Confirming "Dumb Money's" Resilience To The Wall Street Siren Song

Tyler Durden's picture

When Zero Hedge first admonished our readers in June of 2009 to stay away from markets in light of a general deterioration in market structure, which included a regulator-authorized form of structural frontrunning in the form Flash trading (not to be confused with the imminently following Flash crash), an unprecedented mismatch between stock valuations and economic reality, and Wall Street continued attempts to reflate the ponzi merely for the sake of proving that it can be done, we never expected that retail would take to our warning with the ensuing solemnity. Yet with 16 consecutive outflows from domestic equity mutual funds, shut downs by legendary hedge fund managers such as Druckenmiller and Pellegrini (and many more Tiger derivative blows up to be disclosed soon, once the full extent of the carnage of the flattening of the steepener bandwagon trade is fully appreciated), virtually everyone is asking themselves how did Wall Street not only get it all so wrong, but how on earth is the primary business of the post-facelift Wall Street, which is no longer investment banking, but merely trading (with or without flow-facilitated prop frontrunning) going to sustain the recent record headcount levels (hint: it won't, and many more banks will soon let go thousands of additional staffers as key revenue sources have now disappeared forever), and most importantly, why is this time different? Why did the "dumb money" for the first time ever, not bite on the Wall Street siren song lure of an economic "rebound", but instead has hunkered down, proving that not only is Wall Street nothing more than a pure-play enabler of the ponzi regime's status quo, but that all those who were warning that the economy is far more dire than Wall Street represents, were proven right. These same individuals (and bloggers), first validated in predicting the downward direction of the economy, will see their pessimistic forecasts about stocks validated next. Yet while that happens, all those who still somehow find this a surprising development, are now left proposing hypothesis as to what went wrong. Such as the following piece by the Financial Times.

Deep into the dog days of August, a rather unpleasant scenario is unfolding among the ranks of professional investors on Wall Street.

Against the backdrop of unusually low equity trading volumes, even for a typically sleepy August, continued strong flows out of equities into bonds, and high-profile hedge funds shutting down, a bitter truth is dawning for investment professionals.

Namely, that the ranks of retail investors, commonly derided as “dumb money” by the Street, have made the right call on US equity and bond markets in 2010.

As recently as July, much of Wall Street was awash with bullish research notes for the second half of 2010 calling for higher stocks and warning about low government bond yields.

Such bullish research is a staple of the industry and, flush with their bonuses from 2009, the Street simply thought the massive stimulus from the Federal Reserve and US government would translate into a sustainable recovery this year.

But since the eruption of the financial crisis in 2008, retail investors, like Odysseus, have stuffed their ears with wax so as to silence the allure of such sirens.

Like Odysseus, the successful return to the Ithaca of market efficiency (i.e., the purging of Wall Street's siren songs of capital destruction), will ultimately require continued resistance to the temptation of a relapse into the Ponzi. Yet we are rather confident that having gone far beyond merely a contrarian indicator, the recent divergence of fund flows out of equities and into money markets (to a small extent, and a 180 degree shift from patterns established earlier in the year), but mostly in fixed income, the case is now that with the demographic shift accelerating to the point where few if any are hoping for "double baggers" (and are willing to allocate capital to trades which have worse odds than playing blackjack in Las Vegas), the attempt to front run the dumb money has failed. What this means is that the proverbial bagholder is now Wall Street itself, namely the various prop trading desks, and assorted HFT non-overnight holding strategies (and yes, there are thousands of these). Thus instead of slowly, calmly and methodically selling to the last money in, Wall Street is now stuck in a Catch 22 of how much higher beyond fair value can the "Pig Farmers" (as defined by David Rosenberg) push stocks, before defection becomes the normative game theory mode, and the market crashes to unseen before levels, especially since prevalent short selling levels are now at near record lows, eliminating the natural buffer to a downside acceleration.

More from the FT:

Beyond the two big equity bear markets of the past decade, it’s no surprise that Main Street has soured on equities thanks to the Madoff scandal and the bail-out of Wall Street banks, followed by high bonuses paid out to bankers last year, all crowned by May’s “flash crash”.

