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The New Direction Our Economy Is Headed


The second quarter was rough, and the future holds even more challenges. We all need to be on our toes.

The Real New Normal

Feeling a little seasick from the action in the second quarter? Dramamine was the order of the quarter as the market was down more than 13.50% combined for May and June. Looking over the last three quarters, we've seen ridiculous volatility. Look at the crazy 3%+ rally on Wednesday. To me, this is the real new normal.

Don't try telling me that doesn't look like a roller coaster, and don't try to convince regular investors it doesn't feel like one as they've withdrawn more than $30 billion from equity funds so far this year with nine consecutive weeks of withdrawals. As you can see from the chart below, the withdrawals slightly trail the movement of the S&P itself. Fund flows remained positive through April even though the last two weeks of the month were negative. In May, they begin to bail out with vigor, including a massive $13.4 billion withdrawal. Mutual funds had been operating at relatively low cash levels as it was.

Click to enlarge

Source: ZeroHedge

Where's all of that money going? Unquestionably, gold is getting some of it. Following the withdrawals of the ICI chart above, the SPDR Gold Shares (GLD) had a NAV of $42.34 billion on April 15. By June 30, that number had exploded to $52.79 billion. That's a 20%+ increase in nominal NAV in just 10 weeks, but nominally it's only $10.35 billion. Bonds are getting their share, collecting about $50 billion over that same time frame. With baby boomers holding the majority of investable assets, this transition up the capital structure makes sense as they're more interested in the return of their capital rather than the return on it. This is especially true with their potential retirement on the horizon. Money funds are also seeing decreasing numbers, down about $100 billion over that same 10-week period. Consumers aren't paying off their debt either, considering bankruptcies and foreclosures are both hitting new highs. As you can see from the chart below, consumer credit was turning up in April. However, that move was coinciding with the strong up move in the equity markets. Now that stocks have turned down again, I think the next addition to the chart may have credit contracting yet again. Consumer lending has contracted for 17 of last 21 months for about $150 billion (Per Peter Cecchini BGC Financial, LP).

Source: EconGrapher

This tells us a few critical things:
It doesn't look like new money is going back into the market any time soon.
2. The cash-on-the-sidelines argument is officially dead as whatever money is getting invested is going into precious metals and bonds
3. Consumers aren't using that money to de-lever or de-lever enough
4. If they aren't investing or saving enough and they aren't paying off debt, then they must be spending. This fits with retail data we saw during the spring. I believe this has come to an end or will in the immediate future.
No positions in stocks mentioned.

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