Thursday, April 22, 2010

Follow The Buckets

When I think about global markets, my goal is to try and imagine all investment opportunities around the world as large buckets.

Money flows around the world moving from one bucket to the next, and as they fill up, their prices rise.

The goal as an investor is to own the bucket that you think money will flow into next.  On the other side, if you think money is going to be leaving a bucket, you can short it, and make money when it drops in value.

As an investor you also want to pay attention to where money is flowing now, in real time.

The following chart shows the dollar inflows into every major investment class around the world in 2010.  (Click on chart to enlarge)

As you can see by the top two bars, bonds have had an incredible year.  Their buckets have been filling up fast.

Stocks (Equities) are next on the chart and they have risen this year as well, but the bucket has not seen the amount of incoming water as the bond market.

The second to last line shows money markets.  This is the one I want to focus on.  It shows outflows of $327,107 for the year.  This is an incredibly large number.

If money (the water) is leaving money markets, it must flow into one of the other investment choices. (buckets)  Zero Hedge, a financial website, has noted that this outflow does not match the inflow of all the other investments.  There is a $100,000 difference.

What is the most likely reason for this?

People are not taking their money out of money markets and investing it in stocks or bonds.  They are taking the money out and spending it.  They are using the money to survive.

This number is frightening, and it is draining the savings at an alarming rate.

As the economy continues to deteriorate the government will continue to borrow money and bring more water into the markets.  The question you have to ask yourself is, which bucket will this water flow to?

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