Why Having Kids Is Not An Unambiguous Investment In Happiness - Yet More Reasons To Ignore Economists' Pleas To Make Babies

The face of a whiny infant screaming his head off.   And a major reason why many of us chose to never have these creatures.

There is a good reason why most physical scientists consider the majority of economists to be blockheads and simpletons: they don't use rational or testable models. One of the most irritating aspects of market economics posits that population growth is essential for future economics growth. The classic example of this simpleton proposition was expressed several years ago in a Wall Street Journal column (p. A1, 'Population's Flagging Growth Undermines Global Economy')

The author, Greg Ip, writing:

"Previous generations fretted about the world having too many people. Today's problem is too few. This reflects two long-established trends: lengthening lifespans and declining fertility.

Simply put, companies are running out of workers, customers or both. In either case economic growth suffers"


Which is total, unadulterated balderdash which no serious rational person should buy.  And indeed I lampooned it in a number of posts, indicating that in the OECD nations right now there are over 200 million unemployed workers who could do many of the jobs going unfilled.  Hell, in this country alone it appears that over 8 million willing workers over 65 years of age are finding a dearth of positions, opportunities to be hired e.g.

'Just Unbearable.' Booming Job Market Can't Fill the Retirement Shortfall

https://www.wsj.com/.../even-a-booming-job-market-cant-fill-retirement-shortfall-for-ol...

 

As noted in the above cited piece:

"For older Americans, the last few years of work can be a vital chance to patch up thin savings or pay down debt to ease their way into retirement. Many aren’t getting that opportunity.."


So clearly it is merely PR and propaganda to claim there aren't enough workers and we need to generate more babies.   How can any thinking person swallow this rubbish?    Especially given that adding more workers by birthing them is  a solution we simply cannot afford.  See, e.g.
http://brane-space.blogspot.com/2015/04/earth-day-alert-biggest-problem-remains.html

There has been no lack of economic pushback on falling fertility in the U.S. ever since Ip's infamous piece appeared.  Thankfully, at least now many women are thinking two or three times before spawning more rugrats.  And merely because some pointy-headed wonk ensconced in an ivory tower Rightist think tank says they must.  Besides, more people today - one hopes - think long and hard before they have children, given the psychological as well as financial costs.

According to a recent NY Times piece on modern parenting:

"Parenthood in the United States has become much more demanding than it used to be. Over just a couple of generations, parents have greatly increased the amount of time, attention and money they put into raising children. Mothers who juggle jobs outside the home spend just as much time tending their children as stay-at-home mothers did in the 1970s.   The amount of money parents spent on children, which used to peak when they were in high school, is now highest when they are under 6 and over 18 and into their mid-20s."

Even before the modern era, parenting was not something I relished and fortunately, neither did Janice.  Hence we chose a child-free life.   This, despite the RC Church's edict that artificial birth  control is a big 'no-no'  and "mortal sin". All that codswallop did is provide one more reason to finally leave the Church by the age of twenty-nine.  

Of course, money is the other aspect which too few consider before they jump into parenting, given the costs  to raise ONE kid through college is roughly a quarter million smackeroos.  Let me put it this way: had we opted 40  years ago to have five offspring like my parents did , e.g.

We'd never have been able to save up enough to afford a decent retirement, including the ability to travel, work on our own creative projects and donate to multiple charitable organizations.  How did my parents do it?  Well, because in the 1950s, early 60s, the economy enabled a degree of support and the bank savings rate (4-5%) allowed families to save without risking money in the stock market.  Let's also record the high marginal tax rate,  targeting the richest,  was 91 percent  - not the 38.6% today.

Back to kids as a not so great investment.  According to former WSJ columnist Jonathan Clements ('Are Kids A Good Investment ?  Will They Make You Happier?', Market Watch, Dec, 13)there are still far too many Americans who don't think carefully enough before taking the parenthood step.  As he frames it:

"Prospective parents are convinced children will enrich their lives. The data suggest otherwise."

What evidence might that be?   He notes that many—perhaps most—U.S. parents spend more on their children than they end up saving for their own retirement. The Department of Agriculture estimates it costs almost $234,000 for a middle-class family to raise a child through age 17. If the kid goes on to an in-state university, that would add another $85,000 to the tab.  We are now talking about more than 300 grand per kid. Who today can afford that, even for two  kids, far less five?

Much of the problem is only seen in retrospect after a kind of "buyer's remorse"  sets in.  Thus, parents belatedly confronted with evidence that their choice wasn’t necessarily the right one rebel and resist using assorted rationalizations.  According to Clements:

"I see this with retirees who have already claimed Social Security—and are now told they would have been better off delaying. I see it with folks who lease cars or buy overly large homes. And I see it with parents who are shown the sorry data on children and happiness."


