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Bianco on Mutual Fund Flows:

• The Wall Street Journal – Investors Pull Cash Out of Bond Funds
Mutual-fund investors continued to pull money out of bond funds in the latest week, and they weren’t just fleeing muni funds. For the first time in two years, they were also shedding corporates and Treasurys. The Investment Company Institute reported Wednesday that $1.66 billion flowed out of bond funds in the week ending Dec. 8, driven mainly by a $1.26 billion outflow from muni funds. Munis have suffered outflows for five straight weeks now, which is the longest stretch in two years. Of particular note, taxable bond funds lost $401 million last week, their first weekly outflow since December 2008. Equity funds saw losses too, down $1.4 billion last week. Long-term mutual-fund outflows totaled $3.25 billion in the latest week. The data marked the third week in the past month of net outflows for bond funds, which had seen a 99-week stretch of inflows following three months straight of outflows in the immediate aftermath of the financial crisis.

• MarketBeat (WSJ Blog) – Has The Great Bond Selloff Begun?: A Couple Thoughts

Mutual-fund investors are still yanking money out of bond funds, and they’re not just fleeing munis any more. For the first time in two years, they’re also shedding corporates and Treasurys…A new wrinkle in the latest data, though, is that taxable bond funds lost $401 million last week, their first weekly outflow since December 2008. Lest anybody think this is the start of the long-awaited great migration out of bonds and into stocks, equity funds lost $1.4 billion last week. It looks like fund investors are putting their cash in money-market funds, mainly. This is consistent with the broader sense that nobody’s making big bets on anything before the end of the year.

Comment

The weekly mutual funds described above are shown in the chart below.  If this is the start of a great exodus from bond funds, then it only began last week as the outflows expanded beyond just muni funds.

Highlighted in the story above is one of the great misconceptions about bond fund flows.  Bond mutual fund investors are not struggling with a choice between stock or bond funds. As we detailed here, the massive flows into bond funds came from 0% yielding money market funds.  Only about 3% of the inflows into bond funds went into long-term Treasury funds.  An over-sized amount went into short-term muni and corporate funds.  In other words, the public traded a 0% money market fund for a 1% short-term bond fund.  Even with the recent rise in rates, this has been a good trade for them so far.

We would argue if higher rates are going to chase mutual fund investors out of bond funds, they are not going into stock funds.  Instead they would go back to 0% money market funds.

Stock funds have suffered 32 consecutive weeks of outflows, every week since the market highs in April.  As we explained here, the public is not buying stock funds because they did in huge numbers earlier this decade and they are still sitting on losses.  They are not interested in doubling down on a bad trade.  Further market rallies will only reduce losses and not create the Federal Reserve’s much hoped-for wealth effect.

These two charts paint a devastating picture of the US housing market.

Its not just that the market value of US residential real estate fell about $6.2 trillion dollars (versus Case Shiller’s 33%) peak to trough fall; the uglier number is the owners equity RE: It is off 55.7% over the same period.

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Market Value US Residential Real Estate

click for bigger graphs

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Owner’s Equity, US Residential Real Estate

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All charts via The Chart Store

All last year, I kept getting emails from people asking me: “Why do you keep hammering  on these issues?  Why do you beat up on the eejits who push the Fannie Freddie CRA meme? Its dead, everyone knows its nonsense.”

Except, not so much. That 4 members of the FCIC could push such as discredited meme reflects a broader strategy of Agnotology.

Even Gretchen Morgenson, of that liberal media outlet NYTimes, began her column on Sunday with this sentence: :”DECIDING what to do with Fannie Mae and Freddie Mac, the taxpayer-owned mortgage giants that helped set the financial crisis in motion, will be a huge job for Congress next year. ”

That single sentence is a huge victory for the reality challenged.

Repeat a lie enough times . . .

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Before I quickly comment on Housing Starts, Bankrate.com last night said the average 30 yr mortgage rate jumped 19 bps to 5.19%, the highest since April 21st. Nov Housing Starts totaled 555k annualized, 5k above expectations but Permits at 530k were 30k below forecasts and is the obvious precursor to Starts. Permits are just 8k above at least a 50 year low. Starts and Permits for single family homes did rise. It was the multi family category that saw a drop in both starts and permits. For the sake of a market still choking on existing inventory, a slowdown in single family home construction continues to be what is needed at the short term cost of economic activity.

