Where Would The Money To Buy Equities Come From?
Should the pending war with Iraq be a quick
and successful
one, oil prices–which have already come off their highs–will most probably
fall to around $20 a barrel over the next few months. Lower energy
prices will then act as a “de facto” tax cut for the economy as a whole and
provide businesses with lower resource costs and consumers with more spending
power. This stimulus, coupled with a decrease in investor risk aversion
that has built up in anticipation of an Iraq conflict, should get the economy
back on track. But where would the substantial financial capital necessary for a
sustained increase in equities come from?
In my March 5 article titled “Is The Little Guy Telling Us
Something?” I discussed the current, panic level of investor flow
into bond mutual funds and out of equity funds as a good measure of the
overbought nature of the bond markets and oversold nature of the equity markets.
Despite last week’s equity rally, this trend remains intact, as US equity funds reported $3
billion in outflows during the week ending March 12–year to date withdrawals
now total over $17 billion. And, during this same period, bond funds saw over
$3.6 billion of inflows, pushing the four-week moving average to $3
billion per week–the highest ever.Â
Most significant, however, is the
record amount of financial capital now allocated to money market funds,
which now stands at an eye-popping $2.3 trillion. So, if anyone doubts that
there is a lack of cash lying around to be put to work in the stock
market–should the favorable Iraq scenario unfold–perhaps these figures
will make them think otherwise.