Clements says he first came across such data a dozen years ago. He references an  academic paper which charted satisfaction with life, as reported by parents who were approaching their first child’s birth. As the happy day got nearer, reported life satisfaction climbed ever higher—only to come crashing down in the years after the birth. By the time the kids were age 3 or 4, both mothers and fathers were reporting life satisfaction that was significantly below their long-term baseline. Well, think of it!  Faced with a screeching little rugrat such as the one shown, keeping you up all hours of the night, and making endless demands on your time and resources. Selfish? Of course!  That's what many of us knew about ourselves beforehand - we the child-free - which is why we opted not to have kids despite all the yammering of well-meaning outsiders.  (I still recall the Headmistress of Janice's Queen's College telling both of us at a cocktail party that we owed it to Barbados to have children to compensate for all the progeny generated by lower intellects.  Yes, seriously!)

I mean, let's be honest here, it isn't all about just sparing the planet more millions of resource-consuming American kids.  Another huge reason is self-interest and a stark honesty (and self-knowledge)  that includes knowing you are not a child person.  Clements goes on:

“It seems parental happiness has a lot to do with the amount of work and aggravation involved.  Indeed, countless studies suggest children either don’t have much impact on happiness or the effect is somewhat negative. One study even found that women rated child care 16th out of 19 daily activities, putting it just above commuting and just below housework.

The least happy parents seem to be those who have young children, are young themselves, are raising kids alone or have children with problems."

Again, this isn't rocket science or plasma physics.  Young children (2 - 5 yrs.)  are almost universally a pain in the ass.  Walking- talking Donald Trumps in miniature, grabbing, demanding, sassing and worse- crapping nonstop making endless messes to clean up - often requiring tons of disposable diapers to be added to already over strained landfills.

The most interesting Clements' observation of all, and one worth noting in the USA's individualist capitalist culture:

"That brings me to an intriguing study that looked at 22 countries. It found wide disparities in happiness: Parents in Portugal, Hungary, Spain and five other countries were happier than nonparents in those countries. But in the other 14 nations, nonparents were happier. The bad news: The U.S. sat at the bottom of this ranking, just below Ireland and Greece.

What drove differences in national happiness? The study’s authors conclude that the results were heavily influenced by government policies. Parents were happier in those countries with family-friendly laws that mandated such things as paid family leave, subsidized child care, and guaranteed paid sick and vacation days."

In other words, the democratic socialist nations like Denmark, Norway and Sweden assured parents the highest probability of being content because they knew they had state support and benefits - which the stingy U.S. refuses to offer.  Opting to confer most tax cut benefits on the wealthiest. I mean, given this is it any wonder young adults are choosing to have fewer or no children?  Why should they when the government inveighs against their own interests?

In this sick sort of society what are the options for those intent on still undertaking parenthood?  Clements' suggested strategy is to have plenty of moola saved up, say to afford expensive child care (almost as much as private school tuition) and also make sure to live close to "family" and hope they will provide support when needed. Well, good luck!

In the end, let's be clear the condition of lower U.S. fertility is a direct result of the U.S. cowboy capitalist system which demands citizens go it alone, stand on their own. What the child free citizens are saying is: "Fuck you! If you aren't going to support us we aren't gonna have kids to become your future precious consumers!"

In other words, why should they "invest" in having children if the government refuses to invest in their kids as essential future citizens, or consumers?  Can't anyone see that when the Neolibs demand higher birth rates - for whatever reason - they are insisting on having their cake and eating it? They want their precious Pareto-based economic system of endless consumption supported indefinitely by the "Proles", but they don't want to raise the Proles' wages (or social benefits via taxes)  to assist that endeavor. 

The Perils Of Remaining In An Overheated Stock Market

As the DOW passed the magic  22,000 mark,  millions of stock investors began salivating at the prospect of  continued humongous gains - filling their 401ks or IRAs.  But most are barely aware of the treacherous territory they've entered.  Most had never  seen or read Nate Silver's book, The Signal and the Noise- Why So Many Predictions Fail But Some Don’t  - especially where he warned (p. 347):

"Of the eight times in which the S&P 500 has increased at a rate much faster than its historical average over a 5-year period , five cases were followed by a severe and notorious crash, such as the Great Depression and the Black Monday crash of 1987”.

Interestingly, two of the largest stock market dives have followed two of the biggest bubbles: the first of 37.85 percent and on the heels of the bubble that formed from Jan. 14, 2000 to Oct. 9, 2002, and the second of 58.78 percent that formed (mainly due to the housing bubble) from Oct. 9, 2007 to March 9, 2009.

