Dot-Coms and Bonds Aren’t So Different after All

Do you remember the late-1990s dot-com bubble?

The $1,000 stock-price targets, one-day IPO gains of over 500 percent, and companies with names like webMethods, VA Linux Systems, and Flooz.com?

When talking sock puppets and Ferrari-driving secretaries were hawking tech stocks and online brokerage businesses?

And the explosion to more than 5,100 on the Nasdaq Composite … followed by the collapse to 1,100?

It all seems so ridiculous now, like some bad financial nightmare. But it’s a fact of history — and, unfortunately, one we seem to be repeating in another asset class.

The latest case? Bonds. Because, believe it or not, dot-coms and bonds aren’t so different after all — as the numbers I’m about to share with you show.

All you have to do is “follow the money,” and you’ll see the bond bubble is even bigger than the late-’90s stock-market mania.

Approximately $1.4 trillion of ETF and mutual fund money has flowed into bonds during the past few years.

Much of Wall Street analysis is extremely complex. But if you really want to know where an asset class is going, just keep a simple adage in mind: “Follow the money.”

By that, I mean track the inflows and outflows of investor money. The more money that’s moving into an asset class, the higher its value will go. And when everyone and his sister are dog-piling in, you can be sure valuations will get ridiculous, and that the groundwork will be laid for a painful bust.

In the late 1990s, stocks were the asset du jour. My research, based on figures from the Investment Company Institute, shows that a whopping $881 billion flowed into stock mutual funds in the four years from 1997 to 2000.

Every single year saw inflows and, at the time, it was the single biggest influx of investor cash into any asset class ever. That massive tsunami of investor dollars drove dot-coms to ridiculous valuations, setting the stage for the epic crash that followed.

But guess what? It pales in comparison to the amount of cash that has poured into bond funds in the past few years.

Using the same ICI database, I found that a stunning $1.15 trillion in investor money flowed into bond funds between 2009 and 2012, plus the first four months of 2013. Not one year showed an outflow from bonds.

One could argue the bond bubble is at least 30 percent bigger than the late-1990s stock-market bubble.

So what’s coming next?

Well, for starters, understand that the money flow figures I just shared with you don’t include bond ETFs. IndexUniverse.com estimates that investors have an additional $228 billion or so socked away in U.S. fixed-income exchange-traded funds. Add the ETF and mutual fund numbers together, and you find that something like $1.4 trillion in net new money has flowed into bonds in the past few years.

A stunning $79.8 billion was pulled in June alone, according to updated Trim Tabs figures. That was roughly twice the outflows we saw in the previous worst month ever for bond funds — October 2008, the depths of the financial crisis.

We’ve only scratched the surface of the great bond-bubble unwind. We’re likely to see much larger outflows in the coming months, quarters or, if the dot-com bust is any guide, years.

So make sure you take appropriate steps to shield your personal wealth. My recent Money and Markets columns, including this one and this one, tell of many ways you can get started.

Until next time,

Mike