David Rosenberg is chief strategist for Gluskin Sheff + Associates Inc. and a guest columnist for Report on Business
History shows us that financial crisis breeds behavioural change. This time is no different.
Consumer attitudes towards homeownership have changed ... semi-permanently. This is why the U.S. government has to encourage people to buy homes with extended and expanded tax credits.
Consumer attitudes toward automobiles have changed too, and this is the reason the government again has to entice people to buy cars through the 'cash-for-clunkers' program.
And, consumer attitudes toward credit have changed as well. This is why a once stable $800-billion (U.S.) Fed balance sheet has ballooned to $2.2-trillion and why we are on the precipice of a massive mandatory consumer debt-forgiveness program that will likely see private sector credit taps turned off for good.
What about investing? Well, there has been a secular shift here, too. Instead of capitulating and investing in the market in a classic price-chasing fashion, the general public is also changing the way it approaches its investments. It is interesting to see that nine months and 65 per cent off the market lows, private investors are not being lured by Wall Street research and the media into adding to their already overweight equity positions. Instead they continued to sell into the rally and rebalance their portfolios.
We just got the mutual fund data for November and talk about a behavioural shift. Institutional buying of equities was very buoyant in 2009, but the retail investors were basically absent. The bulls point to all the "dry powder" sitting on the sidelines just waiting to be put into the market.
Public investors are liquidating their money market funds - there were outflows totalling $46.7-billion in November and $71.8-billion in October. But this money is not heading in the direction of the equity market. American investors pulled $2.8-billion out of equity funds in November, the third outflow in a row. Year-to-date, stock funds saw net redemptions of $4.1-billion despite a 20-per-cent-up year in the market, and this followed a $213.5-billion outflow in 2008. It may be safe to say that the equity cult is dead.
When it makes it to the front pages of the tabloids, as it did in August, 1979, with the now-famous BusinessWeek cover at that time, then maybe it will be safe to call for the true bottom three years down the road.
Bond funds took in $44.9-billion in November - the fourth-highest ever - and through the first 11 months of 2009 the inflows to fixed-income funds came to a record $349-billion; and this doesn't include the $20-billion through 2009 into hybrid funds (up $3.4-billion in November).
The story in 2009 was the equity market receiving some strong buying power from massive short-coverings after the government corralled the banking system; hedge funds regaining their taste for leverage; and mutual fund portfolio managers taking down their cash ratios back to late-2007 levels.
But the big call for 2010 may be less on what the economy and Fed do, and more on what happens with fund flows. They were not just on the sidelines, but net sellers through most of 2009. The question now that must be asked is: Will the selling from the retail investor outlast the buying from hedge funds and short-covering?
The answer is yes. Keep in mind that more than 25 per cent of the household asset mix is still in equities; ditto for real estate. But less than 7 per cent is in the broad fixed-income market. That is the part of the asset mix that is expanding the most, and sorry, this is not some sort of 'contrarian' call for the equity bulls but rather a sign, yet again, that a fundamental shift in behaviour is taking place.
The median age of the boomer is 52 going on 53, which means that demand for capital gains will demographically give way toward a focus on capital preservation and income orientation. This does not just mean government bonds, but corporates too, especially those with stable revenue streams, a manageable debt-servicing calendar, cash on the balance sheet and in more defensive (non-cyclical) segments of the market.
© 2007 The Globe and Mail. All rights reserved.
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