One indicator of a bubble, of course, is the rate of stock  share increase. But another is the rate of inflation related to the trailing P/E ratio.  This is the classic price to earnings which looks at the current price divided by the company's total earnings the past 12 months. .  This is perhaps the most common metric used by investors to value publicly traded companies. While it does not account for growth rates by default, it represents a simple metric that can be compared over long periods of time. Lofty P/E multiples can predict market declines when growth starts to slow down, since investors can no longer justify the higher valuations.

Well, we are in that territory now. For reference, three years ago (in September)  the P/E ratio was about 18.5. Today the P/E for stock in the S& P 500 index is just over 24.  That is, investors are paying $24 for each $1 in corporate earnings. Just before the 2008 crash and 2009 financial meltdown it hit 27.   

What about those profits? Back in September, 2014, the profits for all the companies in the S & P 500 index were about $106 a share.  Currently, we're in the midst of second quarter earnings reports for 2017 and the estimate is that the same S & P 500 profits will be coming in at about $105 a share. That means profits haven't grown at all in three years - and yet the price of the S & P 500 is up about 23 % over the same period.

What gives?   What gives is that there is no genuine support for the share increases or higher PE ratio.  In other words, people are basically being hosed. Let's also note the long term average pE ratio is about 16 and markets tend to revert to that average at some point.

The other aspect is there is no really solid backing to justify the spiking DOW or sizzling S & P 500. The corporate earnings, profits simply don't support it. This is also why there exists a divergence between what we ae seeing with the stock market, and the low growth and wage stagnation plaguing Main Street.

But we were warned of this before. As the authors (William Wolman, Anne Colamosca)  of The Great 401 k Hoax have noted, it is living in a fool's paradise to believe that if the companies you invested in are only increasing their profits at 2-3% a year, that you can be earning 7% or even 10%. In fact, what one has then is an aberration in which the gains are out of whack with reality. (This is one reason why real stock investors demand dividends, and refuse to forego them so fund companies etc. can use the money to do "stock buybacks" thereby artificially inflating the share price!)

Why is this perilous? Some might ask. Consider: though you may be exuberant now to be getting near 10 percent returns, what if the market suddenly reverts back to the more standard 7 percent?  Doing the math it means you would need to save 70 percent more money to get to the same place as you have with the 10 percent returns.   Translated to income saved to pay for mutual funds or stocks, this means if you are taking out 5 percent now - say $150 a month - you will need to shell out $255 in the 7 percent return environment.  Obviously, if the returns go even lower - say to 5 percent or less- the savings burden will increase as well.

Simply put, the notion that you can save less because the market will do most of the heavy lifting is a fool's errand and paradigm. It won't. In fact, you will be in a hell of a lot worse position if the market tanks - say in a 20 percent correction. To get down to even more severe (e.g. crash) cases, a stock – or mutual fund- that drops in share price from $20 to $10 has suffered a 50% loss. But for that $10 stock or fund share price to return to $20  (breakeven point) it must gain 100%, or double.  Those near retirement need to ask themselves if they can sustain such a loss, and to multiple stocks or funds.

The other phantom contributing to the inflated PE ratio accompanied by low corporate profits, is stock buybacks which I've written about before.  The question every investor ought to ask is: WHY should Company X or Y have to buy back its own stock to create an artificial rise in share price if your company is genuinely doing well? It makes no sense. If Company X or Y is going to use any extra money for anything it ought to be for paying dividends, not stock buybacks!

Columnist Jonathan Clements in his piece in the WSJ three years ago wrote:

"Many companies were big buyers of their own stock before the 2007-09 market decline, only to scuttle their buyback programs during the market crash. In recent years with share prices up sharply they have begun to voraciously buy back."

And indeed they are doing it now more than ever.  Why not, because they are then reaping the bounty of their own high share prices? Buy backs also make management's stock options more valuable - so what better way to compensate the Street's honchos?  Strangely, all this has selectively blinded investors to the lack of dividends. As Robert Arnott, quoted by Clements, stated:

"Dividends are reliable, You cut them at your own peril - but you can cut a buyback and hardly anyone notices."

There's one more reason U.S. stocks are soaring which people ought to be aware of: According to the WSJ European investors are buying them up at a rate 25- 30 % greater than historical averages. You may cheer that our friends across the pond are helping us to this extent, but wait. What if they suddenly pull their money out, redeem all those shares, for whatever reason? 

It's time to think now more carefully than ever just where you're putting your money and why.

The Rigged Market System Redux: Stock Buybacks At Epidemic Levels and Slowing Growth

Greg Ip's recent (Jan. 29) WSJ expose of business buybacks of its own shares merits commendation for exposing an underlying source of continued slow growth, and system gaming. As he noted in his piece:

"Companies are splashing out staggering sums to buy each other's or their own stock while maintaining a tight grip on capital expansion."

He points to a scandalous increase in stock buybacks by U.S. firms since 2009. adding that it attests to a "troubling malaise in the global economy. Nearly seven years into an expansion risk aversion remains pervasive."

