Malt Liquidity 58
Smart Money is Dumb Money
Colloquial wisdom goes that the large size traders are the “smart money” and the retail money is the “dumb money”. While I have used the phrase myself, one really wonders if in an environment where retail is constantly engaged the phrase still applies.
Fund managers who might have once derided small-time day traders as “dumb money” are scouring social-media posts for clues about where the herd might veer next. Some 85% of hedge funds and 42% of asset managers are now tracking retail-trading message boards, according to a survey by Bloomberg Intelligence.
The clear logic behind this is that “smart money” doesn’t want to get caught on the wrong side of a “meme stock”, but that phenomenon is likely dead (or at least has moved to crypto, like I’ve theorized retail trading has). The thing is, being “dumb money” inherently has some edge. When your orders aren’t moving the market, you can afford to trade much smaller moves with much thinner books, especially now that stock trading is virtually commission free. And it turns out that these small trades all add up, as we highlighted with Hertz last year.
JPMorgan estimates that individual investors accounted for more than a third of daily trading activity several times over the past 18 months, reaching nearly 40% of shares traded on peak days.
This is a significant amount of flow! If I’m shorting a stock based on valuation and not observing what people are doing when the stock moves down, not only should I lose money, I should be out of a job. Already we can see that fund managers are shying away from shorting stocks purely on valuation - while regular people just deal with their % PnL, fund managers have to answer to investors on a quarterly basis. If their portfolios can’t get it together, they face redemptions and they’re no longer running a fund. The point being - embrace being dumb money. More often than not, dumb money is creating the opportunity to make money in the first place, sometimes at the expense of smart money. Use your sizing to your advantage and take the smaller trades that the big players can’t. Small sizing is inherently an edge, after all.
Fedcoin
The Federal Reserve on Thursday launched a review of the potential benefits and risks of issuing a U.S. digital currency, as central banks around the world experiment with the potential new form of money to keep pace with private-sector payments innovations.
I struggle to see what more a Fed-digitized dollar would do, as the dollar is pretty digitized as is. It obviously won’t replace paper currency, so what exactly is the benefit of Fedcoin? I can see repo operations and settlement times being slightly sped up, but is it really such a big deal if we wait a day for cash to settle just to make sure we have it in the right place? We might be reversing a lot more transactions if they settle instantly and are erroneous.
A Philadelphia Fed report warned that a U.S. central bank CBDC could destabilize the financial system in a crisis if people pull their money out of banks, mutual funds, stocks and other investments and plow the funds into the Fed’s ultrasafe currency.
I find it highly unlikely that a Fedcoin would be that publicly accessible. After all, paychecks and peer-to-peer transactions are already digital. What would a Fedcoin add to the situation?
Some banks—facing the prospect of competition from the Fed for deposits—have already signaled they don’t believe the central bank has the legal authority to issue a digital currency without authorization from Congress.
It would indeed be interesting if customers could hold on to deposits with the fed directly. Imagine being able to take part in a repo operation yourself, just for the sake of it!
While pseudo-eurodollars have been created in stablecoins, it doesn’t make much sense to me to internalize this ecosystem just yet. Perhaps wait and see if this alternative ecosystem has any sticking power before committing to a digital dollar?
On that note…