With revenues fading, profit margins collapsing, and only financial institutions' entire lack of transparency providing any lift in EPS, the 'great rotation' continues to provide enough cognitive dissonance to sink a boat for the asset-gatherers. The trouble, as we showed previously [14], is this 'rotation' is dominated by US retail investors (more specifically non-US domiciled and non-retail investors are rotating away from US equities). The US retail investor has shifted in a great-rotationary manner by the greatest amount since Feb 2000 - just as the last great bubble burst. US equities are the 3rd most over-crowded speculative long asset in the world after Crude Oil and the Brazilian Real. It seems the Fed is getting just what it wants but, just as Kyle Bass warned [15], "investors should be really careful doing what the central bankers want them to do."
Confirming what we previously noted (remember there is a seller for every buyer...)
[16]
JPMorgan delves deeper into just who is buying...
Via JPMorgan,
What about retail investors? Retail investors have embraced the Great Rotation over the past two months.
[17]
This is shown in Figure 8, which captures mostly US domiciled funds. The gap between equity fund minus bond fund buying skyrocketed over the past two months to almost $70bn as investors sold bond funds and bought equity funds. The June gap of $70bn for the difference between equity and bond fund buying is the highest ever, with the previous record seen in February 2000. The gap in July was marginally lower but still very strong by historical standards. It represents the biggest behavioral change by retail investors since the Lehman crisis, surpassing the previous bond/equity Rotation episode seen at the end of 2010/beginning of 2011.
Is there any difference in the behavior between retail investors in the US vs. their non-US counterparts? The most comprehensive worldwide data are only available on a quarterly and the latest available quarter is Q1. We proxy Q2 via monthly data instead.
[18]
Figure 9 depicts these worldwide fund flows, split between US and non-US domiciled investors. Similar to Figure 8, Figure 9 shows the gap between equity fund minus bond fund buying. While the two flow metrics had tracked each other pretty well up until the end of last year, there is a noticeable divergence over the past two quarters, which became even more striking in Q2. In all, consistent with our evidence from pension funds and insurance companies, Figure 9 suggests that the Great Rotation seen in the first half of the year has been mostly driven by US investors.
And it would appear that long US equities is among the most crowded positions in world assets...
[19]
and all this as macro hedge funds (supposed smart money) neutralizes its US equity position...
Perhaps Bass was on to something...
...the Fed's policies are forcing mom-and-pop to "put their money in the
wrong place at the wrong time." There will be consequences for that... there is only one way this will end... "and investors should be really careful doing what the central bankers want them to do."
and on a final note, if today's record-breaking HFT churn [20] was not enough to convince you who the greater fool is, then there is no convincing...