While retail investors ran from equities and piled record amounts of their cash into money market funds in 2008, what really hurts the Street is their failure to forget and come back.

The common punchline on Wall Street is that once the markets have rallied for a while, you wait for the “dumb money” to rush in for a slice of the action. Then the “smart money” sells out and sit backs as retail investors get hosed when the market falters.

Except this year, the dumb money has resolutely stayed away and kept buying bonds and foreign equities, leaving the professionals twisting in the wind. So far in 2010, $50.2bn has been pulled from US equity funds on top of the $74.6bn in outflows during 2009, while $152bn has flooded into US bond funds, according to EPFR Global.

Such flows aptly illustrate Wall Street’s sour mood. Talk to people in prime brokerage at big banks and they mutter darkly that many hedge funds are struggling to make money and risk big redemptions later this year. The recent decision by Stanley Druckenmiller to wind down his Duquesne hedge fund is the type of shot across the bow that people in the industry could well look back upon as a foreboding omen.

Of course, this is verbatim what we have been warning about for months and months and months. And just as we have warned about the economy tanking, which is now confirmed by even the biggest permabulls on Wall Street (and we note with a deliberate dose of gloating the even Morgan Stanley's "economists" have now stepped away from the Kool Aid punchbowl to their unquantifiable chagrin...and derision), the next leg down is stocks themselves, first as multiples collapse, and second, as all those corporate decisions to conserve cash (absent a few idiotic decisions by corp fin departments ostensibly populated by crystal meth snorting monkeys such as those of HP and Dell), are finally seen for what they have been all along - prudent capital management in light of the next major downleg in the economy (and, yes, a major rise in corporation taxation) seen all too clearly by corporate Treasurers and CFOs, are all effectuated.

As for the winner out of this?

For many on Wall Street, the pain has been minimal, which perhaps
underpins their usually bullish take on stocks and why they think the
economy is currently experiencing a soft patch. The reality for Main
Street, however, has been and remains a lot harsher. Unless the economy
starts picking up speed, housing stabilises and unemployment abates,
Wall Street stands to learn that the “dumb money” has a much better
handle on the outlook for the economy and stocks.

The dumb money also knows one other thing - that the Fed has now run out of all options to restimulate the economy (and prepare for the Fed's escalating appeal of the Pittman decision to the Supreme Court in the week before mid-term elections to take on a very contentious gravity from a political angle), absent for the nuclear option. That option, as Bernanke knows all too well, will do nothing to reflate leverage-heavy assets, and will merely shoot critical commodities like wheat, oil, cocoa (as recently demonstrated by deranged speculation) into the stratosphere, finally ending the lie of the Core-CPI "disinflation." Wall Street has yet to realize just how ahead of it the "dumb money" finally is - we have long said that Americans, especially those of financial decision-making relevance, are nowhere near as dumb as Wall Street would like to believe, and they just need the right pointers now and then.

Zero Hedge will continue to provide such "pointers", and will be more than happy to read additional validation as this particular FT article, which also confirms that unlike even moderately wise people, who are all too aware that they know nothing at all, Wall Street, being at the other end of this spectrum, believes it knows everything, when the reality is precisely the opposite. And now that the majority has finally been awakened to Wall Street's simplistic ploy to control capital markets, and the general economy, with nothing else up its sleeve than a confidence game, it will be time to finally pay for decades of outright lies to those whose interests Wall Street should have held in highest regard all these years.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Double down's picture

Sounds like a new chapter has been started. 


Cistercian's picture

Epic is right!As in Epic Forecast Fail...oddly, retards like me without a PHD in economics saw this one coming...largely due to the efforts of Tyler.


  Another ZH mega win.

THE 4th Quadrant's picture

Far from retarded my friend.

One must wonder what other monkeywerks the 33 Liberty St krew is up to in order to keep things propped up and well lubricated.

If your organization is at risk of failure and you are committed to the game can you silently get put on life support? How many cloaked ventilators are currently in use?

