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Macro Economic Trends and Risks
Where is Your Money Going?

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By EddieLuck
March 31, 2008

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The asset class of choice (the one receiving the biggest inflows by a huge margin) is money market funds. This asset class is referred to these days as "cash", and is bursting at the seams. TIPS are also at sky-high prices.

The reason for this must be general fear, because at today's money market and TIPS yields the asset classes in themselves are not attractive as investments; only as defensive havens. In this respect, they are both somewhat shaky because there is a real risk of money funds breaking the buck and of TIPS falling in price. In summary, they both stink but people are flocking to them anyway due to a lack of a safe alternative of the kind that used to be abundant when we had sound money. Back in those days, say in 1929, an investor who was bearish could go to cash (gold dollars) with the knowledge that he could just hold them without loss of value until things blew over. Of course, he got screwed on that by the govt. in 1932 but the "go to cash" strategy had always worked in the past.

With this option no longer available to an investor, I think we have arrived at a sort of unreal twilight world where we are driven by desperation to try anything that might give us a shot at making money. I am personally impressed by the US stock market's obvious willingness to shoot skywards at the least excuse from its still-elevated levels. It would not take much in the way of good news to light the fuse, despite the dreadful financial and fiscal and trade and credit and economic environments, not to mention the appalling outlooks for local, State, and Federal govt. finances and the unprecedented household debt levels and falling employment and falling retail sales and the total lack of understanding shown by the three major presidential candidates.

There are billions of dollars waiting in the stock market wings controlled by people who must know that corporate earnings are going to fall and that retail sales are going to continue falling, and unemployment will rise along with bond defaults and all the rest, but are still willing to have a flutter on stocks and try to catch a rally before they go back to bear market mode.

There are more billions controlled by people who believe that Messrs. Paulson and Bernanke can throw enough credit at us to "jump start the economy" again, and believe that it's time to play the recovery although we have yet to experience any significant decline.

Am I on the wrong side of the looking-glass?

Ed.