What Do You Invest, Big Money OR Smart Money?

The big money or the other euphemism, the smart money refers to the large institutions that invest. We little guys like to know what they are doing so we may glean a clue or two for our investment portfolio. MARKET FOLLY (June 4) suggests what we can do. It does not seem hard to figure what is going on with the” Big Money” boys and girls. Many of them are leaving the US stock market and buying positions in the foreign markets, particularly the emerging markets for their stocks: BRIC (Brazil, Russia, India and China). They see the US, the UK and Europe stagnating and having limited growth potential. Perhaps these emerging markets will be decoupled from the bigger ones and do better.

However, these big money kids are looking at other areas than stocks. One like the Tiger Management guru, Julian Robertson, thinks inflation is going to roar back. The US debt level is too high. Over the next few years interest rates could again compete with those we saw in the ‘70s. Yields on bonds could to 7% or as high as 18%. Boom and bust cycles will predominate in our economy. So what to do?

These gurus say we should short the long bonds (10-20 year Treasuries) and buy the shorter term one to three year notes. You sit and collect the interest payment on your cash. This can be done using ETFs. By the way, Pimco just brought out their 1-3 years short term ETF bond fund (TUZ). It is cheap as far as expenses are concerned and they plan on bringing out others types and durations like TIPS as well. Robinson told FORTUNE in January 2008 that he “made a big bet on this…and I think I will make 20-30 times on my money.” The bet is on inflation coming back big. Rogers agrees and shorts Treasuries too but puts money in agricultural commodities which are a favorite. He also is in Japanese yen and out of the US dollar. Michael Steinhardt agrees with the avoidance of bonds as a long investment. Others agree, but place their chips differently. John Paulson and some big hedge fund drivers are buying big gold and gold mining stock allotments. Robinson doesn’t like gold. To each his own. There are many ways to skin the cat.

If you want to bet with the big boys and girls on inflation, you can short US Treasuries using ETFs from iShares Barclays 20+ year fund (TLT and others). You short it. You buy the short term ETFs holding 1-3 year Treasury notes to make money on the upswing of interest rates (like TUV and others). You can also use an ETF to trade 7-10 year bonds if you wish. Remember the warning on the double and triple leveraged and inverse funds. Trade the only on a day trade basis. The question: when will this inflation all come down??