February 14, 2004

Greenspan's Sucker Punch

One of the reasons you can expect to see a liquidity-induced rush into the stock market are the figures below. Greenspan, somewhat disingenuously, claimed in his Senate testimony that low interest rates have not cause huge growth in the money supply, and therefore not led to a liquidity induced bubble. Partially true. But, by lowering the real return on cash to nearly zero, Greenspan has given money market mutual funds a swift kick in the rear, propelling them directly into the market. He's not doing savers any favors, although he appears to be doing all he can to get everyone into the market for one gigantic top before the election. Give the man a Nobel. Here are some stats from AMG data services and the Investment Company Institute. Notice the relationship. As money market mutual funds witness an exodus, domestic equity mutual funds get manna: * At the retail level, assets of retail money market funds decreased by $4.37 billion to $893.03 billion for the week ended Wednesday, February 11. *Equity funds report net cash inflows totaling $4.1 billion for the week ended February 11. Net investor inflows are now coming into equity funds at a rate of $8.6 billion per week (as measured over four weeks), the heaviest rate since March, 2000; *Domestic Equity funds report inflows totaling $2.79 Billion or 69% of the total net inflows Despite the trash return, there are still over $2 trillion in money market mutual fund assets under management. These funds own T-Bills, CDs, and short-term commercial paper--all of which currently "yield" very little, less than 2% on average. The advantage for savers is liquidity. You can get to your money easily if you need it. The disadvantage is that if you throw in a management fee, add in inflation, and compare it to the yield available in equities (even if it's not historically robust right now), holding cash is pretty painful at low interest rates. One way of looking at that $2 trillion in money market mutual fund assets then, is additional market cap in equities. Dump that on top of the Wilshire 5,000s current market cap of $11.1 trillion and you have a stock market back at levels it hasn't seen since 2000. It would still be off the Wilshire's high at $14.7 trillion. But this is just retail money market money we're talking about. A little kick from some growth from the monetary base and you can see how it's conceivable the market could actually make a new high this year. It's still insane, but conceivable nonetheless.


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