Ip adds that if this continues the world is in for "an era of growing worker dissatisfaction and political upheaval".

Well, think about it. Sitting on over $1.4 trillion in capital and plowing most into stock buybacks, to inflate P/E ratios, why the hell would these business buzzards invest in more plant, more jobs? They wouldn't, hence reinforcing the premise of William Wolman and Anne Colamosca in their 1997 work, 'The Judas Economy: The Triumph of Capital And The Betrayal of Work'.  The authors made a point of noting the modern Neoliberal state had no interest in human labor, paying it properly, or re-investing. It is only invested in its own aggrandizement and proliferation at the expense of citizens.

Thus, stock buybacks represent yet another symptom of the rigged economy which the Neoliberal elitists are doing their damndest to try to defend against Sen. Sanders' pointed attacks. The latest canard being he is a "single issue" candidate, missing the point that Wall Street Neoliberalism is what underpins the whole perverted system - from elections, to underpaid labor, to overpriced health care, to crumbling roads and bridges. Indeed, only an ignorant or blind person would not be able to see the thread of Wall Street's speculators running through all of these.

Back to the stock buybacks. Mr. Ip observes that since 2009, U.S. firms - entrenched in their own myopic interests- boosted capital investment by only 43%, dividends by 67% and stock buybacks by a whopping 194%. This according to Jason Thomas of Carlyle Group. In addition, rather than investing in new plants for new jobs, businesses have squandered $2 trillion on mergers and acquisitions - a third more than the previous annual record in 2006. This is what has directly led to a distortion in the economy and the failure to grow more decent paying jobs.

Ip does try to justify some of the business risk aversion by asserting it is a reaction to increased government regulations, especially on the banking system - which is then more leery of lending.  For example banks are being required to hold more capital and liquid assets, and also penalties have "been increased for wrong doing". Well, excuse the hell out of me, but banks should be forced to hold more capital, and should be penalized for wrongdoing! To me this is just a dodge to get businesses off the hook.

The reality is American business has become self-invested and fat off its own capital and no longer willing to invest in the American worker. Also, sitting on over a trillion they're not exactly bleeding capital nor do they need a lot of bank loans. They are just plain selfish and interested only in their own expansion.

Stock buybacks help them by inflating their share prices without the need to really improve a product or service. Hence, it's all smoke and mirrors and BS.  Columnist Jonathan Clements in an Oct. 26, 2014 piece in the WSJ Section of the Denver Post, observed:

"Many companies were big buyers of their own stock before the 2007-09 market decline, only to scuttle their buyback programs during the market crash. In recent years with share prices up sharply they have begun to voraciously buy back."

And why not, because they are then reaping the bounty of their own high share prices? Buy backs also make management's stock options more valuable - so what better way to compensate the Street's honchos?  Strangely, all this has selectively blinded investors to the lack of dividends. As Robert Arnott, quoted by Clements, stated:

"Dividends are reliable, You cut them at your own peril - but you can cut a buyback and hardly anyone notices."

And then we beheld this in the The Wall Street Journal (Sept. 22, p. C2):

"U.S. companies are increasingly using the bond market for the benefit of shareholders, a move that is starting to raise alarm among some debt investors.

Proceeds from some of the largest bond sales, including those from Microsoft Corp., Qualcomm Inc. and Oracle Corp., were earmarked for share repurchases...

Buybacks can boost stock prices by reducing the number of shares available. Some analysts warn that the tactic risks eroding corporate financial health by diverting cash that can be used to fund debt repayments and make investments that can boost corporate earnings power over time."

Thus,  share buybacks are in fact undermining corporate health for short term gain, even as they fuel the ongoing equity asset bubble to absurd proportion.

To her credit, as the WSJ piece noted, Hillary Clinton called for "greater disclosure of buybacks amid concerns they come at the expense of longer term investment"

This ought to be a given. But Bernie Sanders solution to this racket would pack an even bigger punch: imagine imposing on each and every share buyback a 50 cent transaction tax. In no time you'd have more than enough of the $70b needed to fund Bernie's free public college tuition proposal. Make the bastards earn their increase in share prices, i.e. by superior products and services, instead of gaming the system.

How Corporations Are Inflating the Equity Asset Bubble By Share Buybacks

In a previous post (Sept. 9) I noted:

"Right now those in the stock market, especially in equities, are riding a huge asset bubble. The bubble has two components that are perilous but which too few - high on the nose candy of their share prices - ignore. One is the very excess price of equities, or more exactly, the high price to earnings (P/E) ratio of most of them. "


This ought to be of concern for us all, especially as Martin Feldstein has noted the role of such  mispriced assets in feeding the current asset bubble.  And one huge contributor has been the practice of stock buybacks by big corporations - which artificially inflates their share prices and P/E ratios. Columnist Jonathan Clements in a WSJ piece last year observed:

"Many companies were big buyers of their own stock before the 2007-09 market decline, only to scuttle their buyback programs during the market crash. In recent years with share prices up sharply they have begun to voraciously buy back."

