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Equity Funds Finally Make a Stand

One must be careful when weighing what to make of a trend that has just two weeks behind it, especially when the countertrend has several months of history.

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But hand it to the equity funds: For the second week in a row they registered net inflows, something that hasn’t happened since before the second-half rally of 2010 began.

Equity mutual funds saw net gains of $1.1 billion for the week ending Oct. 20, piggybacking on a positive week of Oct. 13 where inflows totaled $3.1 billion, according to Lipper data. (Earlier this week I reported on how the market had been able to rally, for the first time in more than 25 years, by more than 10 percent in a three-month period without a single week of positive equity inflows.)

But don’t weep for the bonds: Taxables still saw inflows of $2.1 billion this week, and $4.5 billion the week before.

I got to thinking about this trend because the good folks in our London office filed a piece this morning with the headline, “Money is ‘Pouring’ Out of Government Bonds.”

Suffice to say, it is important to note that the fellow quoted in this piece, Royce Tostrams, technical analyst at Tostrams Groep, was speaking very specifically about Euroland bondsand not Greenbackland bonds.

The US government bond market is still tracking very nicely, thank you.

But what if this is the start of a trend?

Far be it for us to be alarmist, but if investors start bailing on bonds that’s going to be bad news for Uncle Sam, and to those for whom he stands as proxy, namely the good old American taxpayer.

Investors shunning government bonds will drive up rates and make things significantly more expensive when issuing all these trillions of debt to which we’ve grown so fond.

And that could be the beginning of…shhhhh…the I-word (inflation).

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