What's the Smart Money Say?

I tend to think that fixed income is the smarter money whereas stocks is much more emotional. Just hang out with some equity people for a bit and you'll hear them say things like "tight-run ship, great company, yahdi-yahda, and it feels like they could just completely blow the competition away!" a) they often say that "it feels" a certain way and b) they often use these superlatives like: "it's an absolute monster" or "massive outperformance" or "they're just getting hammered/hosed/crushed/obliterated/decimated/burried." Maybe equity people are just a little more prone to the dramatic and a little less prone tto rational thought than fixed income people. And that makes sense b/c, you know, returns are bigger (on the up and the down) in equities than in bonds. Sexier. More action. Break out the champagne. Jump off a building. And what do you have to do in equities? You do some discounted cash flow, you get a target price, that's it. Not exactly rocket science. In bonds you actually have to have a good quantitative grasp on what interest rates will be, what inflation will be, how sudden changes will be and when they will occur, and you have to get your head around something like the convexity of a bond. Of course I oversimplify...

Aaaaanyways: I tend to think that the fixed income market has a bit better grasp on where the economy as a whole is headed than the stock market. So yesterday the Fed announced HUGE new liquidity measures. I mean, they explicitly said they'd use "quantitative easing" to pay for loans and for assets they are taking off the balance sheet of financial institutions and other firms. "Quantitative easing" is the technical word for "printing money." The stock market rallied on that (see graph.)

The bond market, however, did jack. The TED spread remains elevated at 209 (essentially where it came to after the Fed started throwing the kitchen sink at the "frozen" credit markets:

And high yield bond spreads as well as BBB bond spreads didn't react at all (white and green lines below):

(Interestingly, 10 year high-yield spreads did come in, not sure why.)

So all I'm saying is, the stock market is all into the latest measures that the Fed is taking. The bond market doesn't seem to agree. I'm putting my (figurative) money with the latter.