The Wisdom of Crowds

I happen to be a firm believer in the wisdom of crowds, which argues that the actions of millions of participants can deliver a far more efficient answer than any single individual. Think of ants building a colony, where each ant is senseless, but collectively can beat mainframe computers for their utility in design.

Any mathematician will tell you that a boarder sample size will always give you a a better answer. That’s why tampering with free markets is so dangerous (corn, sugar, oil, stocks).

So what were the crowds shouting at us six months ago? Take a look at the chart below for the long bond ETF (TLT) when the market started to discount the dramatic slowing of the US economy in April. This is also when a general “RISK OFF” trade started for the lead asset class, commodities, and energy.

This is back when bad news on the economy barely rated a minor piece on page 18 of the Wall Street Journal, and we individuals were blind to the opportunities. That’s when stocks (SPX), oil (USO), and precious metals (SLV) joined the “RISK OFF” trade. The (TLT) is now peaking again as we approach the end July Fed meeting, potentially putting in a double top for bonds.

So what are the crowds shouting at us now? One way or the other, the bond markets will start to discount what’s next. That will be the reflationary impact provided by a confidence boost from the end of the presidential election and a possible resolution of the “fiscal cliff” shortly thereafter. A return of a broader “RISK ON” trade will anticipate this which could last until year end. That does not auger well for the (TLT), and might even encourage me to take another run at the (TBT) trade, the bet that Treasury bond prices fall. Just thought you’d like to know.




So, Tell Us What's Next