Guest Post: Stocks, Money Flows, And Inflation

Tyler Durden's picture

Via Pater Tenebrarum of Acting-Man blog,

Sentiment Goes Nuts

Mish reports that this week's Barron's cover looks like a pretty strong warning sign for stocks (but not only the cover as he points out, but also what's inside). However, there may be an even more stunning capitulation datum out there, in this case a survey that we have frequently mentioned in the past, the NAAIM survey of fund managers. This survey has reached an all time high in net bullishness last week, with managers on average 104% long (this is to say, including the bears, the average response results in a leveraged net long position, a first).




A new record high in the net bullish percentage of the NAAIM survey of fund managers – click for better resolution.


However, that is not all. NAIIM asks fund managers to relate their positioning as a range bounded by “200% net short” to “200% net long”, in other words, even fully leveraged net long and net short positions are considered.

The survey keepers also relate where the most extreme replies are situated within this range. Naturally, the most bullish manager(s) have been between 180% and 200% long for some time. So that number is actually only of concern if it shrinks, which has  in fact done (slightly) last week.

However, here is the stunner: the most “bearish” fund manager is now 60% net long! That has also never happened before – in effect, there not only are no bears left, there is also no-one left who's merely “neutral” on the market – the bullish consensus is now effectively 100% in the sense that not a single manager among those surveyed is left with an open net short position, not even a tiny one. Two weeks earlier, the most bearish respondent was still 200% short, and one week earlier 125%.


NAAIM response range

The NAAIM response range. The red ellipses show the new all time high in net bullish positioning, as well as the stance taken by the most “bearish” manager in the survey, who's now 60% net long.


That should be good for at least a two to three percent correction one would think, probably intraday (i.e., to be fully recovered by the close).


“Money Flows”

The nonsense people will talk – people who really should know better -  is sometimes truly breathtaking. Recently a number of strategists from large institutions, i.e., people who get paid big bucks for coming up with this stuff, have assured us that “equities are underowned”, that “money will flow from bonds to equities”, and that “money sitting on the sidelines” will be drawn into the market.

What are “underowned” equities, precisely? Are there any stocks that are not yet owned by someone, so to speak orphans, that are flying around in the Wall Street aether unsupervised? If so, give them to us please. Since apparently no-one owns them, they should presumably come for free.

And how exactly does money “flow from bonds to stocks”, pray tell? There may well be bondholders crazy enough to sell their bonds so they can buy into a stock market that's already 130% off the lows, but then someone else will have to buy their bonds, and someone will have to sell them his stocks. If that happens, someone will end up the patsy, but no money has “flowed” from one market to another. All that has happened is that the ownership of bonds, stocks and cash has changed. The same holds of course for so-called “money on the sidelines”.

Admittedly, the stock of money is indeed growing, courtesy of the Federal Reserve's virtual printing press. At the moment it increases at an 11.2% annual pace (broad money TMS-2) respectively a 9.3% annual pace (narrow money TMS-1), which is admittedly none too shabby and undoubtedly a major reason why stock prices have held firm. However, what that mainly  tells us is that money is now worth less, because there is more of it. Which prices in the economy will rise when the money supply is increased is never certain, but it is certain that some prices will rise.

Other than that, all stocks, all bonds and all cash are always held by someone. The only orphaned cash that is truly “on the sidelines” are banknotes people have lost on the street. Probably not enough to push equities even higher, but you never know.

John Hussman has also written about this very topic again last week (Hussman is  among the handful of people actually getting this right) and has raised a further interesting and logical point in this context. He explains why the weighting of bonds versus equities at pension funds and other institutional investors has been altered toward a larger percentage of bonds:


“Quite simply, the reason that pension funds and other investors hold more bonds relative to stocks than they have historically is that there are more bonds outstanding, relative to stocks, than there have been historically. What is viewed as “underinvestment” in stocks is actually a symptom of a rise in the gross indebtedness of the global economy, enabled and encouraged by quantitative easing of central banks, which have been successful in suppressing all apparent costs of that releveraging.”


