Where is the US economy headed?

Securities in retirement funds, obviously. ;p

Look - there's been a massive shift of pension and retirement funds from things like bonds into equities in the last 20 years. Part of this is due to the rise of the mutual fund, part of it is due to the prevalence of individual investors with their 401ks, part of it is due to people just plain living longer and needing to invest more to cover ten, fifteen years of retirement rather than five.

That's not saying that there's no productivity gains or similar involved in the general run-up of stock prices. But the current level of the Dow just isn't explicable through efficiency or a larger economy. P/E ratios, especially, are now significantly higher than they were even fifteen years ago. By historical standards, EVERY Dow stock is a bad deal for return on investment!

But all the additional retirement money hitting the stock market serves to push up the prices on stocks; there's a limited number of corporations out there with business plans solid enough to put your retirement money IN. Sure, more crop up, and it's easier to get equity financing these days for the same reason, but at the end of the day there's more money chasing more or less the same amounts of stock. This is good for people who already hold that stock, naturally - their stock increases in value more rapidly and is worth more when it comes time for them to sell. It also makes stocks look like a better investment, because of the relatively larger returns reflected by the increase in prices.

However, we also have a demographic bubble to deal with. The boomers will need to start retiring fairly soon. You can't eat a stock certificate or use them to pay for your house, so those stocks will be sold. (More accurately, once they retire they can go ahead and sell without taxes biting them in the butt!) Even the securities that aren't needed for day-to-day expenses are likely to be moved into safer investments as retired boomers transition to living from their savings rather than accruing more.

At some point, the rate that money leaves the market (to pay for boomer retirement) will exceed the amount coming in (from relatively fewer younger-than-boomers saving for retirement), and the push behind stock prices will cease or even reverse. Of course, we can expect an initial crash, as hordes of boomers about to retire realize that having 95% of their investments in volatile stocks is not a winning strategy when you're 64. The lucky ones will get out before the crash, and park their cash in a safer environment to await developments; there will, however, be a lot of people who have a 401(k) lose most of its value right before they need to actually draw money from it.

It's not like it's all doom and gloom - there's still productivity advances to look forward to, and foreign markets opening up and becoming affluent enough to afford our exports, and the future's notoriously hard to predict; it may be that something drastic happens in the geopolitical future to make this a moot prediction. But I mean, the demographic trends are there for anyone who's prepared to look, right?

Trust me, I don't need a discourse on the wonders of compound interest. ;p

Just look at the underlying values of the economy. The market was around 10k at the beginning of 2004. This isn't a "depth of the recession" number, but more or less the values that it was at during the late 90s. Now it's at 13k. Has our economy really grown 30% in that time? Hell, have the Dow COMPANIES grown 30% in that time? No! The increase in the index is neither due to expansion of those companies nor due to a general economic expansion (though the growth numbers are, indeed, in there.) Looking at the S&P 500 index, same story.

NASDAQ's numbers aren't as clear, but even there you have a 20% expansion of the index in three years of more or less "meh, all right" economic performance. Okay, 6% growth in a tech-heavy index, that's not out of the question.

But what's driving those gains? Is it reflective of increased investor trust in companies? Probably not, what with Enron and WorldCom, huh? (Or is Sarbanes-Oxley working that well after all?)

Is it that foreign investors are pouring their money into the "safe harbor" of the NYSE? Well, that's probably a factor too, but is that enough to shift the whole damn index 30%?

Look, I'm perfectly aware that individual stock prices are pretty open to certain kinds of manipulation. I'm also aware of the idea of "historical returns". But we've been seeing market performance significantly over those historical returns, across a broad spectrum of companies. This is over-China levels of growth here, folks. What's accounting for it, if not the investor demographic and increased equity holdings? Anyone care to take a stab at it? Or is it just that our economy is kicking significantly more ass than is being reported?

This country hemmorages wealth each and every day. More wealth leaves this country than what comes in month after month after month. I submit to you , that THAT is something that cannot continue, and has never endured throughout History. All this other stuff is bread and circuses for the masses

Richard Saunders wrote:

This country hemmorages wealth each and every day. More wealth leaves this country than what comes in month after month after month. I submit to you , that THAT is something that cannot continue, and has never endured throughout History. All this other stuff is bread and circuses for the masses

How about not reporting how many greenbacks are being printed to prop up this baseless "economy"?

What's accounting for it, if not the investor demographic and increased equity holdings? Anyone care to take a stab at it? Or is it just that our economy is kicking significantly more ass than is being reported?

When the phony dot.com bubble was roaring in the 90's, Clinton was a genius according to some of you guys here, but now when Wall Street performs better, good news is bad for all kinds of reasons. Just an observation.

Ever-increasing amounts of money funnelled to the 'investment class.' Record low taxes on stocks and the rich. A weak and troubled FEC.

Cycloptichorn wrote:

Ever-increasing amounts of money funnelled to the 'investment class.' Record low taxes on stocks and the rich. A weak and troubled FEC.

Well, the first one is more or less my point, right? More money into the market means higher stock prices, all else equal. But the source of the more money isn't magical fairies, nor is it the US Mint. It's money diverted from other forms of investment, such as bank loans and bonds. Individuals are buying stock instead of bonds because of the tax advantages and higher returns; pension funds are investing more heavily in stocks because the higher returns means they can put less money NOW in the pension fund and come up with the same amount later on.

So long as the demographics mean more money in than out of the market, it keeps on keeping on - Ponzi scheme style, except nobody ever really promised you a big payout at the end. However, when more people NEED that money to live on, compared to the number of new investments, won't the opposite effect occur?

Thats money created by the bank so it sounds like magical fairies to me!

Er, no. Bank loans aren't "created" by the bank. The investor opens a bank account or buys a certificate of deposit. The bank then turns around and loans (most) of the money out to other people. Interest paid on the loan is used to pay interest to the investor.

The only bank authorized to "create" money is the federal reserve, which it only does in order to manipulate inflation (and even then, it's not the usual tool for doing so). Theoretically it could print a whole lot of money in order to pay off the national debt, but that would kick the economy in its metaphorical nuts and make pretty much everybody unhappy, so it doesn't do that.

It DOES sell government bonds in order to fund the government deficit, and the interest paid on that is a not-insignificant chunk of the federal budget (7% or so). But that's not inflationary - the money is just sent from investor to government to whoever gets the government money, be it supplier or entitlement recipient or what have you.

Ever-increasing amounts of money funnelled to the 'investment class.' Record low taxes on stocks and the rich. A weak and troubled FEC.
Cycloptichorn

Cycloptichorn wrote:

Ever-increasing amounts of money funnelled to the 'investment class.' Record low taxes on stocks and the rich. A weak and troubled FEC.
Cycloptichorn

Is that a new term you are going to start using, cyclops, "investment class?" I love that we are all classified in a "class." I don't consider myself a mind numbed robot, as part of a class. I am an individual. I don't know about you. And doesn't the investment class include just about anyone that works that has investments or savings, such as 401Ks, IRA's, pension funds and any retirement program, which last I checked, includes lowly teachers that are teaching us about all the "classes."

And if the Democrats would have allowed a phased in partial personal investments as part of the Social Security system, then everyone could be part of the "investment class." As it is, there are some with the only money they can hope for in retirement tied up in loans to the government at a very, very poor return on their money.

And when you say record low taxes, you must be talking about tax rates, not tax revenues.

The 'investment class' is the group of people who don't actually do any work for a living, other than making investments; making money out of moving money around.
Cycloptichorn