Initial Jobless Claims totaled 420k, 5k less than expected and compares with 423k last week which was revised up by 2k. The 4 week average is now 423k vs 428k last week and at the lowest since Aug ’08. Continuing Claims rose by 20k and Extended Benefits rose by a net 325k but comes after a fall of 393k in the prior week. Bottom line, the level of claims continues the improvement seen over the past 6 weeks but the question still remains of when the monthly job gains will be enough to lower the unemployment rate on a sustainable pace.

The cost of funding for Spain continues to rise as they sold 10 yr and 15 yr paper. The 10 yr was priced to yield 5.45%, 83 bps above the last one sold in Nov and the 15 yr yielded 5.95%, 141 bps higher than the last one sold in Oct. The existing 10 yr yield is rising to 5.50%, matching the highest since Nov ’00. Germany and France continue to be the main economic salvation in the region as the Euro region mfr’g and services composite index fell .5 pt and was a touch below forecasts. Markit, who publishes the data, said “outside of France and Germany, output growth slowed to near stagnation, registering the weakest performance since Nov ’09, as faster growth of mfr’g products was countered by renewed contraction in services.” The Hang Seng index fell to a 10 week low due to further fixed asset lending constraints in China. S&P did upgrade the credit of China to AA- and Hong Kong to AAA. India kept rates unchanged as expected but they are expected to start hiking again in Jan.

I never wanted to write Bailout Nation.

That only came about after Bear Stearns collapsed. McGraw Hill approached Bill Fleckenstein to do a follow up to his successful Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve, about the end of Bear.

Fleck turned them down. When the publisher asked him who else was covering this subject, he said “That’s easy, Ritholtz has been all over this story.” (so I was told).

I turned McGraw Hill down — repeatedly — but they cajoled and flattered and wheedled and promised, and eventually I relented.

I approached the subject with a blank slate, pragmatically, with no agenda. It was a problem solving exercise, and I began by looking for and at the data that led me where ever it would. Following the money is always a good tactical approach for anyone researching these sorts of events.

The data led me to numerous conclusions: I blamed Republicans, I blamed Democrats, I blamed the Federal Reserve, Congress, the ratings agencies, mortgage originators and lending banks, the biggest Wall Street firms, the SEC. I blamed US borrowers and home buyers, the RE agents, the mortgage brokers, and appraiser. I blamed the other end of the sausage factory, the collateralized debt obligation (CDO) underwriters, managers and the funds that bought them. I blamed Greenspan & Gramm, Bush & Clinton, Paulson & Bernanke & Rubin & Summers. Even mutual funds, compensation consultants and crony corporate board members come in for criticism. (This is only a partial list).

Which leads to today’s exercise in willful ignorance.

The 4 GOP members of the FCIC have a document which purports to have questions and answers on the causes of the financial crisis have abandoned their charge. They released a silly analysis that could have been written by wingnut think tanks like the AEI or Cato or others BEFORE the crisis even occurred (and indeed, there are many examples of this findable via the wayback machines of the intertubes).

The Gang-o-four absolves Wall Street and the banks, blames the government — for everything — and ignores the data that conclusively demonstrate otherwise.

To these Reality Challenged people, I pose the following questions:

1. From 2001 to 2003, Alan Greenspan took rates down to levels not seen in almost half a century, then kept them there for an unprecedentedly long period. What was the impact of ultra low interest rates on Housing, credit, the bond markets, and derivatives?

2. How significant were the Ratings Agencies (S&P, Moodys and Fitch) to the collapse? What did their AAA ratings on junk derivatives affect? What about their being paid directly by underwriters for these ratings?

3. The Commodities Futures Modernization Act of 2000 removed all Derivatives from all oversight, including reserve requirements, exchange listings, and disclosures. What effect did the CFMA have on firms such as AIG, Bear, Lehman, Citi, Bank of America?