(emphasis added)

There you have it – all it means at this juncture is that there is more debt extant than before. In fact, a lot more – as Hussman also remarks:


“[...] the volume of U.S. government debt foisted upon the public (even excluding what has been purchased by the Fed) has doubled since 2007, not to mention other sources of global debt issuance, while the market capitalization of stocks has merely recovered to its previously overvalued highs.”


(emphasis in the original)

The above facts have been pointed out over and over again, by Hussman and a few others (to our knowledge, Mish, Steven Saville and yours truly. If we forgot to mention anyone, then only because we haven't come across their writings yet). And yet, the fallacy keeps being repeated by people all over Wall Street.


Stocks  and “Inflation”

As noted above, there is currently (and has been for the past 4 ½ years), plenty of inflation. The money supply is inflated at breakneck speed, after all, the 10% and higher annualized growth rates we have experienced are compounding. We keep hearing from various sources that stocks are expected to be acting as a “hedge” when the time comes when a decline in money's purchasing power becomes evident by dint of rising indexes of the “general price level”, such as CPI. For instance, Kyle Bass last week reminded us of the excellent performance of Zimbabwe's stock market during the hyperinflation period by noting:


Zimbabwe's stock market was the best performer this decade – but your entire portfolio now buys you 3 eggs"


He's quite right, but it would actually be a mistake to compare the current market situation and the situation we will likely have the opportunity to observe should CPI actually ever rise again, with the Zimbabwe situation (at least initially).

Let us explain: right now, the “inflation” backdrop is a kind of sweet spot for stocks. There is plenty of monetary inflation, but the officially reported decline in money's purchasing power is very small, which helps to keep bond yields at a low level. “Inflation expectations”, i.e., expectations regarding future CPI, have risen, but not by enough to disturb this happy state of affairs.

It should be clear that the chance to go from “almost no inflation” (let's call that state “A”) directly to “hyperinflation” (which we will call state “C”)  is non-existent. Again, this is in the sense of rising consumer prices and disregarding the fact that the officially reported data are somewhat suspect. We are also disregarding the fact that the decline in money's purchasing power cannot be “measured” anyway.

So even to those who insist that stocks will protect one against the ravages of sharply rising prices of goods and services, it should be clear that things won't simply go from “A” to “C” in one go, but will first proceed to “B” (note, we are also leaving a deflationary contraction of the money supply aside here, which everyone agrees will result in falling stock prices. As long as there are Bernanke & co. at the helm, it isn't going to happen anyway).

“B” is the state of affairs that pertained in the 1970s: high levels of CPI, close to and intermittently even exceeding double digits, but not hyperinflation. What would stocks likely do if we were visited by such a state “B” in spite of the valiant efforts to keep CPI as low as possible by means of an ever changing calculation method?

Both logic and experience tell us that their valuations will be compressed, this is to say, p/e ratios will decline, very likely into single digits. This is because high levels of CPI will raise bond yields considerably, and the future stream of earnings will have to be discounted by higher interest rates.  Stock prices will also reflect the then presumably much higher inflation expectations. If nominal economic growth does not exceed the increase in CPI, then neither will earnings. The 1970s have in fact already shown what happens in such an environment: the stock market tends to decline.

So what if hyperinflation were to break out one day? In Zimbabwe even the nominal prices of stocks of companies that were effectively put out of business because they could no longer pay for inputs (due to a lack of foreign exchange) soared.

However, Kyle Bass is correct: the devaluation of money in the wider sense was even more pronounced than the increase in stock prices. Stocks did not protect anyone in the sense of fully preserving one's purchasing power. It was clearly better to hold stocks than cash or bonds in the hyperinflation period, but still your portfolio would 'only buy you three eggs' when all was said and done (while cash holdings bought absolutely nothing anymore in the end). 

