A Rational Journey To Hell?
The chart is by Goldman Sachs. Here is another screenshot from the article containing the chart, by Sam Ro:
Effective household ownership of the equities market is 80%.
But owning a stock is supposed to mean owning the business. Stockholders are supposed to vote at shareholders meetings. Stockholders control how much money a CEO makes or for that matter, if the CEO is to continue working for the company.
According to Ro, 43% of the market is owned by households indirectly, i.e., mutual funds, pension funds, and insurance holdings. “Indirectly” means the person supplying the money is not voting at shareholder meetings. The ability to vote is surrendered to the fund managers.
Please observe how the combined dark blue section and light blue just beneath it at the top of the graph have grown since around 1978 . This is the year the Revenue Act containing the term, 401K came into being. The intentions of this Act were noble. The unintended consequences could create Hell on earth.
Do index fund managers attend all stockholder meetings for the companies listed in the index for the fund they manage? What about mutual fund managers — do they attend shareholder meetings?
I believe the majority of 401k investors do not know the answers to these questions. This is our reality:
The people supplying the money fueling the markets —contributing to our present ‘bull market’ — are not directly holding accountable those who manage the companies they invest in. The vast majority are not aware how the shares they own are voted.
No wonder CEO salaries have grown exponentially over the past three decades. The people who own 80% of all equities are wearing rose-colored glasses and do not bother with such details. As long as account statements show robust gains they remain apathetic. Ironically, some people complain about CEO salaries while checking their 401k account status. They need only look in the mirror for answers when asking, “Why doesn’t someone do something about these huge CEO salaries?” A big contributor to the robust gains in the markets is due to growth in mutual fund investing. What happens when the trend reverses? What happens when 80% household ownership suddenly reverses?
What will happen to the markets when that big-ass dark blue and light blue section underneath it begin to shrink?
This is what a “bubble” looks like. It will (likely) pop within twelve years.
In twelve more years those born in 1964 will be 65 years old. The last of the Baby Boom generation will be retired. They will move their pile of cash from equities to US Bonds or Treasuries. They will take their robust gains and conservatively invest them to protect their nest egg from market fluctuations. They will no longer favor a risky growth strategy.
As the last of the Boomers exit stocks, a very big bear market could ensue. Their leaving could be the trigger to reverse the household ownership trend. Who will take the Boomer’s place? If no one steps up to keep this fantasy ‘bull market’ growing, the horror show will commence. Once the snowball starts to roll down the mountain, things could become quite ugly very quickly. With each market dip, more will consider getting out while they are still ahead. It could look very much like a depression-era run on the banks — people lined up to get cash only to find there is no more money. Except in this case, people will be on their laptops trying in vain to sell their 401k stock shares. Alas, by the time they hit “enter” after setting a bottom-limit to sell their shares, the stock has tumbled below the limit they just entered. No market “short-circuits” will prevent a Marianas Trench deep-dive. The mob rules. The mob always rules.
I am not an economist. I have no pHd in economics. I don’t need one.
It is not necessary to be fireman in order to proclaim a building is on fire. Smoke is available for all to perceive:
The household ownership of equities trend will reverse. Everything that goes up, eventually comes down. Eighty percent in 2013 is pretty damn high. It will come down one day. When the ‘mob’ finally grows weary of investing in equities, the crash will be quite dramatic.