Cistercian's picture

 Re ventilators: there is no way to tell...the opaqueness of the big players is amazing.Between the Fed discount window and the HFT 3 card monte game, not to mention actual money laundering activities who knows?

  But one thing is growing more obvious by the day, and that is the inability to keep appearances propped up.The Ultra Fail is coming, and when it does I hope the ramifications for the super villains that caused it are dire...because it is going to be painful indeed for Main St.

Thomas's picture

I have been saying this to friends for several years now: people--everybody--knows what happened and who did it. You can walk into a 7-11 and find the checkout person has a negative opinion of banks. How is that? Because the banks have them over a barrel. The banks are charging them $3 instead of 50 cents to use the cash machine. The banks suck and it doesn't take a rocket surgeon to figure that out.

B9K9's picture

Double Down "Sounds like a new chapter has been started."

B9K9 "The conceit of every generation is that their experiences are unique."

Shill bidding is the second oldest con after pig-in-a-poke (straight-up product fraud). It can be dated back to some of the earliest historical written records circa 2500 BC.

Tyler (wittily) writes hundreds of words, yet a simple word check reveals no mention of shill bidding. There is an opportunity to directly warn millions of people about what is occurring on the exchanges, and whose eyes may glaze over at the mention of HFT, etc, but would instantly recognize the term "shilling bidding" from EBay auction experiences.

Simplify & codify (relate) the message of fraud in order to reach a larger audience.

Double down's picture


Thanks buddy I am still a little ESL

I know of the act but not its name.  

thesapein's picture

I kind of think Tyler refrains from using the term "shill" so as not to presume to know the intentions of celebrities, spokespersons, talking heads, etc. He tends to focus on what's wrong with what they're saying without also having to prove that they are lying. But we're all adults here, right, so he leaves some implications for us to ponder and discuss. We can make up our minds about who is actually a shill and who is just wrong. 

Timmay-Jimmay's picture

Know what thesapein? I use to think you were a dick (actully, I still do), but I am beginning to like you.

midtowng's picture

I think the dumb money has been drug, kicking and screaming, into making the right decisions. All those "stupid" bloggers that have been warning about the condition of the economy are being vindicated.

Spitzer's picture

Yeah but they jumped into the bond bubble.

Thats a dumb move, considering we are on the cusp of a currency crisis.


Imminent Crucible's picture

It will turn out to be a dumb move, if they stay in the pot too long.

But the Fed's current approach of using primary dealers as proxies to cloak its hidden QE operations makes it possible for Treasury yields to converge on zero before the scam unravels.

Some of them may be smart enough to get out of bonds near the top.  And while current Treasury yields are certainly irrational, "the markets can remain irrational longer......"

thesapein's picture

I hate to agree. I didn't see it coming that this bubble was going to get so big before popping, but those who did and have now left the building are probably happy with themselves. As for anyone still buying bonds, probably not the dumb (smart) money, no?

Thomas's picture

Are you really sure that is the dumb money in the bond bubble? I am not. I think the folks who are fed up may be in money markets, leaving the bond bubble for hot money, sovereign states, and completely incompetent permatards at the central banks. I could be wrong, but I am waiting to see evidence of retailer investors in the bond market.

thesapein's picture

Kind of depends on when it topped and who has been buying since, no? Still, yeah, we all seem to be looking at the usual suspects for this dead man walking blockbuster.

Johnny Bravo's picture

I agree with Thomas.

If you could get money for essentially free, and invest in relatively safe bonds, does it matter what the yield is?

Bond Yields > Free Money.

I wouldn't be so sure that it's just "dumb money" in bonds.

thesapein's picture

I'll gladly agree with you here if you agree with me in our discussion below.

Johnny Bravo's picture

My opinions are not up for negotiation!  LOL.

Let me check out what you wrote though.  You're a reasonably intelligent fellow.  Perhaps I agree with you anyway.

DavidPierre's picture

"The Fed has plenty of tools" ... quote from a guest on CNBC yesterday morning... did not catch this guest's name but I will refer to him as "Mr. Tool".

