MAYBE BOND GUYS AREN’T SO SMART AFTER ALL
There are certain beliefs that have always been ingrained within the fabric that makes up Wall Street. One of them is the myth of the "smart money". It is fun to think that there is always a group that gets it right, no matter the condition or circumstance. A group of men who hold the world's financial secrets inside of their Ipads or laptops. They communicate with each other on secured lines so that nobody will be able to access the secrets of their vast money making operation. They capitalize on the mistakes of the rest of us to their own benefit.
The problem with the myth of smart money is that nobody can tell you who these people are. It constantly changes based on which hedge fund manager, trader or guru of the moment is having the best performance over a 1, 3 or 5 year period. Those who were considered smart money a decade ago are almost all gone, with the exception of a few individuals. Unless there really is a secret society of market savants that know what the Dow or Crude Futures are going to do before the Dow or Crude Futures know what they are going to do, I would venture to say that smart money is really just hot money.
Which brings me to subject of this latest missive: Bonds investors are dumb. Yeah, I said it.
Let's look at this logically, from a very ABC standpoint. We have a group of investors who are controlling enormous amounts of wealth and looking for a place to allocate that wealth. They have found a hiding place in what is rumored to be the safest asset in the world: US Treasury bonds, notes and bills. They allocate their wealth into these instruments at what are historic low rates of return. They sit in this asset class through thick and thin causing yields to flat line along the bottom of a multi-month range near all-time lows. Only recently, following a near 30% rally in a competing asset class (S&P 500) since October do they realize that their investment may be suffering from a retardation in the rate of return and they decide to begin allocating away from instruments that while safe provide little in the ways of upside and abundant risk in the near term.
Does this sound like the smart money that bond investors are rumored to be? It sounds to me like a group of investors who have missed out on one of the greatest rallies in stock market history. I don't care whether you think this rally is built on the crack of a bum's ass, on a foundation of quicksand or over an alligator filled mote with floating debris of previous victims. The bottom line is that if you have been sitting in cash or even worse, short the market, you have been wrong.
Bond investors have been wrong. That doesn't make them smart, that makes them dumb. Very dumb.
