For the past couple years, the “Smart Money” has looked pretty dumb, but since late last year, the “Smart Money” is looking smarter than ever. Some of the most successful investors in the world have made their mark on the financial services industry simply by following the movements of the “Smart Money.” When you are done reading this week’s update, you will understand how the “Smart Money” is positioned, why they are positioned this way and how to best follow their lead.
For those unfamiliar with the “Smart Money,” they are a group of extremely wealthy investors who manage huge sums of money to their own benefit. Corporate insiders or corporate executives are also considered “Smart Money.” The “Smart Money” has access to real-time information about the global economy and global politics, often before major news events happen, which is how they can make money year after year, regardless of what is going on in the markets.
The “Smart Money” has been around since the inception of the stock market, which has been a tool for them to take money from retail investors all the way up to big-name professional money managers. The reason they are called the “Smart Money” is that they are often on the correct side of the market – always buying low and selling high. Whenever possible, investors should seek to follow the “Smart Money.”
The “Smart Money” is currently neutral on stocks with a slight bias towards the short side, as they have been selling stocks since the Presidential election and more aggressively selling stocks since January 2018. They have been buying huge amounts of U.S. Treasury bonds and volatility for the past two years and physical gold for more than five years. They are short oil and short the U.S. Dollar, as they are betting both will decline in value. It is worth noting that their positions are currently opposite the retail public and most professional money managers.
The reason the “Smart Money” is not betting on stocks going higher, which is how to interpret their positioning, is they understand how the Federal Reserve’s monetary tightening will affect asset prices. When the Fed tightens monetary policy, asset prices, including stock prices, fall. This is why stock prices, Treasury yields, home prices, and other assets fell during the past two recessions and why they will fall during the next. The only difference today is the Fed has unwound their balance sheet to 2013 levels, which suggests asset prices are headed to 2013 levels or lower.
The “Smart Money” is betting big on a huge payday when the next recession hits. They are expecting stock prices and crude oil prices to crash, which will send volatility higher and Treasury yields close to or near zero percent. They are expecting the U.S. Dollar to fall considerably, which will send physical gold skyrocketing along with agricultural commodities. If the “Smart Money” is right, and it’s likely they will be, then they will be strongly positioned to buy stocks, crude oil, and the dollar when prices are low.
Starting with U.S. Treasuries, the reason the “Smart Money” is so interested in U.S. Treasury bonds, despite persistent claims of inflation and high interest rates on the horizon by the financial media, is that the “Smart Money” knows that during periods of monetary decelerations Treasury yields fall. They also know that large issuances of government debt do not lead to higher interest rates, as many people believe, but lower interest rates. The “Smart Money” also knows that when money flows out of stocks, it usually ends up in bonds.
There are also several trillion dollars in investment strategies that can adjust out of stocks and into bonds based on volatility rising. Volatility is expressed by the movement of stock prices. When stock prices move only slightly, volatility is low and when stock prices move violently, volatility is high. Currently, most of the money allocated to these strategies is in stocks but these strategies will start buying bonds when volatility rises. When a large amount of money flows into bonds, bond prices rise.
Thinking like the “Smart Money,” who had a hand in the design in many of these investment strategies that adjust between stocks and bonds as volatility moves, the best way to make a big profit on bonds would be to drive volatility higher. To spur volatility, the “Smart Money” took their largest position in volatility a few weeks ago, as they ramp up their bets that stock prices are going to crash and in turn, flush money out of stocks and into bonds.
Trying to understand what the “Smart Money” sees is just a matter of putting the puzzle pieces together. When trying to decipher their actions, one cannot look at just stocks or bonds by themselves, but the bigger picture of how they all tie together. Once you see what the “Smart Money” sees, then it is just a matter of adjusting your portfolio to match.
The crude oil market is the most manipulated market in the entire world – just ask any long-time oil trader. The “Smart Money” has been betting that oil is going to dramatically drop in price, while most other investors are buying oil in hopes the global economy is going to continue to grow and under the guise that inflation is going to rise. Most investors do not understand that neither inflation nor economic growth can happen during a monetary deceleration.
While analysts, traders, chartists, and other opinionated experts have been calling for rising crude oil prices, I will share with you a secret about crude oil. There is only one solid leading indicator for crude oil prices that you need to know about – five-year Treasury yields. If you want to know where crude oil prices are headed, then chart them against five-year Treasury yields and you will know more than 99% of the so-called “experts” out there. Five-year Treasury yields are signaling that crude oil prices are headed lower.
The reason the “Smart Money” is betting on falling crude oil prices is that crude oil prices rise and fall with the economy. Since the “Smart Money” believes we are headed into a massive recession due to the handiwork of the Federal Reserve, then it makes sense to short crude oil. When you realize the “Smart Money” is buying U.S. Treasury bonds, which trade inversely against crude oil prices, then you have the bigger picture to why the “Smart Money” is buying bonds and selling oil.
