Montreal, Canada

When it comes to market-timing, central banks take the booby-prize for buying or selling assets at the absolute worst moment. And retail investors are following them to the edge of the cliff.

Ten years ago, central banks –excluding the United States and Germany – sold piles of their gold stash at around $250 to $300 an ounce. Turn the clock ahead ten years and gold prices have more than quadrupled. Also in 2000, big banks in the Persian Gulf began dumping foreign currencies for U.S. dollars – about 18 months or so before the dollar peaked.

What are central banks doing now?

Some of the world's largest and most influential central banks are aggressively buying their own debt. Coined "quantitative easing" this practice entails purchasing your own paper in order to keep yields down amid a deluge of bond issuance to finance bulging deficits. This is especially the case in the United States and the United Kingdom – home to incredibly reckless fiscal deficits. Considering it's "inflate or die" for the Western economies, buying bonds at these levels has to be regarded as one of the dumbest moves in the history of central bank policy initiatives.

At some point in the near future – barring an outright economic depression – long-term interest rates must rise. And as rates begin to rise, the long end of the yield curve in the United States and Europe will steepen as investors demand a higher risk premium for holding government paper.

This is already happening in Australia after the Reserve Bank hiked lending rates to 3.25% recently. Australia, by the way, didn't suffer a banking collapse and didn't have to raise hundreds of billions of dollars to finance deficit spending; yet the market has taken short and long-term rates sharply higher since late September resulting in a slaughter for bond investors.

One can only imagine what lies ahead for bond markets in the quantitative easing camp.

In the United States, mutual fund investors have occasionally ranked among the worst in market-timing. For example, the bulk of equity fund flows in the 1990s bull market occurred mostly in the last 24 months of that spectacular "bubble" as investors chased technology stock funds.

Yet for the first time in 2009 U.S. retail investors placed fresh capital into stock funds after selling these assets all year. U.S. stock funds have witnessed net outflows every month this year, except in August. About $14.4 billion dollars has been redeemed by U.S. investors in stock funds in 2009.

It's important to gauge what retail investors are doing because they currently hold about $3.3 trillion dollars parked in near-zero percent yielding money-market funds – representing about 30% of the U.S.'s entire stock market capitalization. That avalanche of cash is nervously sitting earning almost nothing as stocks zoom ahead since March. Still, a record $395 billion dollars has poured out of money-market funds since January.

So where are retail investors taking the plunge this year?

Bond funds. According to the Investment Company Institute, sales of U.S. bond funds hit a record $220 billion dollars through August while equity sales remain negative or in net redemption. That tells me that investors are chasing things like corporate bonds, high-yield debt and anything with a coupon attached to it to supplement a string of post-2007 stock market nausea and since late 2008 – almost zero percent interest rates on cash and T-bills.

The history of retail mutual fund investors and central banks is a sad tale. Both investor types typically sell near a low and buy close to a market top. It looks like it won't be any different with bonds going into 2010 as both investor classes are loaded to the gun-wells in fixed-income.