Muniland “dumb money”
There has been a lot of speculation about the intensity of municipal mutual fund outflows. Investors have headed for the exit for the last 21 weeks. Does this exodus give us an accurate read on the health of the municipal securities market?
Two charts. Two views.
One is the “dumb money” view and the other is the “smart money” view. [No disrespect to anyone reading this blog.]
On Wall Street retail investors and small pension funds are known as “dumb money”. This is because these investors have less knowledge of the practices of the securities markets and less access to sophisticated information. Mutual funds are usually considered products for “dumb money”.
The Lipper data in the chart above shows the exodus from muni mutual funds has slowed and leveled off. This is a big positive for those who own muni mutual funds. It is also a positive for those who own muni securities directly because fund sales were depressing prices for everyone.
“Smart money” are those in the financial markets who understand how the game is really played and know that the appearance of things is unlikely to represent the true state of the markets. Think Goldman Sachs, or another dealer, selling collaterized debt obligations (CDOs) full of securities they knew would fail then shorting the CDOs. Unfortunately this sort of thing happens more than we know. “Smart money” also has access to much richer, faster, and deeper information about markets. Having an information edge is how profits are made.
Our second chart comes from the “smart money” side. It was provided by Markit and shows the performance of the index for municipal bond credit default swaps (MCDX). We’ll leave for another day how the MCDX is structured but it’s a “smart money” proxy for the health of the municipal market.
Both charts tell the same story. As the MCDX declines it means “smart money” believes that there is less risk of default for municipal bonds. It appears that the MCDX improved ahead of the muni mutual fund flows.
Maybe the Markit MCDX could be a leading indicator for muni fund flows. Let’s watch it a while and see if we can find correlation.
Maybe “dumb money” could learn from “smart money”. Sounds like a good plan to me.