Fear Your Cash, Hate Your Bank

I had a light bulb moment tonight.  I was walking down the street, freezing my butt off, thinking about a conversation I’d had with someone this afternoon.  The moment had been building up for some time, working its way to the surface, revealing itself it little bits and pieces, but tonight it hit me like a rock.

We learn in school, and in practice that when the federal reserve lowers interest rates and releases money into the system, it creates an atmosphere where investment capital flows from bonds to equities.  This inherently makes sense to us, if you can’t get a high enough yield from fixed income, you move to equities, pretty simple, even a high school student understands the flow.  But understanding why it works in theory and why it happens in real life, to real people, is a little different.

I had a conversation with someone today who has a CD coming due in a few weeks, it’s paying him a 4% yield.  I almost choked when I heard that, I told him to beg the bank to keep the money and keep paying him the yield.  Of course that doesn’t work, no matter what bank you walk into these days they aren’t giving you more than 2% on your money, no matter how long you lock it up.  Savings accounts are getting .5%!!!!  I immediately internalized this academic idea, and understood that this person really has no other choice but to put his money to work, looking for yield.  The person was almost to the point that they were scared to hold the cash, I don’t blame them.  Holding cash is scary these days, even if the dollar has found an intermediate term bottom here.

Timmy and Ben have orchestrated a masterpiece, they’ve scared the shit out of everyone holding cash, forcing them back into the market, forcing them to buy equities and high yield debt.  I can’t think of anyone who’d be willing to sell equities en mass at this point, short of a catastrophic event, Dubai was a drop in the bucket.  I still hold true to my belief that this has been the most under subscribed rally of all time, and that may be why there isn’t anyone to sell.  There has been profit taking along the way for sure, I believe we’ve seen it take place over the past two months consistently.  But in order to turn the direction of this market around, the equation has to change, people have to become genuinely scared of holding equities, more scared than they are of making .5% in a savings account, it ain’t gonna happen.

If an when it does, I don’t see a mass exodus in the form of a crash.  Unlike 2008, the players holding financials know what they are getting their selves into, these guys are conviction buyers.  Everyone and their mother held a mass amount of financials and REITs into the crash, hence the crash nature of the sell off.  Financials may well bleed out, and drag the market down with them, but a quick and dirty sell off, akin to what happened in February, is out of the question in my mind.  If funds begin to rotate out of financials, they’ll throw the money around somewhere else.

Not only that, but I believe we may see the finnies lead the way over the next few weeks as the market makes its way higher.  Look towards names like $GS, $BLK, $CS, $HIG, and host of other leaders to bring us higher.  I can see rotation taking place already, out of tech/energy and into financials/retail.

I’m off to hockey, it’s brutally cold out, probably warmer in the rink.

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