That questions is not rhetorical. I got no money, but I guess I am among retail investors now, being unemployed and all.
The reason I ask you how dumb you think retail investors are is that I suspect many of you think we are VERY dumb. Here is why.
You keep talking about the Great Rotation from fixed income to equities, as though it is something that looms out there in the future. Taken literally, that speculation is clearly wrong to incoherent.
All assets are owned by somebody, so beyond the effects of net issuance and market repricing, a Great Rotation is literally impossible.
Collectively, investors can’t rotate. They can only BE rotated. And I fearlessly forecast that there will be more fixed income than equities “added” to portfolios over, say, the next five years.
For example, if the equity market were to collapse, then ownership of equities would collectively go down. I have an MA in economics and a quarter century experience in business economics, which is how I know these really complicated bits.
But what about repricing? That has actually been happening. Right?
Right, it has been happening. My proxy of the equity premium over fixed income has fallen from about 9 percentage points at the depth of the financial crisis to about 1% now. My proxy is hardly precise, but is has the advantage of not being meaningless. It has enough content actually to be wrong!
So in the only sense that might possibly matter, there has already been a Great Rotation, imposed on investors, not achieved by them. Of course, investor risk tolerance is the underlying cause of this, but taken collectively, and measured ex post, investors did not collectively rotate. Rather, they GOT rotated, unavoidably, and INTO equities.
And yet people continue to use “flow data” to speak of the Great Rotation as something that looms in the future. Crazy! In aggregate the flow data must add up to net issuance, absent measurement errors. So flow data can never tell an interesting story about the aggregate.
But that brings us to how dumb you think the retail investor must be. When you refer to “flows”, what you really mean is retail flows. When retail sells to somebody else, you say — imprecisely — that there has been net selling of equities. On its face, this is a silly thing to say, particularly if equity prices have been rising, because then you are wrong ex post (as a matter of accounting) and about the ex ante (as a matter of economics).
But in fairness to you, what you really mean is that retail taken in isolation has been selling. I ought not call you dumb just because you speak imprecisely. A lot of investors with a lot more wealth than I have speak very imprecisely. They get paid for making money, not for speaking precisely.
You think the equity market rally cannot end until retail is more involved. You think retail is very stupid, the extremely weak hands.
I am not saying you are wrong. I don’t even have a Bloomberg feed, so practically speaking I am pretty darn dumb. I am just trying to figure out what you are saying. And I think I got it. But just how dumb do you think we are? If you could quantify that, then we could have a chat.