The only things that actually preserved purchasing power were gold, foreign exchange and assorted hard assets for which a liquid market exists. We have put gold in first place because it not only preserved purchasing power during the hyperinflation in Zimbabwe, it actually increased it.  Stocks did no such thing.



zimbabwe stock market

The ZSE Industrial Index – impressive, right? Not so fast…..(via Random Thoughts) – click for better resolution.



The Zim$-USD exchange rate, official, parallel market, and the 'OMIR' rate (which is probably the most exact one: “…the Old Mutual Implied Rate (OMIR) was calculated by dividing the Zimbabwe Stock Exchange price of shares of the insurance company named "Old Mutual" by the London Stock Exchange Price for the same share.” – click for better resolution.


Zimbabwe's estimated inflation rate (from a report by the CATO institute, pdf):



Zimbabwe's hyperinflation progression


Hyperinflation episodes compared:



The time it took for prices to double, several hyperinflation episodes compared.  As can be seen, the rise in Zimbabwe's stock market was no match for the decline in money's purchasing power.

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francis_sawyer's picture

Bullish & Bullshit require only a juxtaposed "T" to separate them...

true brain's picture

The only things that actually preserved purchasing power were gold, foreign exchange and assorted hard assets for which a liquid market exists.


Foreign exchange is junk as all currencies are fiat; there is no place in foreign exchange to run into. And there is no hard asset into gold  exchange, domestic or foreign before the fiat regime collapse.

lasvegaspersona's picture

true brain

In a post HI world your gold will be welcome as the stooges peddle their new improved currency. I'd wait a while though. Sometimes it takes a few 'new' currencies before they get one that does not go hyperI right away.

DoChenRollingBearing's picture

Yes, it took Peru quite a while re new currencies becoming stable.  Stick to hard assets.  Hey!  We may soon see a new currency in Argentina the way things are going there.  And I will not cry for them, THEY voted for the Lefty.  Erm, just like America did

Barron's cover sure does look bearish to me, with such a bullish consensus...  I would buy gold rather than stocks.  I am going to SELL some stocks soon.

r3phl0x's picture

Just don't let "soon" become "too late".

Thomas's picture

I thought that was great. Really put a bat to some of the dumbest logic being trafficked out there by the pimps.

trav777's picture

speaking of zimbabwe; I was just there a couple of weeks ago, and while there I banged this chick from Harare who I thought was from the UK. 

I'm on whatsapp with her right now and she is defending Mugabe as a "an intelligent man who knows what he is doing and the best option yet...the western world just hate him coz he knows too much to put them down"

I really can't even fathom this from someone who lives in Harare and is educated and actually still has a job.

The country doesn't even have its own CURRENCY anymore; this guy and his cronies destroyed it totally and yet people still defend him.

Africans should not vote- ever.

trav777's picture

these brown nations are always only one election away from a Mugabe.

bobthehorse's picture

I've got your stocks and money flows.

I've got them hanging between my legs.


TotalCarp's picture

Great article. Lots of good points here. I am still not convinced that you can as esily apply the traditional long/short fund posi measures to a world where the printers are working at full speed. 

But its is quite clear that the numbers are getting beyond extreme..

Falconsixone's picture

Honey muffins and I got bearish a couple of times yesterday

fonzannoon's picture

they will never let cpi rise like that here. they will change the basket to measure the price of dogshit and boogers, which has been very stable. rates won't rise like in the 70's. the fed will buy every single bond to keep rates down. but eventually it blows up. the only question is how long does this take.

