BONFIRE OF THE FINANCIALLY ILLITERATE

 

Peace,

As President Obama nears the end of his presidency, many of the usual issues are at the forefront of national discussion. Topics such as war, civil rights, and the economy, remain the major fossil fuels for discourse in this country. While much of the media discussion is focused upon society and the election, the “economy,” as an idea and a reality are probably more important to the average American. Remarkably, one can find pundits and polis alike who are touting an economy recovery for the everyday American based upon metrics such as the level of the S&P 500, median incomes, and other statistics released predominately from governmental institutions. (CBO, BLS, et al.) They are all complicit in one of the many media scams concurrently running in our fine republic. Pundits parrot the idea that if the market is trending up, it is a sign to consumers that economic prospects are bright and will spur them to invest more.

This is a bit of play on terminology that can be missed by the lay person. The consumer is not who you think it is. This statement refers to merely a notion, held in economic circles, that rising prices and a bull market is a sign to investors, business owners and the purchasers of securities, ie customers, that the future looks for financial investments, which spurs them to invest more. The so called customers are often the central banks who promote the idea of rising markets benefiting most people by the very nature. Yet in reality, rising prices to an average American, or any person, is rarely a good thing. Juxtapose that against our nation’s historically stagnant wages, drop in home ownership, crippling student and credit card debt and its most certainly a bad thing. In many ways we are all sitting in deck chairs on the S.S. 401(k) Titanic, but we don’t have any other options.

The 1980s saw the Federal laws restructured resulting in most of the population being loving herded into the 401(k) system of retirement planning. 401(k)’s differ from their pension plan predecessors in a few ways, the most important being varied returns and potential for loss, versus the fixed scheduled payments of a pension system. For the bulk of the population the 1980s saw the end of jobs with pensions in the private sector.

By the mid-1990s pensions were largely a thing of the past. Due to the influx of new investors via the 401(k) adoption by major corporations, the indicies rose to reflect both the in surge of money into the markets but the economic performance of America at the time.  Those of us who only have a 401(k) are exposed to movements of the markets. Those people who were promised pensions have it made, right? Not exactly.

Pension are promises that must eventually paid out. However a corporation would be doing itself and its shareholders a disservice to fully fund pension liabilities before they are due.  One of the greatest financial threats in the near to medium future is unfunded pension liabilities of municipalities, states, and corporations. Those monies are due to Baby Boomers and subsequently almost everyone reading this piece. (By relation or direct receipt). These pensions are invested in securities which trade on various global stock exchanges. In order to pay out these sums in the future in the amounts promised they need a continually rise market. The math at present shows large gaps in funding for massive pension/retirement funds such as CALPERs which should be unsettling for the millions of people who most likely have planned to receive all they’re owed. Our futures are tied to the market even if we don’t know it. The question is, does the market being “up” during a presidency or a period of time actually benefit large groups of people? Is the market representative of the economy?

In truth the alleged connection between the markets and the actual economy are far overblown, and is in fact a ploy to shape support for the FED’s money debasing excesses. Financial markets rising is in no way a direct correlation to positive real economic activity. Institutional investors, corporations, and central banks are the oil of our financial markets. Their large scale market decisions are due to a variety of factors, many of which have to do with financialization and profit seeking. Not necessarily cogent investments made on detailed research and proof in the actual economy to warrant a valuation.

In order to clarify this, we’ll work our way through a few statistics.

“According to a study from Fidelity Investments, the average retirement savings for 11.8 million 401k balances in America is just $74,600. In most cases, that is maybe the equivalent to a year’s salary. Certainly not enough to keep you in the life to which you have been accustomed for the twenty five or so years you will likely have left to live.”

“The median household income in America is $59,039 and around 56% of people living in America has less than $10,000 saved for retirement.”

If someone has the choice to buy individual stocks in their 401k it is guaranteed they are being ‘passed through’ some sort of price and fee adjustment. Any mutual funds you’re invested in are managed by professionals who have to find returns in an increasingly difficult environment. You lack the advantage of day trading or churning your own account to skim profits, due to rules of ERISA and your individual firms. In many ways the average American with a 401k is only near enough to the market to feel its burn, and they aren’t even the majority:

“53 percent of Americans have no money in the stock market, including retirement accounts. 62 percent of all US wealth owned by top 5 percent.”

The market works as an price, not value, aggregating mechanism. Prices are bid “up” as part of how the system is structured. There is an assumption that a  “rational investor” will sell if they can make a profit, can do so to achieve flexibility or to raise cash. The latter two examples can include taking a loss on the exchange. Generally we all would like to make money on an investment we entered for that reason. However this very mechanism kills the average 401k participant who doesn’t have access to hedging tools or the ability to negotiate bid prices. A loss of 5% of your portfolio will not be recouped by a 5% gain. The reason being the 5% you made back is based upon your current balance or the current stock price (which had dropped by said 5%.) Therefore we see the average investor, time and time, again double down on losses or attempt to catch trends to late because their actual ability to earn alpha while in a 401k is hampered by their plan rules.

The financial markets can move up due to variety of factors including, trading volume, the closing of short positions, rumors, geopolitical turmoil, or the simple fact that the most traded stock on the index, Bank of America, has a big swing day. Literally none of those factors directly plug into the everyday American’s personal life and wealth. To make reality worse, the historically low savings rates the globe has been forced into by profligate central bank policies is the result of those same banks in turn have lowered rates in order to stave off the mounds of government debt all over the world from exploding. The savings rate that central banks have dropped to zero, in order to make their payments on the interest smaller, is the same rate you receive interest in your savings accounts. So while you’re not truly reaping the gains of the market, you do feel the repercussions of actions committed by financial monks in the ivory towers of finance.

The market, economy and consumer are all economic theoretical concepts that can’t truly be outlined or depended on to function as the books like to state. Greater knowledge of the reality of the economic system is extremely important as we make our political decisions and future plans. We are all staring down the barrel of a generational hand-off the scope of which the modern world still isn’t prepared for. Within the next 20-30 years the Boomers will literally leave the earth. Their assets will be liquidated or inherited and those who have entitlements owed to them will supposedly collect. The economic shift based upon these mortality events alone have the potential to rock our entire geopolitical edifice. The actions of the FED, the IMF, and ECB, portend they will continue to Lionel Messi the can down the road until it slams into a wall of protestors at the gates of power.

Unless America finds the political will to deal with government spending, corporate profiteering and the health of the market its future is tired to, the joke may be on us.

“Everything burns….”

 

 

 

SOURCES:

How the stock market is a sham for the working and middle class. 53 percent of Americans have no money in the stock market, including retirement accounts. 62 percent of all US wealth owned by top 5 percent.

The death of the American pension: How older Americans are entering their golden years with a lack of retirement savings.

 

http://www.businessinsider.com/mutual-funds-are-underperforming-their-benchmarks-goldman-says-2016-9

https://www.washingtonpost.com/business/economy/us-middle-class-incomes-reached-highest-ever-level-in-2016-census-bureau-says/2017/09/12/7226905e-97de-11e7-b569-3360011663b4_story.html

http://time.com/money/4258451/retirement-savings-survey/

https://www.calpers.ca.gov/page/newsroom/calpers-news/2017/preliminary-fiscal-year-investment-returns

The Average Retirement Savings in America Are Not Nearly Enough

 

 

 

 

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