Smart Money” and the Real Financial Market

Former US Treasury Secretary Robert Rubin is reported to have asked “what’s the market done?’ almost daily. When the answer came in terms of how the “Dow Jones Industrial Average” performed, he would respond, “no, not that market, the real market, the bond market.” Secretary Rubin knew that the US economy is incredibly large. And he knew that for it to work a ton of money is needed. His job was managing the distribution of money and that is why he wanted to know about the bond market. It is in the bond market that the price for the use of money is determined. In the last thirty five years that price has been higher than 18%, and lower than 1%. Today it is plus or minus 1%, and it has a direct bearing on how the economy is doing and what returns invested capital can acheive. As a specific investment bonds are misunderstood by average savers. Stocks are known to go up and to go down based on recent purchases. How do bonds go up and down? Inversely to interest rates: as rates go down bond values go up, and vice versa. Here is what sets “smart money” apart from the rest of us. Bond mutual funds are bought in 401ks by millions of investors because they are seen as safe, consistent, and a source of income. “Smart Money” doesn’t buy them because it knows better. A bond mutual fund can lose large amounts of value when interest rates rise. They do not pay dividends, so there is no hedge to risk if bonds decline. Bonds themselves (not bond mutual funds), however, pay interest, and if they are held to maturity, pay back principal. This is the land of “smart Money”, the place where principal has collateral.