Mythical Rotations: With Equities Plunging, Where's the Money Going?

Mish

With stocks down 3% a reader wanted to know where the money is going?

Q: If the money is fleeing the stock market, bond yields down, where is the money flowing?

A: Nowhere

More precisely, the premise is invalid. Money does not and cannot flow out of equities into bonds or anything else.

Nor can there be rotation from technology stocks to value stocks.

Mythical Rotations

The question is related to the sideline case myth.

Someone must own every share 100% of the time. For every buyer there is a seller. Those selling today found eager buyers.

Money exchanged hands. But the amount of money on the sidelines in equities is the same as before. There was no "flow" out of stocks.

The same holds true for bonds.

At the individual level it is possible for a person to "raise cash" or "buy bonds" but at the aggregate level there is no flow.

Repricing Events

What is happening today (and everyday) is a mass repricing. The value changed.

It's is possible for values to change without a trade even taking place,

Housing Examples

  • In 2006 people were standing in lines around the corner to buy a condo. The next week the lines were gone and prices crashed. What happened?
  • In a subdivision of 300 homes what happens when a single person drops their price by $40,000? Poof. Every similar house in the neighborhood is instantly worth $40,000 less before a sale is even made. Mass repricings can happen with few or no transactions taking place.

Attitude Adjustment

What is frequently perceived as a "flow" is really an "attitude adjustment". With stocks, attitude changes or repricing events happen in seconds rather than weeks or months.

Repricing is much slower with houses than equities where prices change every second.

And unlike equities, money to buy houses (credit) is created out of thin air. But the repricing constructs are similar.

Musical Tribute

I happen to have an appropriate musical tribute.

Mike "Mish" Shedlock

Comments (55)
Tony Bennett
Tony Bennett

"What is happening today (and everyday) is a mass repricing. "

...

Thank you.

Many many people can not wrap their heads around this notion.

No. 1-23
Latkes
Latkes

There is only one company and that company does an IPO with 100 newly created shares at $100. Each share is 1% of the company. Everybody buys at the IPO price: $10,000 flows into the company. The market cap is $10,000.

Then I sell one share to you for $90, because nobody wants to give me more. There are no other sales. The new market cap is $9,000. Equities plunged and $1,000 has been "wiped off the market". Everybody feels poorer. The original $10,000 is still with the company.

Carl_R
Carl_R

I agree with all of the above, with the exception of one sentence: " Those selling today found eager buyers."

The price goes up when the buyers are more eager than the sellers. The price goes down when the sellers are more eager than the buyers. I would call today's buyers somewhat reluctant.

Tony Bennett
Tony Bennett

I am a long advocate that liquidity in this 'recovery' has been a mile wide and an inch deep.

In the near term I will find out whether true or not.

Sechel
Sechel

I try not to think about the catalysts but stick to the fact that stocks were over-valued for a long time

Sechel
Sechel

Good point. But the market's decided stocks are less valuable today than they were yesterday. But that doesn't mean one class of buyers is less long than they were yesterday

get
get

Sorry Mish but your logic is flawed. Money can flow out of stocks as an asset class.

Yes, there is a buyer for every share but if a seller sells shares at a lower price or any price and moves their money out of stocks and into cash or some other asset, money has 'flowed out of the stock market'.

The number of shares remains the same and investors, funds, etc. still own 100% of all shares in existence but money can still flow out of stock markets and into other asset classes.

The same would not necessarily be true of bonds if yields drop. The value increases but the amount of money flowing in or out of bonds may or may not change.

abend237-04
abend237-04

It amazes me that many perfectly intelligent people reject the fact that there is no "rotation," real or imagined, associated with the re-pricing of anything of value, including stocks and bonds.
Those compelled to think of it in those terms may find it convenient to simply visualize any delta down in price as value rotating into the crapper and being instantly annihilated.
The remaining value, post-crapper rotation, remains a standalone entity for subsequent consideration, totally independent of any and all prior crapper rotation(s).

Runner Dan
Runner Dan

"What is happening today (and everyday) is a mass repricing. The value changed."

No, the PRICE changed. The value is fixed. Pricing is supposed to reflect the value, but, unfortunately is highly malleable due to intentional manipulation.