TotalCarp's picture

i guess what i find not trivial is the mechanism of how "it blows up" happens. what exactly occurs? what is the possible range of triggers? 

as i keep repeating there has never been a rapid hyperinflation explosion in a country with a reserve currency only in periphery marginalized economies. US is not going to become marginalized overnite and USD reserve status remains "guaranteed" by the guns if nothing else.


hooligan2009's picture

the trigger is a move from bonds to equities. we are not talking about TYT of 2% going to just 4%, we are talking it going to 10% 15% or it did in crappy european countries.

since the official inflation numbers are rigged, the rise in rates will be because of a credit event..or more likely, a realization that US dollars are not worth what they claim to be.

there is not a trigger in inflation of deflation terms; because inflation and deflation are trailing indicators.

you will note that japan has been in the same position. bernanke said that the BoJ got it wrong in the early 90's and he had the right answer. you have the answer now. 

the "best" outcome for the US is to repeat the Japanese experience. that is, for a 75% decline in the S&P500 and TYT to go below 1%. cheaper prices for everything except pensions that get very, very expensive.

the "worst" outcome for the US is for a switch from bonds to equities, since this will bankrupt the nation because of higher debt servicing (or lower DCF values of (much) higher interest rates. the stock market goes down anyway. 

the positions referred to in the tables from this survey represent leveraged exposures, probably secured on TYT collateral (or other maturities). these managers may or may not be a representative sample of the hedge funds and fund managers. it certainly tells us something. perhaps that is why the bond market has remained relatively stable and the equity market has gone up. leverage, just like it was in 2008 when the largest fund managers could produce returns 10% above TYT by leveraging the 2% credit spread 5 times.

if japan ever does get to grow by 5% nominal, its government debt interest burden would tend to absorb 10-15% of GDP or half of all its taxes. the same applies to the US (and Europe). 

which should we prefer? a "best" or a "worst" outcome? or maybe there is another way. PAY DOWN THE DEBT!!!!!

TotalCarp's picture

But you see here is the paradox. We all keep saying - Fed will print as much as as needed to keep the status quo. What would prevent them to buy every bond that private sector/foreigners try to dump?

i also dont believe that a reserve ccy looses its status without a massive political (usually military) dislocation (defeat). In my recent travels i have been reminded of that - everyone would gladly take my dollars in every emerging and frontier mkt country i have visited in last 18 months. In histrory this simply does not happen. 

I do agree and suspect we will see a flught to private from public fin market so my expectations are in line with your "worst case". i think you are making excelent points so thank you for your reply. 

hooligan2009's picture

most welcome. my opinins are not worth any more or less than anyone else's!

i have still not got an answer to the oft repreated question "what happens if the central banks simply cancel the government debt on their balance sheets?"

the circle jerk being engaged in of the government spending money it doesn't own (or is able to pay back) and creating cash out of thin air...flollowed by the fed buying the debt (that can't be paid back) and issuing more cash, seems to be a case of a double cash injection to the overall economy.

simply cancelling the government debt, merely acknowledges what has already happened. the economy has received two lots of fiscal deficit injection and ownership of government debt by central banks is simply an "inflation" of both sides of intra government accounts. if the central bank owns the entire amount of government much does the government owe? it simply pays itself the interest!

i also have the view that the interest rate paid on federal funds is the single most important factor for the rate of money growth able to be employed in the economy.

MeelionDollerBogus's picture

Here's your answer: it never happens.

Central banks owe money to those who control them & cancelling debt is self-impoverishing. They don't exist to go bankrupt any more than you do, for any charity. ALSO, central banks owe debts to EACH OTHER. They have no intention of playing nice with anyone not paying debt TO them so they know as per the "prisoner's dilemma" the cost of being the first to refuse to pay - WAR.

Central banks in play:








each that have ACTUAL nuclear weapons,

the others are allies with some who've been listed above, which makes them proxy levers into war.

MeelionDollerBogus's picture

I find this shocking.

Literally almost every episode of ‘the amazing race’ one detail no one’s thought to talk about or focus on at all is that people trying to push American dollars around the world for things like food or cabs are being told the money is no good. Those having OWED a cab ride & have no local currency have been threatened with police to be called to arrest them – US dollars NO GOOD.

trav777's picture

you're right, of course.  I don't know why these fools can't see this.