Mr. Tool went on to say "the Fed can print, and they will". He seemed to be perfectly comfortable with this concept and none of the anchors even batted an eye and just accepted his answer!  The Fed has many MANY "tools" and none of them work, they just collect paychecks each month! It truly is a world gone mad when supposed professionals are given airtime on "propaganda TV" and spout absolute monetary bullshit.

Next thing you know our President will make a national speech where he tells us "he's figured it out", all we need to do is print money and everything will be fixed!

This printed money can be sent out "inversely" to income, for instance, if you make lots of money you will only get a check for $1Million and if you have no income at all your check will be $10 Million. This would kill 2 birds with one stone, there would be no more poverty and the coveted "wealth re distribution" would be complete.

I'm actually shocked that no one has thought of this yet, it is such an easy "program" to implement and EVERYONE could be millionaires! Just like George Bush back in 2002 or '03 on the aircraft carrier, Pres. Obama could have a big banner behind him during this announcement that says "MISSION ACCOMPLISHED!"

It's getting even better now because Mr. Tool was followed by a portfolio manager that says the new concept of 100 year bonds is a great idea and he is a big buyer.

The yield is higher and the volatility is the same as 30 yr. certificates of confiscation!

Since this guy is a money manger he must be smart, right?

If he says 100 year bonds are a good idea they must be and I think I should "get some of that!". I mean what is there to worry about? Inflation is low, this smart man says that these bonds aren't that volatile and I'm not earning one thin dime on my Gold and Silver so why not give 'er a shot?

OK, I'm back, had to go turn in my metal and got me some of those "100 year bonds".

I really am optimistic now, we can all look forward to big fat checks in the mail (they will even arrive on time US Postal Service), we can ALL quit our jobs, be millionaires and live in Utopia!

I know, someone has to work right, why not just give an open invitation to any and all "illegal alien wannbees" and tell them they are now legal, labor drought solved!

OK, sorry for the sarcastic rant but the world is so whacked out I have to wonder whether logic even has value anymore. The stock market is up and I'm thinking to myself maybe stock buyers aren't so stupid after all, maybe people are buying because they know the Dollar will devalue to the depths of hell?

Nah, people today aren't that smart and are probably just watching CNBC with their fingers on the buy button!

Seriously, I really am now wondering whether we don't get a huge stock market rally in anticipation of a collapsing Dollar. We very well could see the stock market double while the Dollar drops 75% leaving only a 50% drop in real purchasing power. One thing I am absolutely sure of is a stock market massacre and crash in terms of Gold because we obviously have nothing other than "tools" running the show at the Fed and in Washington.

In the words of The Mogambo Guru..."we're freakin' doomed!". Hold your Gold assets and don't let loose of even 1 ounce nor share, you will be amazed at how far these assets will take you down the road. 


xPat's picture

So the so-called "dumb money" can now see through Wall Street, but is still falling for the misinformation circulated by the charaltans at GATA? What a world we live in...


thesapein's picture

They are the good guys.

ZH is to X-Men


GATA is to The Avengers.

thesapein's picture

After learning about GATA, if you're an honest type, you'll also learn to see better who the bad guys are when they attack GATA.

xPAT = villian

tmosley's picture

You either beleive in GATA, or the Fed.  Or you don't beleive in civilization at all.

GATA is by far the more likely of the three choices.

Johnny Bravo's picture

I know, right?

"We got out of the manipulated world of stocks to get into the (self-admittedly) manipulated precious metals market."

You sure showed them.  LOL.

Now, as banks sell their gold to you, you think that they're going to allow the "dumb money" to make money?  LOL is all I can say.

thermroc's picture

"as banks sell their gold to you"

Banks don't sell their gold, their existence depends on it. Read some history.

Johnny Bravo's picture

Which banks don't sell gold?

We've all heard about the Bank of England selling gold at its lows.

Individual banks also sell gold.  Gold is only worth it to them as long as it serves a particular purpose.  All purposes are temporary in a changing market.

