The news item on the front page of today's Wall Street Journal was clear and uncompromising: Small (individual) investors are fleeing stocks and stock funds and putting their money where they know it's safest - in any kind of fixed income vehicle ('Small Investors Flee Stocks: Changing Market Dynamics', p. A1).
Of course, I've been writing in many recent finance-issue blogs that "little guys" have no business whatsoever in the stock game - whether owning individual stocks, or mutual funds. The reason is that there are simply too many sophisticated ploys by which they can easily be gamed and lose their money - from market timing by big funds or others, to computer flash trading that provides instant stats on buy & sell volumes, so the flash traders can buy or sell ahead of the pack, to just plain old overcharging little guys in commissions and fees (especially done with 401ks invested in stocks, or equity mutual funds, or even 'life cycle' funds - as my wife learned in 2000 before I had her move all her money to fixed income money markets, where the earning margins are so narrow now that - in order to not break the buck, 401k companies can't extract one thin dime!)
So, how does wifey make any $$$ when the return on her investment is (from the last statment): 0.00%? She makes it via company matches to what she salts away each quarter, and that 10-15% is as good as a 10-15% return minus the risk. But the error most small investors have made, certainly in the run up to the 2008 stock meltdown, is gambling they can grab their match PLUS make 8-10% returns. They simply got too greedy for their own damned good.
And even before that meltdown, I warned in several blogs how they were playing with fire, and how the whole stock market game is a genuine pyramid scheme. The technique hardly varies: Pundits, wags and paid shills on Business channels hype the various stocks, funds or instigate a "buzz" about them - to get suckers to buy in. (“Buying opportunity” is the mantra issued to rope in millions more suckers. )
The increasing buy-in inflates the price-to -earnings ratio (P-E ratio) and produces a bubble of high profits. The "Big boys" (flash traders, hedge fund operators, large, institutional investors) get tipped 1-2 days in advance and cash out, leaving the little guys to sink. If they're lucky they may earn a few bucks. Not much. The thievery works eventually because most manjacks are conditioned to "buy and hold" rather than fold when the share price dives below a certain threshold. (Which ought to be the tip off). Thus, there are always ample marks left at the end game to be properly fleeced. Amazingly, they're always ready to play the game again, and pile their newly saved up money in.
But evidently no more. According to the article, "small investors' faith in stocks which surged in the 1990s, has collapsed since the Enron and Worldcom scandals of 2000-02. The 2007-09 financial crisis only made things worse".
The article does admit that some small investors were "tantalized" by the year long Bull rally that began in March, 2009, but the recent volatility has scared them off. Especially given the fact we in the U.S. may face a "Eurozone" crisis of our own, not to mention a double dip recession and possible depression (one stock analyst has predicted a 90% drop within five years) thanks to skinflint Repukes who refuse to approve further stimulus- especially extending jobless benefits. (3.2 million more will lose their benefits by the end of July if nothing is done)
Minus private demand and job creation, that lays the perfect storm for a major market decline as the unemployment rate shoots back up past 10% and inventories in stores gather mold from lack of "consumer attention". Meanwhile, any person with the requisite number of neurons and a functioning brain can see this is the time for more Keynesian pump up, not austerity measures or cut backs.
According to the Investment Company Institute, small investors withdrew their money from risky stocks and equity funds for three straight years, over 2007-09. This marked the first three year straight trend of withdrawals since 1979-81. What likely sent them scurrying this time around was the May 6 "flash crash" - believed triggered by flash traders' computers. In the end, it matters not which flash traders or systems or algorithms were responsible - the point is that if it happened once, it can happen again.
Adding to many small guys' justifiable decision to abandon stocks and stock funds is the fact that the Standard and Poor's 500 stock index has fallen at an annualized rate of 3% a year over the past ten years, including for dividends and accounting for inflation. In addition, in the past decade, stocks and their funds have exhibited the worst performance of nine major investment classes tracked by the investment firm Morningstar.
More encouraging signs that little guy investors are finally wising up - the article notes that many individuals appear to be losing faith in "buying on the dip" (e.g. learning to buy stocks after a decline when they are cheaper). Now, investors are selling on the dips, fearing the declines will continue - as well they might.
As I've also noted before, despite the stock humping Pollyannas (like Jim Cramer of MSNBC- who was burned before when he endorsed more stock buying before the 2008 crash), there is absolutely no genuine sign for any expectation that the DOW will continue to rise, or the S&P 500 malaise will suddenly turn into a ten year win streak. No, it won't! Just returning the country to its pre-2008 employment levels is likely to take over ten years, given the current rate of private job creation. If we hit a double dip recession and unemployment goes up to 15% (for the bogus BLS stats, which means the real rate is ~ 23%) we can expect at least twenty years before getting back to the pre-2008 "halcyon" days of putative 6% unemployment.
That means twenty years of almost zero buying power, and of millions out of work for twenty months to thirty months or longer, and needing extended jobless benefits just to stay afloat. That means no eating out at restaurants (unless maybe Mickey D's), no buying HDTVS, far less the 3D versions, and plummeting sales of computers, Ipods, Ipads, blackberrys and other gadgets. That means little or no car buying, even used cars, and likely no home purchases. That means companies will still not be able to hire, and will likely have to lay millions more off because of mounting inventories in warehouses - with no buyers.
That means, not to put too fine a point on it - a stock broker's and stock market's nightmare.
My contention is that the stock maven who forecast a 90% DOW drop may well be in that ball park when all the shit hits the fan. We will see. In the meantime, I strongly advise all little guys to stay cool, keep under control, and don't be lured into the vultures' nests, since the Maul Street vultures regard little guys as "dumb order flow" anyway....or "chickens to be plucked".
To quote one of the little guys in the WSJ article, who's now parked all his money into safe fixed income investments:
"I won't make 8% in my money. I will make 4 or 5% but the money will be there".
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