Investors Flee Stocks and Bonds, Stuff Cash in Mattresses

A new research report reveals that retail investors are pouring their income into bank savings and checking accounts and shunning stocks and bonds in near record numbers–despite all the Federal Reserve has done to entice them into risky assets.

The study released Friday by funds flow tracker TrimTabs says investors stuffed a whopping $889 billion into their bank accounts in the first 11 months of 2011 (complete data for December was not yet available–more than eight times more than the $109 billion that flowed into stock and bond mutual funds and ETFs.

In an interview with AdvisorOne, TrimTabs Executive Vice President David Santschi (left) says the bank flows are more than double the $335 billion 12-month average flows since 2000, and closely approach the record flow into savings and checking accounts in the 12 months ended November 2009.

The report says bank flows exceeded investment flows in every month of 2011, but peaked in July and August as the Standard & Poor’s downgrade of the U.S. credit rating and European debt crisis woes dominated economic news.

Santschi says investors’ mattress-stuffing approach to managing their finances is not being driven by poor market returns–flows have favored safe assets even when market performance was robust–but reflects demographic factors, a weak economy and fear of government manipulation.

“First of all, older baby boomers need to shift into assets that are less risky. Secondly, the economy for the typical family in Peoria isn’t that good; a lot of people are drawing down their retirement funds to pay bills,” he says.

“A third reason is because of all the market manipulation with the central banks and politicians. A lot of the reason the economy is doing better than it would be doing otherwise is because of all the intervention in the past three to four years. They keep getting bigger and bigger and more frequent. What’s the backstop after the central banks? People aren’t going to come down from Mars to lend us money,” Santschi adds.

The TrimTabs report says the most notable flows into investment securities is the surge of flows into corporate bonds, with corporate bond ETFs receiving a whopping 16.3% of assets in the past three months. “Investors are snapping up corporate bonds, perhaps as a hedge against the well-known financial problems of governments,” the report says.

Santschi says there is a lot of crunching of investment flows data, but the comparison with savings and checking accounts is unique.

“The Fed is doing almost everything it can to get people to speculate but retail investors aren’t taking the bait. If you want to know where the real money is going, it’s all going into savings vehicles. We have not seen this point made anywhere by anyone.”