Where is the money coming from that is driving the stock market higher? – it damn sure isn’t mutual fund inflows . . .

One of the more tragic consequences of the Great Recession is the unprecedented flood of retail investment into bond mutual funds and out of equity mutual funds.  The fear / greed cycle pushed all the weak hands into the safety of short term Treasuries at the beginning but since yields were essentially zero, the greed side of the cycle pushed the money on into longer duration bond funds where, as Jim Grant of Grant’s Interest Rate Observer stated, they have “return free risk”.  There are some takeaways from this:  a) there will be a mirror image panic out of bond funds sooner than people realize (2013-2014) as interest rates begin to rise, b) there will be a surge into equities c) the present market is virtually devoid of retail participation, a precondition for a major stock market top d) this is an institutionally driven bull market with hedge funds scrambling to catch up.  As you examine the following chart keep in mind that there is material “gearing” to equity mutual fund inflows.  $10 billion inflow can equal a $50 to $100 billion equity market value increase.  Jeb Terry, Sr. March 28, 2012

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