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As the great bond bubble debate rages, at least among bond players and academics, there are other narratives that must be recognized as well. Americans are pouring money into bond funds, forsaking stocks, and sending several messages. There were two articles on the subject of investors shunning stocks over the weekend. The New York Times and LA Times chronicled the flight of small investors from stocks. Interesting points brought up include the steady decline in appetite for stocks since 2001, especially for those less than 35 years of age. I’m on the frontlines and see that deterioration for stocks, but it’s kind of odd that those with the most time to make mistakes and swing for the fences are most apprehensive.

In an effort to maybe suggest it’s not as bad as it seems, the LA Times did point out previous periods when investors took big chunks of money out of stock funds.

* 1976 to 1979 stock fund withdrawals were an average of 11.0% of all fund assets
* 1988, the year after Black Friday, stock fund withdrawals were 8.5% of all fund assets
* 2008 saw a record $234.0 billion taken out of stock funds, but it was only 3.6% of all assets

Chasing Performance & Instant Gratification

How ironic is it that we are living longer, yet we want things sooner…much sooner. The wild thing is stuff happens much faster than in the past. Andy Warhol had it right, but when he coined the phrase I think he felt people would gain “15 minutes” of fame on local levels. You know, like when the kid at the filling station rescues a cat stranded in a tree and is the toast of a small town. But, these days, Snooki (“Jersey Shore”) can become the toast of nation for doing things that would embarrass a small town and most parents anywhere. In this super-charged world where so many things move so swiftly, you could go from anonymity to the White House in three years. So, it stands to reason people want to make money, and they want to make it right now. Yet, the fast-moving ways of today have only set us back in so many ways.

There was a time when talent, developed over a period of time, was rewarded. There was a time when grace and beauty meant something. There was a time when you had to win a war, lead a state, or have a long record of congressional achievement to ascend to the most powerful job in the nation. There was also a time when strong corporate earnings were reflected in a strong stock market. Maybe the world turned upside down during the irrational exuberance period and has never fully regained equilibrium. But, the fact is Americans want instant money. Before stocks took off on a new paradigm the average holding period was three years. People held stocks an average of three years during periods of very small gains.

Granted, there wasn’t the kind of hair-rising volatility that has become the norm these days. But, one thing really driving all of this is the idea of making money right now! In the last 20-years, we’ve seen this mentality drive baseball card mania, beanie baby mania, the tech bubble, and the housing bubble. That brings us to the bond bubble. It is a bubble in my mind but probably doesn’t burst until a large swath of naysayers become believers. In the meantime, it’s all about chasing performance. Up to August 11, Americans poured $197.5 billion into bond funds while taking a net $7.0 billion out of stocks. I should note stocks didn’t engender confidence after the flash crash as positive inflows to that point became withdrawals of $24.8 billion in May (flash crash was May 6).

Abandoning America

This is a theme ignored by too many people, but one that presents a huge threat. Sure, there is rationale for investors buying stocks in companies outside the U.S., it’s another version of chasing performance. But, what else is going on here? I’ve been touting the need to have exposure around the world, but that’s not the same as saying to completely avoid American companies. Interestingly, the big shift began in 2007, when U.S. investors dumped a net $47.7 billion in domestic equities while pumping a net of $139.1 billion into funds holding international stocks. Much has been made of the fact the market is down overall for the past 10 years, but it’s hard for U.S. stocks to move higher at the rate they are being jettisoned and ignored.

People don’t forget how much money was made in the market in the 1990s, which resulted in a golden age for domestic equities. Back then, we all became believers .. and why not?

1995 S&P +37.6%
1996 S&P +23.0%
1997 S&P +33.0%
1998 S&P +28.6%
1999 S&P +21.0%
2000 S&P -9.1%

There is no denying that performance plays a role in allocation, but it’s much deeper than that, and at some point confidence in the nation could send more funds into the market. This would help U.S. stocks perform in a manner that better reflects their value.

This year, $35.8 billion net U.S. bonds exited while $28.9 billion net flowed into international funds. Since 2007, $2.89 trillion has come out of U.S. stock funds while $1.43 trillion was invested in equities outside U.S. It’s real hard to expect the stock market to move higher under that much selling, which shows a lack of faith.

I think the U.S. market is extremely undervalued, but in order for it to rebound Americans are going to have to once again believe in America.

Charles Payne is the CEO and Principal Analyst of Wall Street Strategies . This post was republished, with permission, from his company’s column, WStreet Market Commentary.

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