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February 25, 2020 | Mythical Rotations: With Equities Plunging, Where’s the Money Going?

Mike 'Mish' Shedlock

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
With stocks down 3% a reader wanted to know where the money is going?
Q: If the money is fleeing the stock market, bond yields down, where is the money flowing?A: Nowhere

More precisely, the premise is invalid. Money does not and cannot flow out of equities into bonds or anything else.

Nor can there be rotation from technology stocks to value stocks.

Mythical Rotations

The question is related to the sideline case myth.

Someone must own every share 100% of the time. For every buyer there is a seller. Those selling today found eager buyers.

Money exchanged hands. But the amount of money on the sidelines in equities is the same as before. There was no “flow” out of stocks.

The same holds true for bonds.

At the individual level it is possible for a person to “raise cash” or “buy bonds” but at the aggregate level there is no flow.

Repricing Events

What is happening today (and everyday) is a mass repricing. The value changed.

It’s is possible for values to change without a trade even taking place,

Housing Examples

  • In 2006 people were standing in lines around the corner to buy a condo. The next week the lines were gone and prices crashed. What happened?
  • In a subdivision of 300 homes what happens when a single person drops their price by $40,000? Poof. Every similar house in the neighborhood is instantly worth $40,000 less before a sale is even made. Mass repricings can happen with few or no transactions taking place.

Attitude Adjustment

What is frequently perceived as a “flow” is really an “attitude adjustment”. With stocks, attitude changes or repricing events happen in seconds rather than weeks or months.

And unlike equities, money to buy houses (credit) is created out of thin air. But the repricing constructs are similar.

Mike “Mish” Shedlock


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February 25th, 2020

Posted In: Mish Talk

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