Example: A house is wood placed on dirt with utilities hooked up and that's its value. Now, give money to everyone to buy such a thing (while patting yourself on the back for exercising such magnanimity) and the price will skyrocket. The wood didn't turn to gold; no, just the price changed. A price no longer reflective of the underlying value, but the price honest schmuck bagholders and the taxpayer will have to pay, later on!

Now just rinse and repeat the above formula for healthcare, higher education, and automobiles. Will Wall Street & Washington run out of things to game?

Stay tuned...

Cecil1
Cecil1

The S&P is up almost 1000 points in a year.

400 in the past quarter.

A 100 point drop is just minor noise.

Its telling though that so many think its a big deal.

Why do people think China basically closing for a month won't be a huge deal economically???

How is that even conceivable?? That's where the attitude adjustment needs to come.

shamrock
shamrock

Peter has $1,000 cash. Paul has $1,000 in stock. Paul sells Peter half his stock for $1,000. (The price doubled). Now Peter has $1,000 in stock and Paul has $1,000 in stock and $1,000 in cash.

In aggregate the amount of cash didn't change but the proportion of "wealth" went from 50/50 to 67/33 stocks/cash. That's what is called money flowing into stocks.

Ted R
Ted R

Money is probably going to cover long positions that are, at least for now, not go investments. Money is also going to cover margin calls. Bound to be tons of them. One day the world will finally wake up from its debt induced high and realize it is broke, bankrupt, out of money. Dow at 2000 makes sense to me. I hope it does fall to 2000. I pity Trump in November. Maybe by than he will decide to release his tax returns and we can see how much income the Donald really makes?

Casual_Observer
Casual_Observer

There are buyers and sellers but the question becomes where did they buy or sell. And where did the money go - to cash/money markets, bonds, gold, etc. In the aggregate it is all a zero sum game yes but the question is how the pie is divided at the end of a day like this.

SMF
SMF

I keep wondering how many companies will change their supplier location to avoid these types of problems in the future?

RayLopez
RayLopez

They say a broken clock is right twice a day. Well, today, and not just today, Mish is right as rain (and I dare say he's right more often than wrong, in his day job). We'll see what tomorrow brings...I'm out of the stock market (by chance, renovating an apartment building in Greece) since last fall.

Bonus trivia: "Real estate is the biggest asset market in the world. The value of residential property in America—at around $34trn—rivals the market capitalisation of all listed American companies. Throw in commercial and retail property, together worth around $16trn, and its value easily eclipses that of public firms" (Economist, Feb. 2020). Houses were "overvalued" in 2006-2007. Might the same be true of stocks today? Bubbles go 'pop'?

Zardoz
Zardoz

The money never existed. Everybody just pretended it did by using the highest price... but that only works if you're the first to sell

TimeToTest
TimeToTest

I think the world is about to figure out the difference between money and wealth.

Money is not wealth. Money is an exchange system. Assets are wealth. Money is the way of pricing assets.

You can’t print wealth. You can print money.

lol
lol

Fed will never let "markets" fall....ever,they can print infinite amounts (and they will)of Fed bucks,and continue to buy the dip...forever...until they can't!

magoomba
magoomba

Watching trillions of fiat inflation being instantly annihilated POOF! makes me SMILE.
Great post Mish, and I had forgot that song completely. I'll be doing it this weekend at the Green Woof. THANKS.

CCR
CCR

Disagree. I sold my stock and reinvested in physical gold, thereby not keeping my cash in equities. On the margin, their is less cash in the market. Now if everyone did that until there was one investor left, call that investor Buffet, then all investors will have rotated out of stocks, except Buffet.

psalm876
psalm876

Woe to the chap who has borrowed money against a repricing asset!
Woe to the chap who has provided a hedge against such assets.
Woe to the holder of derivatives during a mass repricing!

Aaron Starr
Aaron Starr

Does this analysis apply when someone is selling short or covers a short sale?

It seems to me that when one sells short that additional shares are electronically created, and when those positions are covered the shares are electronically destroyed.

WebSurfinMurf
WebSurfinMurf

The premise is false, money IS flowing from perspective on who has the hot potato on the way down. I am a pessimist in this area, so I am not even trying to catch a falling knife. I'd rather ride the knife down.


Global Economics

FEATURED
COMMUNITY