Bond-FundsAccording to BlackRock, Inc. (NYSE/BLK), the biggest U.S. money manager by assets, $70.1 billion was funneled into exchange-traded funds (ETFs) in the first quarter of this year. What’s even more surprising is that 93% of all the inflows were in the U.S. equities market funds. (Source: Wall Street Journal, April 2, 2013.)

Morningstar, Inc. (NASDAQ/MORN), an investment research firm, states that 352 mutual funds that are classified as bond funds had exposure to the equities market as of the end of March 2013. This number is up from 312 at the end of 2012 and 283 in the first quarter of 2012. (Source: Wall Street Journal, May 1, 2013.)

Take Loomis Sayles Strategic Income fund, for example. This $15.0-billion fund is shifting its gears toward stocks, as its allocations to the equities market soared from five percent in mid-2011 to more than 19% now. According to the fund, it can allocate up to 35% of its assets into the equities market in preferred stocks and dividend-paying common shares. (Source: Loomis, Sayles & Company, L.P. web site, last accessed May 3, 2013.)

On top of this, and as it has been documented in these pages before, central banks are investing in the equities market, too.

It is no longer a hidden fact: investors, like central banks, and bond funds are rushing toward the equities market, because investment returns elsewhere are very low. These investors are taking a higher risk for an average rate of return.

The Dow Jones Industrial Average rose 11% in the first quarter—the best start to a year since 1998—and the S&P 500 soared 10%.

All of this makes me more cynical toward the rise in the key stock indices and the equities market. It reminds me of nothing but the quotation from Sir John Templeton that states bull markets die on euphoria.

When you have bond funds and the most conservative investors, like the central banks, investing in the equities market, it’s a problem.

There is more and more money flowing into the stock market—money that shouldn’t be there. I believe under all this is a bear market that has done a superb job of convincing investors the stock market is a safe place to invest again. A new bubble has been created.

Michael’s Personal Notes:

In its latest meeting minutes, the Federal Reserve said it will continue with quantitative easing, creating $85.0 billion in new money monthly, in order to bring economic growth to the U.S. economy. (Source: Federal Reserve, May 1, 2013.)

The Federal Reserve, once again, didn’t provide any clear indication as to when it will end the quantitative easing; rather, the central bank stated it will continue to do the same “until the outlook for the labor market has improved substantially in context of price stability.” (Source: Ibid.)

The Federal Reserve has already increased its balance sheet to over $3.0 trillion, and if it continues its quantitative easing at this pace, its balance sheet will balloon even more, possibly even reaching $4.0 trillion—or even $5.0 trillion—in a very short period of time.

This is troublesome news, dear reader. The more money created out of thin air via quantitative easing, the more the fundamentals of the reserve currency, the U.S. dollar, deteriorate.

As I have mentioned in these pages before, we only need to look at the Japanese economy to see quantitative easing is not a viable option for us.

The Japanese currency has plummeted since the Bank of Japan revved up its quantitative easing. Just look at the chart below of the Japanese yen compared to other major currencies in the global economy; it seems as if the currency has fallen off a cliff. If we keep up with all this money printing, the U.S. dollar may eventually look the same!

Chart courtesy of

A falling U.S. dollar will drag down the buying power of Americans even further, as they are already struggling to keep up with their expenses. What we could purchase for $1.00 in the year 2000 now costs us $1.35. (Source: Bureau of Labor Statistics, last accessed May 3, 2013.)

I have yet to see any real economic growth in the U.S. economy as it was promised when quantitative easing was first introduced after the financial crisis. Quantitative easing is working to make big bank balance sheets strong and to create inflation, but I don’t see any economic growth being created by it.

I am looking at the Japanese economy as the best example of a country failing with long-term quantitative easing and what might be next for the U.S. economy and the dollar due to all this newly created money.

What He Said:

“Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don’t know. Big (cap) stocks, they just continue going up. Wall Street bonuses are at record levels. Popular consumer goods are flying off the shelves. Designer clothes, fast and expensive cars, restaurants with one-hour waits… people are spending in America today at an unbelievable clip. 1932, 1933…who remembers those years? The depression of the 1930s was the biggest bust of modern history. 2005, 2006, 2007…welcome to the biggest boom of the same period. When will it all end? Soon, my dear reader. Soon.” Michael Lombardi in Profit Confidential, February 7, 2007. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.