mishtalk.com / Mike “Mish” Shedlock / September 12, 2016
Reader Curtis writes “Hello Mish: Can you explain why equities would also go down in a bond market selloff? Wouldn’t equities go up if everyone is dumping their bonds and buying REIT’s, commodities, etc.? They can’t all leave it all in cash.”
Curtis’ question came in response to Red Hot Junk and Massive Bond-Market Dislocations; Equity Smash Coming Up?
Three Base Fundamentals
- It is impossible for people to dump bonds for stocks or dump stocks for bonds. For every buyer there is a seller. Someone must at all times hold every stock or bond issued. The exceptions are companies going private, bankrupt, or bought out. Bonds can be retired.
- It is impossible for money to flow into stocks or bonds except at issuance (new bonds, an IPO, or secondary offering).
- Sideline cash is a function of Fed printing and bank lending. It does not change when stocks or bonds are sold. So yes, it is impossible, in aggregate, for everyone to go to cash.
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