I still have my vast stockpile of USSR rubles and they are worth every penny I paid for them, TO THIS DAY.

CASH IS KING!!!!!!111

Muppet Pimp's picture

We are in uncharted waters.  I'm going to buy assets with my dough, we shall see how it pans out.  If I had lots of money I might buy a business or two but unfortunately do not have that problem at present.  Real estate, gold & silver for me.

fasTTcar's picture

Not yet, but getting closer.

trav777's picture

see my post upthread...there are nonstupid people in ZIM who think Mugabe is a smart man doing a good job and that failure is a matter of Western persecution.  Aka, niggerology explanation.

Silver Garbage Man's picture

You can lock in your food and energy prices right now.....just buy silver!

Vint Slugs's picture

Well, at least your middle name is applicable here.  If the scenario that you appear to have bought into occurs, you will find that you will barter anything and everything - including silver - for gold.

mess nonster's picture

I wonder what the debt repayment rate was in Zimbabwe. What happened? Or, what would happen here if I repay my mortgage with a 100,000 dollar bill that otherwise wouldn't buy a piece of bubblegum?

Something tells me the PTB would change the rules to make that 100,000 bill NOT a valid re-payment for my mortgage.

However, in theory, hyperinflation is a debt jubilee- we all get to pay off debts with worthless money- what banker is going to go for that?

On the other hand, the price of the food I would need would be so prohibitively high, that ALL my trillions of dollars would go to paying for commodities, and I might not have an extra 100,000 left over to pay off my mortgage.

Isn't this what we're seeing already- the destruction of asset valuation, and the skyrocketing price of food and fuel?

lasvegaspersona's picture

France tried something like that post assignats...they tried to tie debt to the new currency so the debtors could not benefit from hyperinflation....just get benefit allowed...didn't work.

Hyperinflation will happen when control is lost....what the almighty 'powers that be' want will not matter....if they are not holding real assets they will become the 'powers that were'.

In the post HI world there will be new folks who will have capital. I hope to be one of those people I complain about now. I'd like a private jet and a matching set of politicians.

FL_Conservative's picture

Ahhhh, but what if that gold double eagle was now sufficient to liquidate that mortgage, rather than worthless fiat?????  Debt in today's dollars and gold in tomorrow's.

Vint Slugs's picture

"hyperinflation is a debt jubilee"

Wrong.  Logical fallacy - guess which.  Ask a Zimbabwean debtor how it feels to be "debt free".

trav777's picture

I'm going to hazard a guess that not only have none of you ever been to zimbabwe, but you've never even MET a zimbabwean.

Mugabe gets ELECTED by popular support.  So wtf good would it do to ask anyone there anything?

Tinky's picture

"What are “underowned” equities, precisely? Are there any stocks that are not yet owned by someone, so to speak orphans, that are flying around in the Wall Street aether unsupervised? If so, give them to us please."

Excellent line, and good post.

sablya's picture

This guy seems to be on the verge of frothing at the mouth.  NAAIM is a pretty small survey.  It certainly doesn't indicate the general tenor of market sentiment.

Compare which is fairly neutral and which is above average bullishness but not at an all-time high.  

His point about money not being able to flow from bonds to stocks is interesting.  But if lots of people sell their bonds and move that money into stocks, wouldn't the primary dealers possibly end up holding those bonds? It's not as if they would be putting their money into the stock market anyway.  They have cash sitting there doing nothing I imagine so it seems that money would flow from bonds into stocks and other money would come out of the vault or printing press to make up the difference.



lasvegaspersona's picture

From 'When Money Dies' if I recall correctly...purchasing power of equities, good ones, lost about 50% when all the hyperinflation and rejiggering of currencies was done. Yes equities rise but in the end gold is the best to hold....especially since the price now seems a tad low.

