It’s Simple: “Buy What They Buy”

One of the things that continually amazes me in my conversations with retail investors is their overwhelming tendency to pretend as though QE flows aren’t somehow behind the inexorable rally in equities and credit.

You’d think this would be as simple as asking “well, what do you imagine happens when there’s trillions and trillions of freshly minted euros and yen chasing scarcer and scarcer assets?” and further “what do you imagine investors do in terms of moving down the quality ladder into corporate bonds and other risk assets when someone dumps trillions on the top of that ladder driving down risk-free rates?”

But as common sensical as those assessments most certainly are, the retail crowd likes to believe that it isn’t central banks driving everything higher because to admit that would be akin to admitting that every average Joe with an online brokerage account didn’t suddenly become a guru in 2008.

Well anyway, if anyone needed further evidence of what’s going on, look no further than the following chart which shows that the “taper” notwithstanding, the ECB is still buying just as many corporate bonds as they were before:

(BofAML)

And guess what? It turns out that IG has outperformed European equities lately:

(BofAML)

Imagine that, right?

So it probably shouldn’t surprise you that, as BofAML notes on Friday, “high grade funds recorded another week of inflows; the 20th in a row [and] the latest inflow has been the highest in 44 weeks and the second-highest since EPFR data started”:

(BofAML)

In case the implication here is in any way lost on you, allow BofAML to explain:

Any questions?