Stepping back and considering the 2010 Flash Crash caused by HFT bots, the MF Global malfeasance, the JP Morgan fiasco, the failed Facebook IPO, this week's PFG Best crime, or the still-breaking Libor scandal (possibly the largest in history), the greed and malfeasance scandals are once again breaking hard and heavy on Wall Street. Nothing has changed since 2008, and why would it, given that no major prosecutions arose from the near collapse of the global financial system. In fact, Wall Street made money off of the entire fiasco, thanks to the free taxpayer funded bailout. The failure of Washington to reform the financial system after the events of 2008 reveals the enduring silent pact between Washington and Wall Street; and in retrospect this inaction will likely be viewed as the most devastating corruption of political influence in U.S. history. Both Parties are getting paid to look the other way. Even more disturbing (albeit not surprising), is the overwhelming complacency of the general public to all of these scandals breaking one after another. This is exactly how the problems started in 2007 - first one shoe dropped then another...Sure, last year we had the Occupy Wall Street movements, yet the attitude of the public was apathy at best, mocking and derision at worst. As long as the stock market continues its Central Bank sponsored levitation act, the sheeple at large can't be bothered with Wall Street's uninterrupted sleazefest. However, wait until we get to the other side of this latent fiasco and 401k accounts are obliterated; all of a sudden the public will awaken from their semi-lucid coma to stage Occupy v2.0 which will be a tad more intense than last year's version. Yet, as always, it will be too little too late, and by then people will be wishing they had directed more of their support to OWS and a lot less to the latest American Idol...
Insider Dilution - The Biggest ("legal") Stock Market Swindle
The question on the table is why if S&P operating earnings are substantially higher today than they were back in 1999, is the S&P 500 at the same level as it was back then, and why is the dividend payout rate, so low by historical standards? The answer is because companies don't want to use earnings to pay out as dividends to the benefit of ALL shareholders. Instead, they use earnings to buy back stock to conceal the fact that they are busy diluting the hell out of their float by issuing stock grants and stock options (priced well below the market) to their top employees. In the past 13 years, small investors have poured hundreds of billions if not trillions into stocks directly and via mutual funds, a net inflow flow that only reversed very recently. And as the link above shows, operating earnings have been expanding consistently. So where the hell does all of the money go? It goes straight from the small investors' pockets to the bank accounts of wealthy insiders who are selling their (newly issued) stock to the Middle Class bagholders. During the past 13 years, even as the market went nowhere, insiders have taken hundreds of billions of dollars out of stocks. So the stock market is not a wealth creation machine as advertised, it's merely a casino-style wealth transfer machine, where the casino can issue new chips at whim, lowering the value of all chips outstanding. Thanks for playing...
The question on the table is why if S&P operating earnings are substantially higher today than they were back in 1999, is the S&P 500 at the same level as it was back then, and why is the dividend payout rate, so low by historical standards? The answer is because companies don't want to use earnings to pay out as dividends to the benefit of ALL shareholders. Instead, they use earnings to buy back stock to conceal the fact that they are busy diluting the hell out of their float by issuing stock grants and stock options (priced well below the market) to their top employees. In the past 13 years, small investors have poured hundreds of billions if not trillions into stocks directly and via mutual funds, a net inflow flow that only reversed very recently. And as the link above shows, operating earnings have been expanding consistently. So where the hell does all of the money go? It goes straight from the small investors' pockets to the bank accounts of wealthy insiders who are selling their (newly issued) stock to the Middle Class bagholders. During the past 13 years, even as the market went nowhere, insiders have taken hundreds of billions of dollars out of stocks. So the stock market is not a wealth creation machine as advertised, it's merely a casino-style wealth transfer machine, where the casino can issue new chips at whim, lowering the value of all chips outstanding. Thanks for playing...
So, Why Would Anyone Still Invest in Stocks?
Good question. The largest (and wealthiest) cohort amongst us is of course the Baby Boomers and they have been told by their financial advisors (yes, the same ones who never saw 2008 coming), that if they don't invest in stocks, they will NEVER retire. So now the Boomers are caught in a Faustian Bargain - they know damn well that the market is a casino with odds against them. However, if they withdraw their money there is a 100% chance they will retire poor. On the other hand if they keep their money in the market there is a "x%" chance they will retire not just poor but eating dog food - hmmm, decisions, decisions... Meanwhile, that 'x%' is seemingly a subjective variable that is constantly manipulated and obfuscated by the financial press and financial industry. As you can tell, I put the "x%" at 100%, meaning for those who remain in stocks, there is a 100% likelihood that they will be eating dog food.
No Safe Havens
Sadly, but truthfully, another reason people keep plowing money into stocks is because there are no 100% safe investments anymore. There is an entire industry now dedicated to pushing gold and silver, but as we saw in 2008, precious metals were no safe haven (declining 30%). I am still of the belief that short-term Treasuries are the best option (owned via ETF or Mutual Fund), because they gained in value in 2008, but they won't be safe in the long-term when the U.S. is no longer deemed a safe haven. Arguably, high grade corporate bonds are the least leveraged financial instrument, however, they too are highly correlated to the economy. That said, as we have learned, stocks are one of the most volatile financial instruments - far more so than any bond product, so stocks are the worst place to hide in a really bad economy.
So when you put it all together, just about everyone who is associated with the market at this juncture - both the wolves on Wall Street and the sheep on Main Street has a vested interest in maintaining the illusion of sustainability. Conversely, the vast majority of people under the age of 30 (the few with jobs) are shunning the stock market like the plague. They recognize it for what it is - a speculative casino that keeps their parents awake at night, while making a tiny fraction of the population obscenely wealthy as they trade pieces of paper back and forth in a zero sum game, while the real economy gets worse by the minute...
The Market Only Gives So Many Chances
One thing we have learned the hard way is that the market only gives so many chances to get out. We have revisited these same levels multiple times now, each instance on an attenuating time scale. The market has a way of setting its hook by making investors believe that they are about to regain all of their previous losses and break to new highs i.e. fear morphs directly to hope, skipping sober reality.
When the Temple of Greed collapses this time, those caught inside will not be getting out. The mob at hand will not abide any more bailouts for the ultra-wealthy. Investors and Wall Street have come to believe that the Fed is invincible and therefore they are backstopped by the Bernanke "put" (option). This is the last delusion that needed to be fully accepted, to cement their fate...
One thing we have learned the hard way is that the market only gives so many chances to get out. We have revisited these same levels multiple times now, each instance on an attenuating time scale. The market has a way of setting its hook by making investors believe that they are about to regain all of their previous losses and break to new highs i.e. fear morphs directly to hope, skipping sober reality.
When the Temple of Greed collapses this time, those caught inside will not be getting out. The mob at hand will not abide any more bailouts for the ultra-wealthy. Investors and Wall Street have come to believe that the Fed is invincible and therefore they are backstopped by the Bernanke "put" (option). This is the last delusion that needed to be fully accepted, to cement their fate...
