Money stampeding out of the market

While the myth is that the stock market is a discounting machine, the reality is that it is mostly a liquidity measuring device.

What I mean by this is that the gigantic machinery of Wall Street, which includes all the people working at brokerages, as well as all of the buildings and infrastructure involved in operating a market, are not cheap, and the money to operate all of that has to come from somewhere.

It is safe to say that just keeping the machinery well-oiled requires several billions of new money each month to keep it fed at a subsistence level (for the pin-stripe crowd, I mean).

Yes, we could look at stock's p/e ratios and scrutinize annual reports, but the sad truth is that if more money is leaving the market than entering it, prices will fall.

It's very simple:

  • More sellers than buyers = prices fall
  • More buyers than sellers = prices rise

So for all the fancy analysis of stocks and earning and such, the most important measure is how much money is entering vs. leaving the market. It is in that sense that the stock market is, first and foremost, a liquidity measuring device.

First, I have been watching the mutual fund money flows pretty carefully, because the constant flow of "retail" money from ordinary citizens (much of this via automatic 401k contributions) is the lifeblood of the industry.

Up through August it has been, well, disappointing, with up months and down months, but adding up to a net outflow for the year of more than $67 billion. This outflow is the primary reason there are so many articles in the mainstream media cajoling and sometimes berating people into "investing for the long haul" and "not making the unfortunate mistake of selling at the lows."



The reason, for such articles, I believe, has little to do with helping people make wise investment decisions and everything to do with helping out Wall Street by keeping retail money in the markets to provide essential nutrition to the money machine. Otherwise we would expect to see the counterpoint to these articles advising people to sell when new highs are reached, but I can't recall ever reading any such article in a mainstream media source.

At any rate, as bad as the August data was, the early read on the September data is even worse.

Funds saw $104.4 bln outflows in September
BOSTON, Oct. 17, 2008 (Reuters) — Investors pulled out a record $104.4 billion from U.S. mutual funds in September as they were spooked by the credit crisis and turmoil in financial markets, research firm Lipper Inc said on Friday.

"We have never seen (monthly) outflow figures like this," said Jeff Tjornehoj, senior research analyst at Lipper. The data did not include flows of exchange-traded funds.

No wonder they trotted out Warren Buffet to calm the crowds - this is a disaster for the investment community. Now, I have to point out that my two data points are a bit of "apples to oranges," because the first data applies to stock mutual funds only and the second to ALL mutual funds, of which stocks are only a part. But the trend is worth noting.

And then there was this data that caught my eye:

Hedge funds' assets off $210 billion in third quarter
SAN FRANCISCO (MarketWatch) -- Hedge funds saw a record $210 billion drop in assets under management during the third quarter as investors redeemed an unprecedented amount of money from the industry after poor performance, according to a survey released Friday.

Net capital redemptions totaled $31 billion in the quarter, also a record, the firm added. Withdrawals came during a period of dismal performance for the funds.

Funds of hedge funds, which invest in a range of outside managers, also saw assets under management fall by $78 billion as investors withdrew $13.3 billion in the third quarter, Hedge Fund Research said.

When a retail investor pulls money from a mutual fund, that is what we call "unleveraged money." A dollar pulled out represents a dollar that was in the market (for the most part). But hedge fund money? That is a different beast.

Hedge fund money is typically leveraged up, so the $31 billion withdrawn means that more than that was withdrawn from the the asset investment markets. How much more? Hard to say, since hedge funds use such widely varying levels of leverage, ranging from 1.2x to more than 30x.

Bottom line: Money is fleeing the markets, and this means we are not yet near a bottom. I am expecting more downside over the coming months.


This is a companion discussion topic for the original entry at


Reading this raises the question for me, is this not likely to lead to more downside over the next coming years?

Whales cannot survive without plankton. If the retail investor pays down debt (or indeed, is not able to pay down debt), is potentially out of a job if things get really bad or is in a home that is in negative equity, the desire and ability to save may be academic for the next few years.

As a rsult, surely the money going into funds, of whatever type is going to become and remain curtailed? Unless the uber-wealthy take advantage of the situation and pile in?

And who was the weasel who shouted "FIRE" in the theater? Aw I won’t keep you in suspense: Paulson.

Well with 18 million less people to keep the Ponzi scheme up over the next 15 years what do people expect. Also its hard to keep putting money in when it takes everything you earn and more just to get by. That is if you aren’t recently unemployed and living off your 401K.

Read this article:

When the US did not bail out Lehman, it broke the Fed Funds rate/3 month LIBOR connection. The US is no longer in control of its money.

The 17 years of Yen-carry trades are unwinding and there is nothing the US can do to stop it.

Our currency is based on debt. When a country no longer honors its debt, its money becomes worthless.

So now the 800 pound gorilla question. What are the nine banks doing with $250 billion soon-to-be-worthless dollars? My best guess is they are doing what Lehman did before it went belly up. They are buying stock on the open market trying to prop it up.

I really hope I am wrong.


I understand that you are working on Section 20: What Should I Do?..coming soon.

Rather than wait until you have the whole Section 20 completed is it possible you could break it up into smaller sections like you did in Section 17? As things are changing very rapidly in the financial world I would like to have some of your suggestions sooner rather than later. Thx.


I’ll be interested to read Section 20 too, but I understand there’s still a lot up in the air. For now, I’m cutting unnecessary expenses and I’ve reversed my traditional assumption that the market is always going to rise on average over the long term. I’m one of those who pulled money out of the market (ahead of the recent drops) and I paid off a lot of debt - thereby saving a bunch of money 100% risk free. That was the first and the last time I ever buy a car with financing!