And why not, because they are then reaping the bounty of their own high share prices? Buy backs also make management's stock options more valuable - so what better way to compensate the Street's honchos?  Strangely, all this has selectively blinded investors to the lack of dividends. As Robert Arnott, quoted by Clements, stated:

"Dividends are reliable, You cut them at your own peril - but you can cut a buyback and hardly anyone notices."

Why? Why aren't the little guys more aware of how they're being shafted?  Because generally they're happy just to see higher share value, unaware of the risk being taken in enabling mispriced assets.

This has been abetted by the Fed's ginormous QE (quantitative easing) program - purchasing over $4 trillion in the bond market. Now we know corporations have been taking advantage of this strategy to use bond sales for buybacks.

As noted in The Wall Street Journal (Sept. 22, p. C2):

"U.S. companies are increasingly using the bond market for the benefit of shareholders, a move that is starting to raise alarm among some debt investors.

Proceeds from some of the largest bond sales, including those from Microsoft Corp., Qualcomm Inc. and Oracle Corp., were earmarked for share repurchases...

Buybacks can boost stock prices by reducing the number of shares available. Some analysts warn that the tactic risks eroding corporate financial health by diverting cash that can be used to fund debt repayments and make investments that can boost corporate earnings power over time."

Thus share buybacks are in fact undermining corporate health for short term gain, even as they fuel the ongoing equity asset bubble to absurd proportions. This is now made worse as the Fed, instead of raising interest rates to temper borrowers' insanity,  has dispensed yet more borrower's crack. As Feldstein has also noted, while these same investors may have realized the rapid increase in share prices are a bubble waiting to pop - they still invested "on the mistaken belief they would know when to pull out".  But they were deluded, as the 2007- 08 financial meltdown showed.

To her credit, as the WSJ piece notes, Hillary Clinton has called for "greater disclosure of buybacks amid concerns they come at the expense of longer term investment"

She is spot on and the WSJ  points out that companies are effectively transferring capital from bondholders to shareholders without investing to expand their business. This cannot be right, and it shows again how the Fed's nose candy QE bond buying program is actually backfiring on bond buyers.

Hopefully, at its next meeting the Fed will do the right thing and raise rates. I'd like to see at least a raise of 50 basis points, not merely 25.

Kids in COLO. Play a Simulated Stock Market Game: Do They Have A Clue?

Kids get into the 'stock market challenge' in Colorado

The "Stock Market Challenge" is a recent invention of Christina Frantz, manager of social responsibility for Great West Financial - a Greenwood Village-based financial services company. The purpose,  as stated in a recent Denver Post piece (Nov. 16, p. 1C),  is to teach kids how the stock market works since "whether they realize it or not most Americans have a stake in the stock market through their retirement programs". Thus, more Americans need "basic financial literacy".

Actually, the 'stake in the stock market' meme needs to be corrected: Americans DO have the choice, for example in their 401ks (most of them anyway),  to select money market or low risk funds as opposed to equities. This is something more might have benefited from if they'd known before the 2008 stock crash. 

The piece goes on to cite a 2013 survey wherein "43 percent said their number one financial worry is not having enough money saved for retirement.".  Another 38 percent fretted about not having enough money to get by according to a Harris Interactive 2013 survey.

But nowhere in the article do readers learn that stock market investment is only one way to attain financial security. A better way  for most average people, perhaps, is to save much more (on average 20-30% more than the average) and instead of plowing it into a volatile market - use it to purchase immediate fixed annuities to ensure a stream of later income. The problem is most Americans would rather risk their stash on the stock market, then have it tied up with an insurance company to provide steady income later. This, to me, is nuts.

Some of the students in the challenge also learned "both the agony and ecstasy the market can offer".  The students initially saw their simulated portfolio growing 26 percent in 30 days- but then "thirty minutes later all the confidence and energy was gone".  They saw $200, 000 "evaporate" in minutes and they ended up near the bottom of the pack. 

The students in this team later said: "It was fun, it was just dream shattering!"

Really, kids? Imagine if that money you lost in minutes was real money and not the synthetic kind!

But most of these students can be forgiven their irrational exuberance given they may not be familiar with certain things going on in the market now. I refer to the recent column by WSJ author Jonathan Clements, who writes that "I find it hard to get enthused  about the prospects for U.S. stocks over the next ten years."

Why?

