As I mentioned on the show yesterday morning, I came across some research from the Investment Company Institute, a company that, among other things, compiles statistics and research on investments and retirement plans. According to their research, people sold about $30 billion in stock mutual funds last week alone.
That’s a lot of money, but what’s more important than how much was sold is who was doing the selling. It wasn’t portfolio managers or hedge funds or any other insiders. It was the retail public. People have become so afraid of another 2008-type situation that they’re stepping away from the markets.
ICI also reported that in the first half of August, insiders were net buyers of $700 billion of their own stock. As the general public increasingly moved toward the sidelines, guess who was in there buying the market? Smart money—the people who saw value and an opportunity to back up the truck.
I don’t want you to be part of that retail group that’s selling its future. I want you to be part of the group that goes out and identifies value. Every now and then you have to take a leap of faith, because sitting in cash or treasury notes is not the answer. We don’t need to hold our breath until Friday’s Jackson Hole conference to know that inflation is the new reality. To paraphrase my guest, Keith Fitz-Gerald of Money Map Press, take advantage of the fact that everyone’s still on the other side of the boat. Invest in something that can shield you from inflation.
Keith and I also discussed the European Union crisis at length this morning, and he brought up something that really struck me and I definitely wanted to reiterate here on the blog. There are some 7,000 banks in the U.S.—the sheer number helps spread out risk. But in Europe, there are only 20 or so big financial institutions, all from the different countries that comprise the EU. That kind of concentration of positions makes it very difficult to properly diversify risk.
That’s why he’s paying such close attention to credit default swaps on European banks. Credit default swaps are, very basically, insurance on a country’s debt. But Wall Street has sold this insurance to third parties—something like selling you a fire policy on your neighbor’s house: you now have an incentive to burn it down. The big trading firms are so powerful that they’re intentionally destroying countries. And with bailouts practically inevitable, they’ve got nothing to lose.
Wonderful observation, and something I hadn’t thought of before. Thanks to Keith for the wonderful Socratic dialog.