The retail investor means nothing to these people.

Has anybody even thought about where all the physical gold that the retail investor is buying is even coming from?
My guess is that other owners are unloading to them while the getting's good.

Johnny Bravo's picture

What a haggardly fellow.  I've never even seen your stupid video.

StateofFraud's picture


The dog is gold. The chain bullion banks. The chain will fail first.

obelisks's picture

" "The Fed has plenty of tools"

WOW ! it sounds so much like Leo Kolivakis !!

Eally Ucked's picture

Of course FED got plenty of tools, that's good they admit it. Main is Ben and there are  a lot of smaller ones used for mop-ups or spreading shit around so nobody sees it, just general color of things are getting a bit more brownish but everybody gets used to that tint.

StychoKiller's picture

Back when the DOW started dropping from its all-time high (around 14,000 or so), I bailed out when the DOW reached 9,500.  When the DOW finally started going up again, I bought back in at around 7,000.  All was well and good until May6, 2010.  I started investigating just what was going on when I stumbled onto this site.  I bailed completely out of the market again and I DO NOT intend to return until some severe systemic changes are made, as well as seeing hundreds of "perp walks" of those responsible -- until then, it's Gold and Silver, beans, bullets and TP!

Freewheelin Franklin's picture

Forget gold, buy goats...and chickens. And lots of Mason jars.

doggings's picture

"The Fed has plenty of tools


... quote from a guest on CNBC yesterday morning... did not catch this guest's name but I will refer to him as "Mr. Tool".

Mr. Tool went on to say "the Fed can print, and they will".


He seemed to be perfectly comfortable with this concept and none of the anchors even batted an eye and just accepted his answer!

well, I think to an extent this is correct, Mr Tool just left the last part of the sentence off.

It should read..

"The Fed still has plenty of tools who still believe that it can do whatever it wants, including print it's way out of this with no ill effects or catastrophic collapses.."

that's actually a correct statement now, isnt it? :)

Troy Ounce's picture

Tools are still packed in plastic: never been used.

100% sure all those phD's are now reading together the manuals, poor souls.

Noah Vail's picture

I am eager to see how long the "printing" goes on after China, et. al. threaten to dump their Treasuries. Hahaha. Any ideas on what they'll do after that event, hmmmm?

I will be rolling on the floor laughing my ass off. Checkmate and AMF.

Freewheelin Franklin's picture

China is still in the process of building up its Navy. They won't make a move, at least, until they are finished.

thesapein's picture

But, really, China is already primed for war, much like we were before WWII, by having their large manufacturing base. Remember how the US was ready for Pearl Harbor by looking like we weren't ready? How long did it take to rebuild and surpass our previous forces, even after looking like we were wiped out? China has superior manufacturing, and, worse, they have been providing for our military needs by exporting rare and precious materials and are already beginning to put an end to that.

China, as a creditor nation, also has the means to fund a war. The US is already over expanded its military well beyond its means. It's doubtful that China would lend us more money while in a war with China.

thesapein's picture

They've already been dumping our dump. They're just not doing it all at once because, well, that might be counterproductive if they're trying to balance between getting paid back and moving to a hard currency. At least, that's the impression I get.

Jim Willie recently said something about China picking up the pace of dumping UST's... Anybody know if that's true?

Pope Clement's picture

Thanks Tyler for the continuing 'edumacation' and you too Murph for getting me into PMs in the $300 range.

Sicilian Stallion's picture

Its funny that I thought of that "plan" when I was like 5 years old.  I remember asking my dad why the government couldn't just give everyone $1 million so we could all be rich.

I don't remember his answer but he knew that you can't create wealth by printing money.  I would guess he understood economics better that Weimar Ben, Tiny Tim and the rest of the current "dream team".

B9K9's picture

I would guess he (my father) understood economics better that Weimar Ben, Tiny Tim and the rest of the current "dream team".

Please, I beg of you, desist in sustaining and/or advancing the meme that the power-elite did not, nor do they presently, understand the ramifications of their decisions.

