In what I would consider one of my top 5 economic pieces of this blog I tie the majority of the stock market's movement NOT to profits, earnings or dividends (as it should be) but rather to the volume of retirement dollars flooding the stock market. The ramifications, of course, is "what will happen to stock prices when the baby boomers retire and withdraw their trillions of dollars?"
Economics would tell us "go down" but what's funny is markets are not rational all the time. Matter of fact they can remain quit bubbly for extended periods of time. ESPECIALLY when the market participants (AHEM AHEM, COUGH COUGH - AMERICANS) are addicted to "high asset prices" because it fools them into thinking they don't have to work for a living. Asset prices just magically go up without the necessary production and profits to rationalize the price increases. And this can go on "forever" or at least until the delusional (and lazy, I might add) Americans retire.
We see this today where the dividend yield is still at a historic low going back to 1890 and the PE ratio is still above it's historic average of 15x's. The profits are simply not there to rationalize the lofty prices. However, there is something more amiss going on beyond the simple "retirement dollars flooding market" and it may not be obvious to the naked eye.
With the DJIA breaking 13,000 and the economy showing signs of a tepid recovery, you would think the market would be doubly flooded with money. The monies flowing in from automotonic 401k retirement drones AND the new monies flowing in from people with new-found hope that the economy is indeed turning around and America has a future once again.
There's just one problem - the volume isn't there to support it.
If you look at the volume of the NYSE, it's cratering. It's lower than it has been in over a decade
This doesn't jive with the prices we see in the market. In basic economic theory, the more trading volume there is in a market, the higher prices should be in that is shows a demand for those stocks. Additionally, with increased volume comes increased "liquidity" which in itself provides a premium that should translate into higher prices. We are now getting the opposite.
So what is happening?
Well, your humble Captain has a theory.
The reason volume is tanking is because, despite what heavily-spun news you might hear about GDP, consumer confidence, the reality is that the economy still sucks. Unemployment, though down, is still 2 full percentage points above the WORST it ever was under George Bush. If you want to consider the "underemployment" argument, that many people have left the labor force, you could argue unemployment is closer to 11%. Additionally, even with today's revision of 3% RGDP growth, it's nothing compared to the booming quarters we had after most recessions (even the hated, incompetent,evil puppy-kicker GW managed a quarter above 6%). Also delivering a dose of realistic doom to the economy is the massive amounts of debt we have. And finally, unemployment is particularly high amongst the youth, who are not only necessary to bail out older generations via their public pensions, but whose retirement dollars are also necessary to keep the 401k Bubble/Ponzi scheme going as well. But just like the housing market, you need jobs in order to afford a house. And so, I'm sure if you looked at it, a huge reason for the lower volume is the lack of "new blood" entering the retirement/401k market, plus the fact people just don't plain have the disposable income to afford IRA contributions.
While this explains the collapse in volume, it doesn't explain why prices are still so high. And here is the nefarious side of the theory:
Something nefarious is going on.
When you see Apple with a market cap of 1/2 trillion dollars, you start to wonder why Apple is so valuable. And as it turns out it's because hedge funds and mutual funds all want to own Apple. No real financial reason for it, hedge fund managers, mutual fund managers and other incompetent perma-bubble Wall Street dolts like shinny new electrical doo-dads just like their spoiled brat, humanities-majoring children at home in Connecticut do. But what this shows you (or at least alludes to) is that it is institutions, not individuals, that are accounting for the majority of the buying and selling of the stocks. You also throw in electronic trading programs or "computerized trading" and it's no longer real investors with real money, as much as it is a potentially rigged beast of its own trading on itself.
It reminds me of a now-deceased publication called "Lake Minnetonka Magazine." This magazine was basically the socialite magazine for Minneapolis' uber-rich western suburb. Here is where Cargill, Carlson Companies and many more firms are based, as well as the hundreds of trust-fund babies these empires spawned. The magazine itself though was a self-absorbed love fest within itself. Written by the trustfunders about the trustfunders and all the parties they went to and who bought what Italian car or what worthless trophy wife opened up what worthless trinket shop with her hubby's money. Essentially it was a club or an entity that didn't produce anything and when its founder (ahem ahem-Tom Petters) was arrested for what was then the largest fraud in the history of the US (soon to be outdone by Bernie Madoff), the magazine went bye bye (ironically, shortly after, there were a LOT of for sale signs on the prestigious Lake Minnetonka, what handsome, dashing, chiseled motorcycle riding, fossil-hunting, bad-boy economist would have predicted that!).
In short, the stock market is being artificially inflated, if not, limped along, by the sanctimonious (or perhaps, oblivious) yutzes trapped in their own nepotistic, inbred echo chamber called "The East Coast." They trade amongst themselves, they believe that the stock market is a finite, mathematical beast that can be predicted. They have NEVER seen a real stock market crash, as they're perpetually bailed out by Dotcom Bubble after Housing Bubble after QE-LXI Bubble. They are truly oblivious to all the work, toil, labor and entrepreneurialism that gives those worthless pieces of paper (they so love to trade and sell and take commission on) value.
The question is if you wish to join this little clique or social party. Do you want to "hang" with all the fake and plastic of the paper-rich, asset-poor, and soon to be bankrupt class? Then by all means, throw that $16,500 max of your money into an inflated stock market every year. You'll be one of the cool people. But if you're more like me and want to hang out with your non-stab-you-in-the-back buddies at a reasonably priced bar, entertained with good intelligent conversation, and darn fine food, you may want to look elsewhere and hang out where there is real value.
In the meantime, enjoy the decline!