Lack of Trust – Caused by Institutional Corruption – Is Killing the Economy
We’ve previously documented that lack of trust – caused by institutional corruption – is killing the economy.
Not only amateurs, but also professional investors are giving up on America and other economies that have become untrustworthy.
(When you have financial luminaries such as Bill Gross, Nouriel Roubini and Laurence Kotlikoff saying that America is running a giant Ponzi scheme, it’s hard to get too excited about traditional investing strategies.)
As AP discusses in this excellent article, ordinary Americans – defying decades of investment history – are selling stocks for a fifth year in a row. It’s the first time ordinary folks have sold during a sustained bull market since relevant records were first kept during World War II. The answer is both complex and simple but summed up best by a former stock analyst’s comment that in order to buy stocks “You have to trust your government. You have to trust other governments. You have to trust Wall Street, and I don’t trust any of these.” With Fed policy trying to force investors back into stocks (at any cost), a former fund manager notes, presciently that, “When this policy fails, as it will, baby boomers will pay the cost in their 401(k)s.” Are we the new ‘Depression Babies’? We suspect so.
Investors, as you well know, are leaving the equity markets in droves…
Based on AP’s calculations, individuals accounted for 40 percent to 50 percent of money going to U.S. stock ETFs in recent years.
If you assume 50 percent, individual investors have put $194 billion into U.S. stock ETFs since April 2007. But they’ve also pulled out much more from mutual funds – $580 billion. The difference is $386 billion, the amount individuals have pulled out of stock funds in all.
If you include the sale of stocks by individuals from brokerage accounts, which is not included in the fund data, the outflow could be much higher.
But why are investors not buying the propaganda this time and jumping in with both hands and feet…
“You have to trust your government. You have to trust other governments. You have to trust Wall Street,” says Neitlich, 47. “And I don’t trust any of these.”
Defying decades of investment history, ordinary Americans are selling stocks for a fifth year in a row. The selling has not let up despite unprecedented measures by the Federal Reserve to persuade people to buy and the come-hither allure of a levitating market. Stock prices have doubled from March 2009, their low point during the Great Recession.
It’s the first time ordinary folks have sold during a sustained bull market since relevant records were first kept during World War II, an examination by The Associated Press has found.
“People don’t trust the market anymore,” says financial historian Charles Geisst of Manhattan College. He says a “crisis of confidence” similar to one after the Crash of 1929 will keep people away from stocks for a generation or more.
What is at the core of this mistrust or doubt?
People who think the market will snap back to normal are underestimating how much the Great Recession scared investors, says Ulrike Malmendier, an economist who has studied the effect of the Great Depression on attitudes toward stocks.
She says people are ignoring something called the “experience effect,” or the tendency to place great weight on what you most recently went through in deciding how much financial risk to take, even if it runs counter to logic. Extrapolating from her research on “Depression Babies,” the title of a 2010 paper (embedded below) she co-wrote, she says many young investors won’t fully embrace stocks again for another two decades.
“The Great Recession will have a lasting impact beyond what a standard economic model would predict,”
But it’s not just ordinary folks, its professional investors too…
Public pension funds have cut stocks from 71 percent of their holdings before the recession to 66 percent last year, breaking at least 40 years of generally rising stock allocations
as old ‘lessons’ or myths are dismissed…
And old assumptions about stocks are being tested. One investing gospel is that because stocks generally rise in price, companies don’t need to raise their quarterly cash dividends much to attract buyers. But companies are increasing them lately.
Dividends in the S&P 500 rose 11 percent in the 12 months through September, and the number of companies choosing to raise them is the highest in at least 20 years, according to FactSet, a financial data provider. Stocks now throw off more cash in dividends than U.S. government bonds do in interest.
Many on Wall Street think this is an unnatural state that cannot last.
As it seems, for once, a positive lesson is being learned…“People aren’t looking to swing for the fences anymore,” says Gary Goldstein, an executive recruiter on Wall Street, referring to the bankers and traders he helps get jobs. “They’re getting less greedy.”
The lack of greed is remarkable given how much official U.S. policy is designed to stoke it.
But the powers that be are not happy about it…
“Fed policy is trying to suck people into risky assets when they shouldn’t be there,” says Michael Harrington, 58, a former investment fund manager who says he is largely out of stocks. “When this policy fails, as it will, baby boomers will pay the cost in their 401(k)s.”
We’ve noted for years that a strong rule of law – including prosecuting white collar criminals for fraud – is essential to restoring trust in the economy.
But – instead of enforcing the rule of law – the government has become more and more blatant in its corruption:
The top white collar fraud expert in the country says that the Bush and Obama administrations broke the law by failing to break up insolvent banks… instead of propping them up by bailing them out.
And the Special Inspector General of the Tarp bailout program said that the Treasury Secretary lied to Congress regarding some fundamental aspects of Tarp – like pretending that the banks were healthy, when they were totally insolvent. The Secretary also falsely told Congress that the bailouts would be used to dispose of toxic assets … but then used the money for something else entirely. Making false statements to a federal official is illegal, pursuant to 18 United States Code Section 1001.
The government made it official policy not to prosecute fraud, even though main business model adopted by the biggest financial crime in world history, the largest insider trading scandal of all time, illegal raiding of customer accounts and blatant financing of drug cartels and terrorists have all gotten away scot-free without any jail time.
While Iceland prosecuted its top criminal bankers, and thus quickly got through its financial problems and now has a vibrant economy, the American government has done everything it can to cover up fraud, and has been actively encouraging criminal fraud and attacking those trying to blow the whistle.
Moreover, U.S. government personnel are on the take. They have become so corrupt that regulators are literally sleeping with industry prostitutes … while they pimp out the American people.
We’ve gone from a nation of laws to a nation of powerful men making one-sided laws to protect their own interests … in secret. Government folks are using laws to crush dissent. It’s gotten so bad that even U.S. Supreme Court justices are saying that we are descending into tyranny.
As Ralph Waldo Emerson said:
“Who you are speaks so loudly I can’t hear what you’re saying.”
Its like a thief who has been arrested 5 times for burglary. Even though he says all the right things to the judge at sentencing, the judge is still going to throw the book at him.
If the thief is appointed to head a government commission on corruption, do you think people will have confidence in the commission or its proposed actions?[Obama, Geithner, Bernanke and Holder – kuje] Paulson, Bernanke, Bush, [and the rest of the gang before them] may be saying nice things about fixing the economy, shoring up the financial system and helping American citizens, but people don’t believe them anymore. They’ve been proven liars one too many times.
While the [government] is doing everything in their power to prop up the stock market until they are out of office (or at least until after the election), the problem is them: Americans and people everywhere distrust [government] so much that they see through every superficial magician’s trick that might have worked when people had a less jaundiced eye.
People have woken up to the scam. Americans are no longer quite so gullible about how “good” their government is. They hate [both the Dem and GOP leadership].
Who they are speaks so loudly that we can’t hear what they’re saying.
The only thing that can restore confidence in the economy and the financial system is to replace the whole lot of them (tar and feather them) with honest leaders who will do what’s best for the people.
Forget the “toxic debt” that the talking heads keep referring to. The only way to restore confidence is to get rid of the “toxic leaders” who caused the mess.