Who is the Dumb Money Now?

Posted: Apr 17, 2012 12:01 AM

As the financial markets came off their lows in 2009 and made a dramatic run higher, it was assumed the retail client would return with a vengeance. 

Not right away since they had been burned by the dot-com bubble, the housing market collapse, and then the credit meltdown of 2007, but soon. 

Indeed, it was understandable that John Q. Public would be a little hesitant. 

But how could he resist a market that was being driven by free money and high-frequency trading? 

The fix was in. 

If the market showed any kind of hesitancy or decline, the central bankers would either open their checkbooks or their mouths and we’re off to the races again. 

So of course the dumb money would return. 

However, something very strange occurred. 

The dumb money did not find its way into the markets; it found its way out.  How could this be?  Didn’t they understand the “Bernanke Put,” the wealth effect, and a myriad of other strategies were being used for their benefit? 

Why didn’t the general public grasp the fact that all these actions were being implemented just to help the little guy? 

It seems that falling home prices, foreclosures, accelerating job losses, declining wages, and rising oil and food prices were all inconsequential. 

After all, the dumb money cannot afford to make a mortgage payment, but purchasing Apple at $640/sh to go to $1,000/sh was an absolute no brainer. 

The rest of the stock market would inevitably trade higher, sooner or later, the so-called smart money thought. 

It was inevitable because it had always worked that way before.  Scare the dumb money out at the bottom, run the market higher with the smart money until greed overtakes common sense then fill the airwaves with analysts, pundits, and so-called experts who make the market sound like a gift from the gods.

 “Get in,” they say.  “Get in, it’s stupid not to, and you don’t want to be stupid.” 

Yet, just as the dumb money is getting in, the so-called smart money is getting out.  In most instances for every buyer there’s a seller and smart money needs the other side, without which could be catastrophic. 

Unfortunately or fortunately depending on your perspective, this time it was different.  John Q, Public, for the most part, decided to let the bankers and the high-frequency traders play amongst themselves. 

Mattresses, tin cans, treasuries, and even bank accounts became the place to be. 

The siren song of the markets weakened many but failed to work the magic of years gone by. 

When the dust finally settles, it will be very easy to see who the dumb money was and who the smart money was.