Clements cites three components of the market's current returns which reflect inflated growth beyond realistic expectations leading to a ridiculously high price to earnings ratio. (He names dividend yield and corporate earnings growth and the value put on those earnings reflected in the P/E ratio.)

He notes,for example, that over the 10 years up to mid-2014, the per share earning of the S&P 500 companies grew 6.3 % a year compared to 3.6% growth in GDP per year. In other words, something is out of kilter -and this anomaly was also warned about by the authors of  'The Great 401k Hoax'. 

The other anomaly is that recent gains have been driven by corporate profit margins. After tax corporate profits rose from 7.9 % of GDP in mid-2004 to 10.6% in early 2014. Without this boost the S&P 500 earnings would have lagged behind GDP. 

The main contributors to this profit anomaly are productivity gains (mainly via automating production or laying off workers and having fewer do the work of those fired) and buying back "as much stock as they've issued". Of course, using these tricks can't go on forever, nor can the Fed's cheap money (quantitative easing) policy.  Besides, that - the more workers laid off or automated the less disposable income they have to purchase the goods and services available- so the path is set for a permanent decline unless: a) more people are hired, and b) at significantly higher wages.

The anomalous S&P increase, combined with the corporate earnings gimmicks, have enabled to P/E ratio to increase to 25.3 since 1990, which might sound great until you compare it to historical averages, i.e. 19.6 over the past 50 years and 16.6 over the past 100 years. This begs the question of what would happen if the current P/E average reverted to its 100 year average, say indicating a drop of 25.3 - 16.6 = 8.7. Well, you might not want to lose sleep thinking about it because it implies a large part of your share value is "phantom money". (Another little item the students in the Stock Market Challenge might have wished to learn about)

This is why Clements ends up pining for a 25 percent correction. In his own words:

"My hope: We get a 25 percent decline in share prices. That would make the market more reasonably valued and provide a buffer against disappointment."

He is right to be concerned as the students would be if their little simulation also included some realistic facts concerning stocks, valuations, capitalization and loss. Say, for example, an original, over-valued stock share plummets after ten years from $50 to 50 cents a share. The market capitalization has now decreased a factor of 100 ($50/ $0.5 = 100) to $5 million. If there are now 10 million investors, the share price can be no more than 50 cents a share and that is the maximal cashout (redemption) amount. Thus if all ten million stock holders cash out at once they will (theoretically) get 50 cents a share. However, since stock managers do demand to take profits, commissions, and don't intend to part with all the money, they use a formula pegged to the volume of selling such that the share value is inversely proportional to the volume.

Thus, what theoretically might look like 50 cents per share on paper, for a mass redemption, will really end up as probably only ten cents per share.

If all the buyers (say of company XYZ stock) initially bought stock at $50 per share, then watched it collapse to $1 a share, where did the money go?  The (Duh!) answer (see also 'Ask Marilyn' column in PARADE, April 5, 2010) is that the sellers (redeemers) got it. Well, who else would? The other aspect is that this scenario only accounts for a tiny fraction of the total money "lost".

Remember that when all the 2 million purchasers of XYZ stock bought it (at $50 per share) they actually artificially inflated the worth of all the shareholders. Obviously, they also inflated the worth-value for all those who bought it at $48, $24, $15 and $1! The reason? Everyone's stock is valued at the last share price times the number of shares owned. Thus, at any time in that transition interim, IF one of those lower purchase owners had the prescience or good fortune to cash out in time, they would have reaped a relative reward. This, despite not having bought the stock at a lower value.

In like manner, Janus World Wide Fund sold shares at one time for as high as $75 each. When I bought in (in 1997) they were still high but not as high as the initial offering rate. As they began a down swing I cashed out (in 1998) at least 100 shares for $70 a share- enough to finance a holiday to Yellowstone National park. Eventually,  the shares crashed to below $30 a share, by which time almost all share holders were selling (which was why the share price was being driven lower).

Consider now that Jack Sprat similarly may be elated at beholding a $174,000 balance after his 10th year of holding XYZ stock,  following an initial investment of $35,000. But he needs to understand that the bulk of this:

$174,000 - $35,000 = $139, 000

is phantom money. (I.e. generated by an excessive P/E ratio)

By the same token, if the following month the share prices collapses back to $5, Jack has not lost $174, 000 but only the money he actually put in up to THAT point, say  $35,250.

It is this larger value, based on a "misleading multiple" of inflated share value times shares, that leads many to believe they have lost money they never owned in the first place. It only appears they did. Such is the stuff of stock hocus pocus which has nearly every modern day "investor" bamboozled and starry -eyed.

What if all sellers sold at once, does that make their losses real? Never in a million years! As I noted earlier, if all sold at once they'd all be victimized since as sellers outnumber buyers the share price drops according to inbuilt formulas used by the companies to correct for diminishing share volume. Diminishing (held) share volume = diminishing returns. Zero sum game anyone? The true and hard fact, again, is that only the prescient or early sellers, are able to obtain the top share price. This is possible because there are many times more "buy and hold" investors to support those sales.

