Kate Welling of ref="http://welling.weedenco.com/" >welling@weedon has just conducted another of her top-class interviews with Michael Belkin. Belkin is the author of The Belkin Report that I used to read regularly, but have had difficulty in obtaining over the past two years or so. He has a huge reputation among institutional investors and got his calls right more often than not when I still had access to his material.

Friend Barry Ritholtz (The Big Picture) provides some insight into Belkin’s latest thinking with the following excerpts from Welling’s report:

“Where my views are probably different to what some of the higher profile names are currently saying is that I’m not pointing to the equity market now as the source of a bubble or of malinvestment, in Austrian terms.

“If not the stock market, where are you pointing?

“At the bond market. Specifically, since the March 20, 2009 turning point in the equities market, if you look at the AMG weekly data on inflows into ETFs and mutual funds, bond fund flows have been positive every week and have averaged $4 billion a week. There hasn’t been a single down-week. But meanwhile, for equity funds, there’s been a completely different pattern. They’ve been down two weeks, up one week, then down, up four weeks, down five weeks - and the average inflow is only $500 million a week.

“Just barely positive?

“Yes, at last count only $24 billion had gone into all kinds of equity funds over this entire recovery rally, versus $178 billion into bond funds. I’ve been looking at this for quite a while and sort of scratching my head and wondering what was going on. But finally it just occurred to me. They’re buying bonds. It’s rather obvious. I think what has happened is that the public in previous cycles bought emerging-market funds or internet stocks or whatever, when the Fed would lower interest rates to an artificially low level, thereby penalizing people on their savings. So right now, for instance, I have friends who inherited a lot of money and I’m an informal advisor to them, not a paid advisor. They keep asking me, what do I do now? They were investing in CDs, which were parceled out to a lot of different banks on which they were making 2, 3, 4%. But now they’re maturing and the banks are offering, like, nothing. So they are asking, what do we do, what do we do? They need the yield; they need income; they don’t want to lose the nominal principal. What to do? What to do?”

“Belkin’s time series regression analysis is not only data driven, but he is also aware of historical predecessors. I find his argument that bonds are at greater risk than stocks to be very counter-intuitive, contrary - and compelling,” added Ritholtz.

Source: Barry Ritholz, The Big Picture, February 1, 2010.

Did you enjoy this post? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.