4. Prior to 2004, Investment Houses were limited to 12-to-1 leverage by the SEC’s net capitalization rule. In 2004, the 5 largest investment banks asked for, and received, a full exemption from leverage restrictions (known as the Bear Stearns exemption) These five firms all jacked up their leverage. What impact did this increased leverage have on the crisis?

5. For seven decades, Glass Steagall separated FDIC insured depository banks from riskier investment houses. Prior to the repeal of Glass Steagall in 1998, the market had regular crashes that did not spill over into the real economy: 1966, 1970, 1974, and most telling of all, 1987. What impact did the repeal of Glass Steagall have on the banking system during the 2008-09 crash?

6. NonBank Lenders: Most of the sub-prime mortgages were made by unregulated non-bank lenders. They had a ”Lend to securitize” business model, and they sold enormous amounts of subprime loans to Wall Street for this purpose. Primarily located in California, they were also unregulated by both the Federal Reserve and the California State legislator. What was the impact of these firms?

7. These firms abdicated traditional  lending standards. They pushed option arms, interest only loans, and negative amortization mortgages, all of which defaulted in huge numbers. Was non-bank sub prime lending a major factor in the crisis?

8. The entire world had a simultaneous global housing boom and bust. US legislation such as the CRA or Fannie & Freddie only covered US housing and lenders.  How did this cause a worldwide boom and bust — even bigger than that in the US ?

9. Prior to the 2004, many States had Anti-Predatory Lending (APL) laws on their books (and lower defaults and foreclosure rates). In 2004, the Office of the Comptroller of the Currency (OCC) Federally Preempted state laws regulating mortgage credit and national banks. What was the impact of this OCC Federal Preemption ?

10. Corporate Structure: None of the Wall Street partnerships got into trouble, only the publicly traded iBanks. Partnerships have full personal liability for their losses. What was the impact of this lack of personal liability of senior management on Wall Street risk management?

I can go on and on — but the concept is rather simple: If you cannot answer these questions, or adequately explain these facts, then how on earth can you explain the credit crisis?

Today’s exercise is cognitive dissonance and ideological foolishness:

Financial Crisis Primer

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Seinfeld – The Complete Series: This is simply one of the funniest television series in TV’s history. Its $250.95, but Amazon has a one day sale price: $84.49 for 32 DVDs. That’s $2.65 per DVD . . .

Its a one day only, Amazon.com Deal of the Day — I already sent out 4 to people I know who would appreciate the gift.

• Features 32 DVDs with all 180 episodes
• More than 104 hours of amazing extras
• The Official Coffee Table Book: a 226-page bound anthology filled with photos, quotes, and trivia from every episode
• Bonus disc featuring the reunion of the cast plus Larry David on the ninth anniversary of the series finale
• Packaged in a handy collector’s case that will look great on your shelf
• Documentaries for all nine seasons
• Inside looks
• Not That There’s Anything Wrong With That (bloopers)
• In the vault (deleted scenes)
• Yada Yada Yada (commentaries)
• ”Sein-Imation”
• Notes about nothing

Update: December 17th, 2010 11:43am

Its back to $200 at Amazon

I had the pleasure of collaborating with Catherine Rampell of the NY Times on a piece that she recently posted here.  We looked at recently released Census data on median income and examined whether — or to what extent — it played a factor in the 2008 presidential election.  The answer — apparently not much — surprised us both.  I intend to have a closer look at the data, perhaps break it down by decile, and see if it looks any different under the magnifying glass than it does to the naked eye.  I will confess I’d fully expected a different outcome on the macro level.

Inflation expectations in the 10 yr TIPS today are spiking by 10 bps to 2.36%, to the highest since May 3rd and it’s the biggest one day move since Sept (Sept was on a closing basis). Looking at the 5 yr TIPS has the same message, rising 8 bps to 1.97%, the highest since also early May. The 5y5y inflation breakeven is up by 14 bps to 2.96%, a one month high. Specifically since Aug 26th, the implied inflation rate in the 10 yr TIPS is up by 79 bps while the conventional 10 yr is higher by 100 bps. Thus, the rise in interest rates has been a mix of expectations of better growth but certainly also of higher inflation and, right now unquantifiable, likely concerns over debts and deficit.