Bond Bubble Watch: 'Dumb Money' Wisely Buys Bonds

Today’s Financial Times offers an unconventional take on the frenzy for bonds that’s been spurred by economic uncertainty: Wall Street’s “dumb money,” also known as retail investors — people with E*Trade accounts or money in mutual funds — has actually outfoxed the “smart money.” By ignoring analyst reports that had called for healthy growth in the second half of 2010, amateur investors have by some measure beaten the pros:

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 while $152bn has flooded into US bond funds, according to EPFR Global.

The FT also points to the possibility of more hedge funds unraveling as a source of concern among Wall Street pros. Perhaps it was foreshadowing when Stanley Druckenmiller, the wildly successful manager of the Duquesne hedge fund, said that he was throwing in the towel.

Meanwhile, the FT believes, the dumb money is sitting pretty: “In spite of warnings about a bond bubble that could well come to pass should the economy finally rebound and/or inflation emerges down the line, there is little doubt that the mindset of retail investors has fundamentally changed.” Furthermore, “Preservation of capital via bonds and chasing equity performance in emerging market countries … make sense,” because of limited prospects for the U.S. stock market.

So there you have it. If the poor slobs who have always been outplayed by the fast-thinking traders on Wall Street are piling into Treasuries, it is because retail investors’ financial acumen is sharper, not because there’s a bubble in the bond market.

Bond Bubble Watch: 'Dumb Money' Wisely Buys Bonds