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Who Is Smarter: Credit Or Equity Investors?

Nobody saw the collapse in energy prices, and nobody certainly saw the collapse in equity and bond prices over the past 6 months. Or did they? Was there any difference in how equity vs debt investors approached what in retrospect was visible to anyone not deluding themselves with goalseeked narratives.

To answer an age-old question, namely who is smarter - credit or equity investors, and specifically, whether credit investors know something that equity investors do not, Citi examined whether credit or equity is leading the price action in the energy sector.

It found that the credit and equity markets are responding to energy headlines at the same pace, in other words under the New Paranormal, both equity and credit investors have become equally dumb.


Citigroup decided to examine the difference in stock, bond, and implied vol performance for a basket of about 140 HG and HY energy issuers.

Citi's bottom line: "it is very difficult to make the broad statement that credit is anticipating or doing something that other markets aren’t."

Then again, none of this should come as a surprise: we have often remarked how under central planning, in which the Fed is everyone's Chief Risk Officer (a development which has crushed the alpha-generation abilities of the hedge fund community) there is no longer an explicit need to discount the future in order to achieve if not price then risk discovery, since there is no risk. After all, any time there is a 9.99% correction in the S&P 500, some Fed president comes out and starts talking about QE X+1, resulting in an immediate rupture of buying in the S&P500. And if and when the selling starts, everyone is selling for dear life at the same time... and then the markets break.

Which is why one can't blame either equity or debt investors for having become, thanks to Bernanke and Yellen, dumber than a bag a hammers. If anyone is desperate for someone to blame, then the academics in charge of the Marriner Eccles building are your best bet.