“Don’t fight the Fed.” “Don’t Fight the Fed.” There is no mantra more drilled into the heads of investors. Betting against the Fed, especially by staying out of the market when rates are falling or ultra low, has been a sure-fire way to lose money and certainly not make any.
But could it be that (dare I utter the four most dangerous words on Wall Street) it’s different this time?
Hear me out on this: If the Fed keeps cutting and rates on safe havens fall to 1% or even less, won’t cash naturally flow back into U.S. stocks? What about real estate?
You can forget latter unless you’re in need of a place to live: Credit ain’t what it once was.
What about stocks?
I put that question to Charles Biderman of Trimtabs.com, who tracks money flows. Surely, I thought, he’d say something like, “You nitwit, of course” money will go back to stocks. That’s how Charlie talks. Nitwit is one of his favorite words, and he was right (calling plenty of people “nitwits” along the way) while he was pounding the table on stocks when a few of us were flying red flags over the looming mortgage mess and its ultimate ripple effect on the economy. Even if Charlie knew in his heart that an economic upheaval was in the works, he knew what the fund flows were telling him.
So, what happens if rates fall to the point that cash makes no sense (aside from those of us who prefer the mattress — or gold?
“At some point,” Charlie says, “return ‘of’ investment becomes more important than return ‘on’ investment.”
What about not fighting the Fed? “Flow follows performance,” he says. “Also has always will. If stocks go down, money will leave equities, even if interest rate is zero. Japanese investors ignored Japanese stocks for a decade even as Japanese interest rates hovered around 1%.”
But surely, you would think, with nowhere else to put the money, in a market ruled by computer programs and speedy flow of information, after another cut or two there will be a mass rotation back into stocks.
Won’t happen this time, Charlie says, because the mortgage market isn’t what it once was. “Since August, 90% of non-conforming loans loans have not gotten funded. That translates — based upon quarterly federal reserve analysis of equity (cash) extraction from homes via cash over mortgage at sale, cash out from refi’s and home equity loans — into about $20 billion less per month going to the economy. That is equal to about 4% of the $430 billion monthly after tax take home pay of all 140 million or so on payrolls.”
He continues: “Since October, the year over year growth rate of withheld income and employments taxes has steadily slumped to about zero over the past two weeks from an average of 7.5% for the first three quarters of 2007.
“That’s a long way of saying that with individuals generating less new money, there is less new money available for investment.”
Add fewer new jobs to the mix, and the dominoes continue to fall through retail and the economy.
Put another way, if I understand what Charlie is saying — and there are times I don’t: Even if money does start flowing back into the market there won’t be nearly enough to reignite the market’s pricing power of recent years. At least not anytime soon.
It’s an interesting theory — and certainly one worth pondering as the Fed itself ponders what to do next, knee-jerk rallies, notwithstanding.
The beat goes on…