DoChenRollingBearing's picture

Yes, I agree.  Stocks are better than bonds in HI, but gold beats 'em all.

Meat Hammer's picture

Stock up on gold, silver, lead, food, and water so you can survive in the USSA when this starts to unwind.  Then, when gold is worth $20,000 of inflated currency per ounce in, say, 5 years, sell 10oz or so and pay off the mortgage, which is locked in at the old less-inflated money of 5 years prior.  I wouldn't ever recommend being a landlord and scooping up investment real estate that baby-daddy will burn down when he falls asleep while the blunt is still lit, but I would encourage people to buy their primary residence with today's money, hedged with plenty of gold on the side with which to pay it off in 5 years.  


tarsubil's picture

Or you could hunker down and rent something cheap and use the savings to buy gold and silver. In 5 years, you won't be tied to a house and you'll have an extreme amount of financial freedom compared to the above scenario.

Threeggg's picture

The natural and economy expanding/supportive inflation created from the fractional lending system has been suspended. (this money they cannot steer, focus or direct to where they want it) The employment, production and output that usually feeds that system is not needed at this time. 

It has been replaced by outright printed money from QE and bailouts, is steerable and is being directed/funneled into the balance sheet reserves of the financial institutions that TPTB hold their generational wealth in (banking/financial system). They are throttling the economy through the injection of this steerable/directable printed money, into the market and public entitlements. Then extracting, to meter inflation felt in the real economy, through higher goods, energy and food prices. (All employment, production, investment and output has been shut off to throttle the economy as to not compete with the unhealthy non-growth, outright printing scheme they have deployed)

The economy is being put on hold because if we combined these two money creation methods, the dollar would tilt into hyperinflation and be worthless within weeks.
The crowd in DC never mentions jobs or unemployment anymore because its not needed at this time, thanks for applying.

dunce's picture

There might be an increase in the amount of bonds outstanding because it makes sense to borrow money at the current low rates as long as they can service the debt and pay it off with inflated dollars. Since interest is a deductable business expense they would see a lower tax bill also. What they do with the cash makes the real difference, some are buying back stock which probably makes sense for high level management that ges much of its compensation in stock options though is a loser for the share holders in most cases.

q99x2's picture

The markets can't go down because of conterfeiting. Unless the Bernanke, Blankfein and Dimon choose to lower the market it will go higher. No surprise here.

Peter Pan's picture

The future is basically revolving around three factors:

1. Having a job for income

2. The relative values of things against each other when things get ugly.

3. The availability of some things under certain circumstances.

socalbeach's picture

I hope the Fed governors don't take that ZWD vs USD Exchange Rate History graph as a challenge, not wanting to be outdone by a two-bit CB head like Gideon Gono. 

It looks like exponential growth on a log scale!

Poor Grogman's picture

Actually the Zim dollar is doing quite well at the moment.
I saw some on eBay go for 5usd each.
Mind you the 100Tn note was about the same price!

There might be a message there...

Collect some low denomination Fiat (paper or coin) first.

When the inflation starts to bite, it will quickly disappear.

Ebay = Mugabe's last laugh.....

Sudden Debt's picture



eddiebe's picture

So Pater, do you lump in the miners with the stock market in general?

madcows's picture

I don't think we'll get true hyper inflation.  I think Benny would pull back before then.  But, I certainly think he's willing to push real inflation into the 20+ range.


Herdee's picture

I can see the U.S. Government having to resort to wage and price controls in the near future.Inflation has taken many forms lately.Increased gasoline and oil costs get passed on.The cost of insurance is increasing and commodities are putting up the costs of basic essentials to the public but hit the poor even more.Price of new cars compared to lower wages,I could go on but the Government has an outdated inflation calculator which is a joke.It's the start of inflation now returning in a different form.Just compare the old graphs on Canada when Canada was forced into resorting to this strategy.High debts and high commodity prices will get you voted out every time if nothing is done to stop it.