Most investors do not understand how currencies move, but when it comes to the U.S. Dollar, it tends to rise as our economy expands and it tends to fall when our economy contracts. For more than two years, the “Smart Money” has been dumping their dollars while they amass a massive short dollar position. Since the U.S. Dollar is the world’s reserve currency and the Fed has cut the Monetary Base down to where it was in 2013, it is realistic that the dollar will fall back to where it was in 2013.
I realize many investors struggle to understand how the dollar can lose value against other currencies, but I do not think other currencies will do that well either. I believe all currencies are headed lower due to the Fed’s monetary tightening and the U.S. Dollar’s status as the world’s reserve currency. The “Smart Money” would not be so eager to dump the dollar if they thought it was going to hold its value. It also helps that the dollar is exhibiting a classic topping pattern which if true, indicates the dollar is going to fall considerably.
When you understand what is likely to happen with the dollar, then you will also understand why the “Smart Money” has been buying gold for the last five-and-a-half years, as it is poised to skyrocket. While gold does not always trade inversely to the dollar, it frequently does. Gold also acts as a safe haven during periods of deflation when investors look to park their money in an asset class that either holds its value or appreciates.
When it comes to analyzing chart patterns, the longer an asset class is in a consolidation phase, as gold has been for more than five years, the higher it tends to rise in price. After all, if the “Smart Money” owns a large portion of an asset class, they can simply mark up the price when other investors want to buy. Since American investors have a long history of investing in an asset class that is already high and rising, they will gladly pay a marked-up price to buy gold when stocks, oil, and the dollar are falling off a cliff.
Agricultural commodities also benefit from a weak dollar, which is why the “Smart Money” has been buying up soft commodities such as corn, wheat, and soybeans to name a few.
As the puzzle pieces are connected, it becomes obvious that the “Smart Money” is expecting a correction in stock prices, a huge recession, or both. They plan to take their profits from their volatility, U.S. Treasury bond, short oil, agricultural commodity, and short dollar positions to buy stocks, oil, and the dollar when they are cheap.
The challenge for investors today is being patient. The stock market is experiencing the longest topping pattern in history as the last of the “Smart Money” dumps their shares onto the unsuspecting public. For most investors, this waiting period is not fun. However, the pay off to be in sync with the “Smart Money” is huge.
When analyzing the last three major Bull markets in stocks since the early 1900s, it shows that stock prices appreciate on average, by +600% from the bottom. For most retirees, even a +100% return in retirement gives them the security and peace of mind they are looking for.
Getting in sync with the “Smart Money” is worth the sacrifice, as most investors seem content with chasing stocks up to the peak, then losing -68% of their money which is the average loss for Bear markets since the early 1900s. With 75 million Boomers headed into or already in retirement, a large investment loss will spell financial doom.
Even today investors cannot see the “Smart Money” at work. While investors seem hyper-focused on stocks right now, U.S. Treasury bonds are in a Bull market and are outperforming stocks. The news barely mentions this because the “Smart Money” is waiting for Treasury bond prices to peak before they tell the media that bonds are the place to be instead of stocks. Once the media starts talking about bonds, investors will dump their stocks to buy bonds at the peak of the bond market, just like they always do.
Fortunately, my Portfolio Shield™ strategy does follow the “Smart Money” by design since it hedges its equity positions with U.S. Treasury bonds. I am quietly testing a strategy that invests in oil and gas producing stocks while using U.S. Treasury bonds as a hedge since oil and gas producing stocks track five-year Treasury yields. I’m ninety percent confident that the strategy will work, but I’m not sure at this point how good it will be.
I have toyed with building a U.S. Dollar strategy that uses gold as a hedge, but I have not had the time to dig into the data. The one time I tested it, the hedging component did not work quite as I hoped. If I am able to develop both into working strategies, then I will have three strategies, that if combined, will follow the “Smart Money” regardless of where they go.
In the meantime, the “Smart Money” is buying U.S. Treasury bonds, which I think every investor should own, along with volatility, gold and agricultural commodities. They are selling stocks, dollars, and crude oil. Keep this in mind as you watch the markets since the “Smart Money” is always right.
And now you know exactly how to follow them – just keep an eye on the big picture and be patient. The big move is coming.
Here’s the playbook for those who are curious – First Treasury yields will move lower, just like they have been, which will pull stock prices lower and cause volatility to rise. The U.S. Dollar will likely move a little higher to squeeze corporate profits going into the next quarter, right before the dollar falls, which will trigger the beginning of a larger move in gold and agricultural commodities.
Stocks Are Looking Over the Edge of a Cliff (06/03/19 – 15 min)
Wyckoff Chart Patterns on Stocks, Bonds, and the Dollar (06/05/19 – 15 min)
Weekly Economic Update (06/07/19 – 30 min)