You Can Only Fool People For So Long
In an article, Bloomberg News wonders why people continue to pull money out of the stock market. “The stock market has effectively doubled since the March ’09 low, and we’re still in redemption territory for equity funds,” Liz Ann Sonders, the New York-based chief investment strategist at Charles Schwab Corp., said in a Feb. 2 phone interview. Her firm has $1.7 trillion in client assets. “That’s never happened.” It happened after the Great Depression. For decades after, corporations had to pay dividends to attract investors.
“The price-earnings ratio for the benchmark gauge of American equities has fallen to 14 times reported income, down from 24 at the end of 2009.” But are those earnings real, or fraudulent, as in the 1990s? And if they are real, how dependent are those earnings on the federal government running a massive budget deficit and the Federal Reserve keeping interest rates artificially low, neither of which is sustainable? And even if the earnings are sustainable, why should investors care if all the money goes to excess executive pay in the form of stock options and awards rather than dividends? The dividend yield is about 2.0%, less than half its historic average. Instead of real investor returns today, the executive class promises investor returns tomorrow, but it has been making the same promise for nearly two decades. Public employee pension funds remain available as a sucker, but even these are starting to get fed up – and to object to small returns in exchange for outsized pay in hedge funds and private equity.
People are beginning to doubt all kinds of things. Work hard and you will get ahead? Younger generations seem to believe that you’ll just be downsized after 20 years. That’s what the history says.
Pay more in taxes to spend on education and the schools will get better? More likely teachers will just get more in retirement and retire earlier.
Pay more in payroll taxes to save Social Security? They’ll just cut the income tax instead.
Take advantage of a chance to buy a house with a subsidy? The subsidy will just inflate the cost of the house, benefitting the older seller, and the price will then fall, leaving you worse off than before.
“The past decade parallels the span between Dec. 31, 1964, and the end of 1981, when the Dow added less than 1 point after surging interest rates diminished the appeal of equities. While the 115-year-old stock gauge ended the period at 875, it ranged between 577.60 and 1,051.70.”
Right, because stock prices were over-inflated at the start of each period. We’ll see about interest rates. Older generations, for the most part, did not save, and now they face retirement. Younger generations are poorer and in no position to save. Unless it is newly printed, where will the money come from?
This situation were are in has several years to go. Only those who benefitted from the debt binge would say otherwise.
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