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A Mutual Fund Selling Panic?

Economic Trends


Why it isn't on the horizon

Wall Street's current nightmare is that the huge rush into mutual funds in recent years could suddenly turn into a reverse stampede--bringing the long bull market that began in the early 1980s to a traumatic end. For now, however, economist Martin Barnes of The Bank Credit Analyst is dubious.

To be sure, the flow of cash into domestic stock funds has already abated sharply. With mutual-fund cash reserves at a historically low level, any surge out of funds could trigger a major market sell-off. And the fact that inflows to equity funds in the first half of this year exceeded total household savings doesn't help matters.

But all of that, Barnes believes, simply suggests that a slowdown in fund purchases was more or less inevitable. The real question is whether the current risk profile of households and the psychological and economic factors influencing their investment behavior suggest the possibility of a near-term catastrophic mass liquidation of equity mutual funds. And here the evidence seems reassuring.

For one thing, Barnes oberves that despite the mutual-fund explosion, directly owned equity funds account for only 3 1/2% or so of household financial assets--and a still surprisingly low 5 1/4% when funds held indirectly, via pension plans and trusts, are included.

Other positive omens: Many fund holders are still sitting on sizable gains from recent years and are likely to downplay market turmoil as long as they are ahead of the game. The rapidly rising share of mutual-fund assets in retirement plans--and the aging of the baby boomers--suggests that purchasers increasingly view their holdings as long-term investments. And equity funds experienced only very brief periods of net redemptions during the market corrections of 1987 and 1990.

Barnes concludes that while a further market correction undoubtedly lies ahead, a massive sell-off of equity funds is likely to occur, if at all, only in the wake of a crushing bear market. And the economic developments that could spark such a bear market--such as a severe recession or major inflationary buildup--are still nowhere in sight.BY GENE KORETZReturn to top

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Pencil pushers vs. computer users

Is the wide gap that has opened between the wages of skilled and unskilled workers in the U.S. and other countries over the past 15 years mainly the result of technological change or of such factors as declining unionization, import competition from low-wage countries, and a falling minimum wage?

Noting the growing use of computers, most economists think the cause is "skill-biased" technological change. And they often cite as evidence a landmark study by economist Alan Krueger of Princeton University that found that U.S. workers using computers earn 10% to 15% more than their peers.

Now, however, economists John E. DiNardo of the University of California at Irvine and Jorn-Steffen Pischke at Massachusetts Institute of Technology have come up with intriguing results from an analysis of similar data covering German workers. Predictably, they found that computer usage increased markedly from 1979 to 1991. They also found that German workers using computers enjoy wage premiums similar to their U.S. counterparts.

It's their added findings that are surprising. Unlike the U.S. data, the German surveys included information on workers' usage of pencils, telephones, and calculators. The researchers found that German workers using such low-tech items enjoyed wage premiums almost as high as those using computers.

Such results, of course, don't mean that technological change isn't behind widening wage gaps, though they may provide ammunition to those who think its role has been exaggerated. But they do suggest that rising computer usage itself may be far from the whole story.BY GENE KORETZReturn to top

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