I am pretty certain that none of the kids in the "Stock Market Challenge" were taught any of this!

Attending to the Warning Signs of a Major Stock Market Correction

Many in the stock market are fairly ebullient - when the market soars - which is when it's not taking a dump on certain days or in response to specific events (e.g. Ebola infections, ISIS gains in Iraq etc).. Most have been beneficiaries of the Fed's infusion of "crack" in the form of "quantitative easing" and cheap money. (With another round on the horizon. Notice how the DOW stopped dropping once the buzz began about QE3, following QE1 and QE2 - which have together infused $4.3 TRILLION in bond purchases so far).

But at some point, the cheap money flow has to stop and even if it's done slowly Maul Street will respond hysterically, which is what has prompted discussion of how large a future correction will be ('How Bad Can It Get?', WSJ Sunday in Denver Post, Oct. 19). As the article observes, "corrections of 5% to 20% are a normal part of the stock market" and pointed out that even J.P. Morgan built corrections into his forecasts (often taking advantage of inside info while the little guys got toasted.)

Thus, those in the market now, whether in 401ks, IRAs or doing their own thing in day trades, need to be aware of the potential for loss, and large loss. In line with this, the article points out the "gloomiest" prognostication for a drop so far has been Scottish stock market historian and analyst Russel Napier. He suggests that Wall Street "might fall by 75 percent or more before the carnage is over."  This would put the DOW at about 4300 or where it was in 1980.

And it's not just a remote possibility. Arch-forecaster Nate Silver, in his book, The Signal and the Noise- Why So Many Predictions Fail But Some Don’t  warns (p. 347):

"Of the eight times in which the S&P 500 has increased at a rate much faster than its historical average over a 5-year period , five cases were followed by a severe and notorious crash, such as the Great Depression and the Black Monday crash of 1987”.


Interestingly, two of the largest stock market dives have followed two of the biggest bubbles: the first of 37.85 percent and on the heels of the bubble that formed from Jan. 14, 2000 to Oct. 9, 2002, and the second of 58.78 percent that formed (mainly due to the housing bubble) from Oct. 9, 2007 to March 9, 2009.

Are there warning signs to attend to? Of course! First among them is that IF  the economic future was truly rosy long term interests rates (a barometer of economic growth, i.e. since it indicates wages going up) would have been going up. But instead we observe them tumbling with the benchmark yield on 30-year Treasury bonds having now dipped below 3% and yields on the 10-year note at mid 2013 levels.

People should also be leery of the S&P increasing beyond the range Silver notes over a 5-year period, and the DOW is also a proxy of that - and red alarms ought to sound if it hits 17,000 and stays there any length of time.

A final warning sign which too few attend to is stock buybacks by the companies themselves. I mean, WHY should you have to buy back your own stock to create an artificial rise in share price if your company is genuinely doing well? It makes no sense. If you're going to use any extra money for anything it ought to be for paying dividends, not stock buybacks!

Columnist Jonathan Clements in his piece in the WSJ Section of the Post this past Sunday, observes:

"Many companies were big buyers of their own stock before the 2007-09 market decline, only to scuttle their buyback programs during the market crash. In recent years with share prices up sharply they have begun to voraciously buy back."

And why not, because they are then reaping the bounty of their own high share prices? Buy backs also make management's stock options more valuable - so what better way to compensate the Street's honchos?  Strangely, all this has selectively blinded investors to the lack of dividends. As Robert Arnott, quoted by Clements, stated:

"Dividends are reliable, You cut them at your own peril - but you can cut a buyback and hardly anyone notices."

Why? Why aren't the little guys more aware of how they're being shafted? Maybe for the same reason, as former trader Michael Lewis observed this morning on CBS' Early Show, they're not paying attention to how flash trading is ripping them off via "millisecond" advantage and thereby gaining pennies on the dollar with each trade made. They essentially gain those pennies (which add up to billions over time) by getting shares redeemed before you can via that slight micro-time advantage.

Why doesn't the SEC do anything to stop this baloney? According to Lewis, because once they leave the SEC they will be looking for jobs on the Street so don't want to alienate it with antagonistic regulations or judgments.  So don't look for the SEC honchos for any guidance or alerts to help you with navigating the swamps of Maul Street. You are literally on your own - with maybe this blog and a few others to try to provide some heads ups.

What you can do is what every sane investor ought to be doing: leaving any stock now that doesn't deliver dividends and is only doing buy backs. (With a little research you can find this out.)

