Sold To You, ‘Dumb’ Money

Make no mistake, it’s becoming increasingly difficult to determine who exactly is the “smart” money and who’s the “dumb” money these days.

After all, active management ceased to be able to generate any alpha as soon as QE started:

QEActive

(Goldman)

Meanwhile, passive vehicles that simply track benchmarks did great over the same period as Yellen, Draghi, and Kuroda levitated every risk asset that wasn’t tied down.

But the problem in the post-crisis world is that investors have forgotten why it is that low-cost vehicles that replicate various benchmarks work so well. These strategies’ outperformance relative to active management is attributable to the fact that central bank largesse has been the rising tide that’s lifted all benchmarked boats.

And that’s fine (I mean, it’s not fine that it creates gross misallocations of capital, etc., but it’s fine from a the perspective of anyone who’s ridden the wave since 2009), right up until passive investors forget to what they owe their outperformance. That’s when the epochal shift to passive becomes dangerous. Suddenly, hordes of retail investors start to believe they stumbled upon some magic formula eight years ago and then they kind of rewrite history to make themselves believe that they did something other than simply ride the central bank liquidity wave.

Well anyway, to the extent you’re a retail investor and you care what it is that the people who everyone used to consider “smart” are doing, do note that BofAML’s institutional clients have been selling to your “dumb”ass all year long on net:

ClientFlows

Some more granular color:

  • Institutional clients have been net sellers on a 4-week average basis since early Feb 2016.
  • Private clients have been net buyers of US equities on a 4-week average basis since mid-June 2017.
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