bernanke has introduced to "control" money supply, just how quickly and in what fashion money growth could get out of control is not clear to anyone, including Bernanke.

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©2010 Economic Policy Journal

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