Of course, a regular Joe (such as your father) could readily explain the logical fallacy of such a plan. So too could Mish, Denninger and anyone else either not directly profiting nor paid to lie.

The beauty of a lie of this magnitude is that it is so large, so utterly outrageous, that normal, rational people are stunned into inaction by its sheer audacity.

Shit, when Goebbels was directing his guidelines regarding the Big Lie, even he may have thought there were limits. Ditto Orwell; 1984 was primarily an exaggeration to make a point. Who knew that it would actually become reality?

SwapThis's picture

everyone, including the power-elite, perhaps especially the power-elite because of there extreme dilusions of grandure, are capable of miscalculations and especially human error.  As Prof Quigley reminded us in 'The Anglo-American Empire' & 'Tragedy & Hope', these are often very flawed individuals who's arrogance and lust for power can cause the best plans to need alteration, sometimes midstream.  There is no reason to believe they are infallable, in their plans, there actions or their understanding.   

Alexandre Stavisky's picture

Season of Sorrow   Sire of Sorrow

Since life was breathed into the form of man, he has had to contend against the thorns and noxious weeds of Uneden.  And thereby, provide for his daily and future physical needs.  Organized and clever beings have cobbled the coordinated efforts of sons of men into a kind of form, an imperfect monetary system.  They have come to make material representation of the virtue/vice productions of any man and every man.  Gold, paper money, sovereign bonds, equities, pay stubs, scrips, oral IOUs--all are claims upon the virtues made manifest of men who toil by the sweat of their brow to make exchange with their fellow laborers of the fruits of this garden.

That this system of simple exchange of Virtue has been seized by evildoers and conspiratorial thieves is a tragedy.  But virtue and vice must coexist to know the gap which exists between them.  Never will the sweet be so sweet except by draining the bitterest of dregs from the bitterest of cups.

The present economic tumult finds the subtlest, wilest, connivingest on top, while the real benefactor has been tossed to the very bottom in the eternal wrestling.  Truly the tall trees have fallen.  But all the energy of this new "bottom" is to obtain.  To obtain whatever condensation of virtue can be had.  The present "innovators" and all those who discretely plunder through every human institution, the same as the gutter thief, attempt to procure that which they cannot obtain by blessing of heaven or exertion of muscle and mind.  This is why the nation's pulse (gov't) and purse (treasury) are the complete aim of malefactors.

To possess the robe, wand, library, and august gestures of the sorceror does not elevate the apprentice to the same station.

Having contravened the eternal laws, the punishment must be suffered.  Keynes or his counterparts are the merest of men. They seek to obtain all the fruits of wickedness without having to bear the equivalent punishment. Balance sheet accountant embezzling liars!  These worst of men (that deserve not to be even called men) wish to concentrate societal virtue into a bowl from which only they may drink while leaving the onerous burdens of bitter labour to their "lessors".  Love of money is the root of all evil.  See the money throughout the world...and money which thieves cannot break in to deprive.  Beauty, inheritance, abundance, personal virtue, decorum, peaceableness, contentment, charity, perfect proportion. "What man by taking thought may add a cubit to his stature?"  And then there is money (especially USD) which has so many doors by which depredation, chicanery, duplicity, artifice may enter.

Better is the man who at his greatest feasts, places a platter of unleaven bread and bitter herbs, to remind him of his unworthiness, his remind him of the great gap he must traverse to be numbered in the wisest of stars of heaven.

Better yet, when building his paltry domicile upon this poor, poor bit of dust in a wide universe; Man should do so with a foundation of the Seven Sorrows upon which should form Seven Pillars to then contain a screening framework to make some escape from the rain, dews, bitter cold of arbitrary nature.

Tell all the truth,

But tell it slant,

Success in circuit lies,

To great for our infirm conceit,

The truth's superb surprise,

As light'ning to children eased,

By explanation kind,

So truth must dazzle gradually,

Lest everyman go blind.


faustian bargain's picture

Zerohedge is a Tipping Point hub.

Miss Expectations's picture

Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.