You can also re-assess your risk tolerance. Can you really afford to lose 75 percent of your 401k  if the market came a crapper again? And don't take any online quizzes to asses your current risk tolerance! Psychologists will tell you when the market's going up, DOW headed toward 17,000 as it is now, people tend to over answer on the positive side.

What you really need to do is doff the rose-tinted glasses and pink Pollyanna hat and put on your black, negative thinking cap. Ask yourself how you would feel if you had $300,000 salted away  in 401ks and IRAs and after a major crash or "correction" had $75,000 left.  Would you be able to suck it up and move on? Would you be able to stick to the Street mantra of "Buy and hold!"  If not, you had better rethink your positions and portfolio.

Of Retirement Nest Eggs - And The Inadequacy Of Americans' Savings

Columnist Jonathan Clements in Sunday's Denver Post WSJ Section put forth a blunt question:

"If you lost 25% of your money invested in a stock market correction, would you be ok with it?"

He then put it another way: "If you had $200,000 in stock investments and lost $50,000 of it, would you be able to handle it?"

The questions are spot-on given many money and finance gurus expect a correction soon, maybe as early as January or February next year when the Fed will likely start raising interest rates - signaling the end of the cheap money era. Clements suggests many could survive the loss using the buy and hold strategy, but many ordinary workers who had piled it up in their 401ks might have to work ten more years.

But this is the problem with investing in the stock market. It is laden with volatility and your money rises and falls almost daily with the share value. Another reason many of us call it 'phantom money' because it isn't real until you actually cash out, redeem the shares. Another problem, of course, is that many clients get burned by investment advisers and even pension funds when these assume too high a return, often 8 percent or more per annum, when that simply isn't realistic on examining the global situation. The shareholder then has been led into the proverbial fool's paradise.

According to an article in MONEY magazine ('You Call This Retirement?', Feb-March, p. 49), citing stats from the Investment Income Institute,  there is a total savings accumulated for all Americans of $21.7 TRILLION. This sounds like a staggering amount of savings until one realizes that perhaps half of it is for those in the upper ten percent of earners and the rest for 90 percent.

And while 1 in 5 Boomers is already out of the work force, many who've been forced to retire because no one will hire them, the rest scramble to save enough to live off of for 25 or 30 more years.  As MONEY notes: "It's the best and worst of times for Boomers at retirement" - meaning the potential for up to 20 or more years of living (once one hits 65) and doing the things you never could before as well as "fulfilling your bliss" (Joseph Campbell's term)  in whatever ways suit your fancy.

The problem is that without sufficient money to live off,  it portends a time of genuine misery. It is true that for a tiny elite group of lucky Boomers who have a million or more stashed away the warning could be more like: "Don't be the richest corpse in the cemetery" - the warning for too many is "Don't end up a corpse too soon from eating cat food and fried kibbles".

Based on the earlier stats, Fidelity Investments claims that a person 55 or older who has been active in his or her 401k for the past 10 years, is likely to have only about $269,000. This sounds like a grand sum until you realize that a typical couple will need at least $220,000 to cover medical expenses that Medicare doesn't pay for. Most Americans don't have anywhere near that much saved anyway, and a recent WSJ article (Sept. 12) put the median savings at just over $50,000 for the worker aged 60 -64. This is pathetic and portends a life of "cat food" and poverty unless some other means of income is supplied. (Or, one has the advantage of a VA medical benefit which pays for all the things, e.g. dental, glasses etc., that Medicare doesn't)

Oh, and don't look for lotto winnings, the chance of winning even one ordinary lotto (not the Powerball)  is less than two asteroids striking Earth at the same time.

But MONEY has some encouraging words for those who won't be able - for whatever reason - to hit the magic number for retirement nest egg savings (generally computed as at least 80% of your mean salary for the last twenty years,  so if your salary was averaging $50k/ yr. you'd need to have $800,000 saved.):

"Retirement itself is a very modern concept, an artifact of postwar prosperity and longer life spans. For most of history, those lucky enough to reach an advanced age kept working until they were physically unable - so rural life and extended families provided the safety net."

Then the piece puts a downer meme into the mix, noting that the longevity revolution and industrial revolution put an end to that.

But left unsaid is the real problem or issue, which no finance column or magazine has ever had the balls to mention, at least those that I've read: That is,  the genuine problem is we have a population surplus, too many babies being produced, which is creating too many workers chasing too few jobs.  Just tally up the "population replacement" numbers by month since 2000  (avg. about 150,000) and look at the numbers of current unemployed and under-employed. A coincidence they're nearly the same? Hell no! But again, the Neoliberal media doesn't want people to see that, only to blame THEM if they can't secure a decent job to keep them off "entitlements" until they are 70 or so.

Stop the population surplus and you solve the problem Marc Freedman complained about at the end of the article, "too many people being warehoused who no longer have an economic role".

Something to think about!