"Sheeple."
People who just do what they're told and never think about it.
And while normally this would apply to college students that just regurgitate what their professors told them, when it comes to the financial markets a scarier instance of "sheeple-ism" is retirement plans.
Specifically your 401k's, 403b's, IRA's, etc. And the reason it's sheeple-ish is that nobody thinks about the ramifications of suddenly ordaining stocks, bond and other liquid securities as the defacto retirement mechanism. We just do what we're told and invest.
I made a more analytical post about this taking a look at how much cash flows into mutual funds drove the price of stocks versus corporate profits and found that it is indeed cash flows driving the price and not necessarily profits. This is particularly scary when you look at the American economy and see us about to enter a recession and looking at jacking up taxes by 10-15% GDP to pay for social security and medicare. Where are the profits going to come from in that environment to give stocks their value, let alone give them the rationale to keep increasing in price by 12% a year?
Thus I was not surprised when I saw this chart;
Without a proportionate increase in GDP or profits we are all of the sudden applying 3 times more value to stocks, bonds and other financial assets. Now some of this can be explained away by increases in liquidity where more people are allowed to invest due to online trading, lower trading costs and so forth. But it mimics what my previous research showed me. That we are valuing stocks and other securities more highly, but for no reason, other than the market has been flooded with retirement dollars.
This is a scary prospect to the sheeple who just invested in their 401k religiously because that's what they were told to do. And while I am no advocating NEVER contributing to a 401k or retirement plan, nor saying this couldn't be resolved by investing overseas and diversifying your portfolio, don't be surprised if your 401k is worth considerably less than you thought it might be.
8 comments:
Captain -
You make a very good point about 401Ks etc. driving the prices of stocks up. More money into the market means higher prices if the amount of shares remains the same.
Questions -
1) If stock prices are high, doesn't it mean that investors get less stock for that money that's coming in?
2) What do the market-wide measures such as P/E and other items that measure profits vs. price? Is the market really overpriced? Or are only certain sectors overpriced?
3) For those who are saving for the future, what are the alternatives to buying stock, bonds and mutual funds? Certainly from the recent posts here, real estate has not yet bottomed out and is not yet a good investment.
You're right in saying that retirement plans may be worth less than your think.
But with the absence of alternatives for those who already own their homes, investing in stocks and bonds appears to be the only game in town.
Or am I missing something here?
BTW, with the devaluation of the dollar, it doesn't appear you can bank on your bank either.
So, how does the Captain save for retirement? No bonds, no stocks, what's left? Gold coins?
Silver is the old hope in Mexico, it funny becouse now there is a campaign sponsored by the senate to implement the silver coin to incentivate people to save. Honestly, i take your advice and now i am saving booze. The thing is that i don't think that would last, i'm in college and soon there would be college parties...
Such is life. By the way, i am against finances in general, i think the moral way to make money is hand working or something related, getting your bills payed by the profits your accounts manager passes you is not work. The least people should do is getting involved with their stocks or funds.
Hey Roberto,
I am curious, from what I've read (though not terribly much) Mexico is doing quite well economically. Pemex is making a killing on oil, your GDP is growing quite well. And I don't recall Mexico having the "social security" problem we have here in the US. Why would they be pushing silver currency to save? If anything I would think Mexican stocks would probably be a better investment long term than American stocks.
And you're right. College students saving booze for a collapse in the currency it pointless. You'd all drink it! ;)
Cpt.
Anon,
To answer your questions;
1. It's kind of the other way around. You get less dividends for the stock price you pay.
2. I don't know, I haven't looked at sectors, but you bring up a good point. articles in The Economist recently show the financial services industry has had a disproportionate amount of the profits and so that sector may be overvalued, but in general (and based on the research I've done, although not official) I'm inclined to believe the stock market is geniuniely overvalued due to the unintended effects of retirement programs (although, if the market keeps crashing, but corporations are able to maintain their profits, then they may be worth buying into, but methinks corporate profits are going to tank in the next 6 months).
3. Well, don't discount real estate. I don't think it's going to go much further down. People have to live somewhere and people keep breeding, resulting in more people. Based on my figures real estate should come down another 10% to be in line with historical averages, but who knows, it could "overcorrect" and come down 20%. Additionally, the stock market is about 20% cheaper than it was 6 months ago. US assets are becoming cheaper, making them more attractive investments. There is a reason the Arabs and Chinese have been making bids to buy our firms.
That being said, if you're looking for the long haul and a return on your investment, I'd rather invest in Chang and Punjab in China and India majoring in computer programming rather than Tanya and Tricia majoring in philosophy. And thus, why I still have my investments in overseas corporations.
Hi Marty,
Finding myself a rich cougar. That's the retirement plan. ;)
No, Chinese firms, long haul. Indian firms. Long haul.
I'd short US positions, but the US has this uncanny ability to get lucky and get saved by some unexpected force or another.
So you would take your weak US dollars and buy Chinese and Indian stocks. Just seems as though you would be paying an additional premium here.
These foreign indices or stocks could perform very well but then you may not make much if the dollar strengthens in the long term and you lose a considerable amount of returns in the currency exchange.
The problem we have with extra oil income is that no one knows where is it. Pemex can not use those resourses, thats why now we are trying to pass an energetic bill, its a turnoil, just see the news. And indeed we are growing, but just remember that in the 50's and 60´s Mexico's GDP used to grow at 7% at least. Why should we push for silver? just to basic, we can´t afford to depend so much on your inversion in our country, thats what we do before 1994 and then when the foreign inversion left we have a crisis (sum another issues too). The gross of the mexicans do not invest on anything. Not even in ourselves
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