Funding Problem

See the people walking down the street
Fall in line just watching all their feet
They don't know where they wanna go
But they're walking in time
--The Go Go's

Some commentators are waxing bullish about charts like these suggesting upturns in equity mutual fund inflows and high levels of cash in investment accounts. Perhaps they're correct but consider the other side of the trade.

Exhibit 1 indicates that the trend of money flows out equity mutual funds is perhaps reversing. However, mutual fund flows have been on a steady decline since 2004--well before the recent stock market meltdown. Perhaps substitute products, such as ETFs, have provided durable alternatives to buying a mutual fund. Moreover, observe the lopsided inflow pattern over the past 20 yrs. Is it likely that we'll revert to the mean of the past two decades? Or might secular change yield a decade or more of lower mutual fund inflows or even (gasp!) persistent outflows?

Exhibit 2 indicates high amounts of retail money market funds relative to stock market value. Hoofy argues that this is bullish, since investors will have to put this cash to work, thus goosing stock prices higher. Boo might counter that, currently, cash stashed in money market accounts is not 'free and clear'--it is borrowed money (home equity loans, credit card loans, etc). In a deflationary environment, collective risk appetite may not drive much of this cash into stocks. Instead it will be used to retire debt.