Yet just yesterday I got two emails pushing cheap credit, one from my mortgage broker offering ARMs and one from the car dealer offering 0% financing. It hasn’t sunk in yet we need to completely change our way of thinking.

or Chapter 20: Get down on your knees and pray

or Chapter 20: Gold doesn’t taste as good as I thought it would

or just make it multichoice like our future used to be.

Sorry Chris and Erik - no dissrespect intended. What can you say?

Oooops again


I don’t blame Chris for puzzling over Ch. 20. From what I read, other savvy folks are split 50-50 over whether we are heading for deflation or inflation in the short term, though inflation in the long term seems apparent. But…how long is the long term? The U.S. has kept all of the plates spinning in the air for years, with the help of other countries. They can’t bail now or their assets become worthless. Maybe they will slow their rate of buying but that still could be a long time. In the short term, those of us who have recently procrastinated buying gold thank our lucky stars…we would have been screwed.

The long term path may be clear but the short term path holds opportunity cost dangers, as well as not having some fat deflated dollars to survive that period.




Just a note of appreciation for the site, the Crash Course, which is superb, and the blog entries.

It seems to me that all the destruction of credit/debt is short term deflationary, as it destroys fungible "money." But, it also seems that the only recourse the central banks will have is to try to inflate through various avenues that equate to "printing." So, deflation short term, reversing quickly to inflation. Or, a total system collapse, as an alternate.

Again, thanks for the site!

I’m a newbie here but it seems to me that the bail outs happening both inside and outside the US are designed to buy time and perhaps to slow the inevitable collapse. I can see some good things coming out of all this so long as you’re up for a bit of Fight Club philosophy…

Plan strategies to profit from both inflation and deflation - there will be both, you will only experience either when you make a transaction.

Things that are ‘must have’ in your lifestyle and physically limited in supply will eventually inflate, ‘nice to haves’ will deflate.

Also, whatever the average inflation/deflation rate is you probably won’t experience it, few people are actually average.

Depending on your age and circumstances you shouild be able to tell whether you are more vunerable to inflation or deflation.

Think … carefully! At your age what is long term for you? What are your long term plans?

Do different - maybe radically different!

[quote=xeroid]Plan strategies to profit from both inflation and deflation - there will be both, you will only experience either when you make a transaction.
Good point. I often chuckle when I see people say "I sure am glad I didn’t buy gold and silver", because we’re headed for deflation in the short-term. In the same paragraph, they also state their belief that deflation will be followed by inflation eventually.
My question for those folks is, why are you glad you didn’t buy gold and silver? Were you planning on selling it at its low during deflation? Obviously nobody who owns gold or silver is going to sell it during a deflationary collapse - unless they’re in dire straits and they have to. They’re holding it as a store of value.
Are you certain that you’ll be able to acquire some at that magic point in time - just when deflation is ending and inflation is about to take off? If gold and silver are this difficult to find in our current market, do you think there will be an abundant supply when inflation kicks in?

It is still hard to find gold or silver, even with the ‘market’ prices coming down. I bought some gold on ebay, and thought I would buy more with the prices going down. The prices have actually gone up on ebay. is selling silver at about $13.50/ounce unless you buy a lot. I can get uncirculated coins and 24kt gold from my suppliers, holler if you want prices… they mark it up a little as do I - but it is there! We have a little jewelery business.

Hi, Chris,

I’ve tried to understand the meaning of existence of 750 trillion to 1 Quadrillon of OTC derivatives in the financial systems without avail. Can you please explain to us what the consequences of the collapse of these derivatives are in terms of lives of the ordinary people in this country within next 6 - 12 months? It seems like the collapse of this ponzi scheme is playing out fast…

I really appreciate the clarity of your explanations in all of your materials.



Presentmoment (Sun, 10/19/2008 - 16:23 #1)

Don’t know what Chris’s advice will be, but in my opinion if you want to get a good psychological, emotional idea of what to plan for – what to expect when an economy collapses – so you can at the very least be psychologically kind of prepared… you should read Dmitry Orlov’s article, Surviving Peak Oil & Economic Collapse: Post-Soviet Lessons for a Post-American Century

He has allot of excellent insights – in my opinion.

There is a copy at, in a three part series; all on one page at


Chris should just continue the crash course indefinitely in installments. Nobody knows for sure what’s going on or how to deal with it. I don’t want to pressure Dr Martenson into thinking he has to have a definite answer. He’s done a lot of working opening everyone’s eyes and minds already.

Thanks JMCSwan - printing it as I write.

My own favourite is a bit briefer and can be found here

Happy end of the world as we knew it


"And those that create out of the haulicaust of their inheritance, anything more than a convenient self-made tomb, shall be known as survivors"


Oh yes, Dale’s Eating Fossil Fuels, is a DEFINITE MUST! I got a couple of copies up too. It is really important info for people to read.

And as Chris says, it certainly is an exciting time to be alive, and if the adage of every crisis is an opportunity, then indeed ‘humanity’ (hmmm slight exagerration of ego, me thinks for us two-legged neanderthals) have before us an opportunity of immense proportions… a multitude of options, not too mention emotions.

So, Don, I can only agree and hope we make the best of finding an empty seat on one of the very few Titanic life-rafts and if not; well we may as well live every day to the fullest…

Frankly I’ve had such an interesting life, you wouldn’t believe me if I told you the stuff that happened in my life, so I don’t particularly mind if I am one of those culled… only one thing that I didn’t do, and that wasn’t my decision… and perhaps the other individual shall change thier mind, and perhaps not… we shall see.

But same to you Don… Can you say Thelma and Louise ? :wink: