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In last week’s article, Why You Should Understand the Market’s Upward Momentum and What’s Going to Stop It, I explained how following market benchmarks is easier than following individual stocks. That’s because “big-picture drivers” (that are easy to follow) impact investor psychology and market direction.
Those drivers are:
- What the market is doing
- Interest rates and central bank policies
- The economy
- Alternative investment opportunities
- Risk and reward
I explained that “momentum isn’t last on that shortlist because it’s the least important big-picture item. It’s last because everything before it determines momentum…and when it’s hot, it becomes its own driver.”
And I also teased what this article’s going to reveal: “There’s another piece to the momentum picture, a big-picture momentum driver all its own, that’s been an engine of momentum, which I’ll get into right here next week.”
So, what’s the secret?
The hardly ever talked about big-picture momentum driver is the passive investing trend.
Here’s what it is, how it works, why it’s working so well, and what could end it.
Thank you, thank you, thank you, all of you who posted comments on yesterday’s “I’m All for Opinions, But This Stinks.”
You are passionate and patriotic, and most of you have very strong opinions. And I respect that! I love all of you, because you are engaged. We, you and I, all of us, we are conversing, we are being heard, we are making ourselves “cause in the matter.”
Now, what was I up to yesterday?
Yesterday’s blog was an exercise (a couple of you actually got that). It was hard to construct, but I think I hit my mark because hundreds of you joined in – just as I had hoped.
I was hoping that you would have an opinion about an opinion piece – mine – whose premise began by saying opinions that aren’t based on facts are too often “lies presented as absolutes,” and from there went on (without any facts) to level my opinion about a movie that I claimed bastardized the truth for the sake of a political agenda, because, in my opinion, it was nothing more than an opinion masquerading as a bunch of facts.
So… what was the exercise?
I wanted to see what your reactions would be.
Would you believe me that my opinion was a fact, just because I prefaced my opinion with some diatribe about me being the truth seeker? Would you see that I presented a “fact” (that the movie wasn’t factual) without any facts? Would you take a side in the political debate, based on the movie, or based on what you thought about Obama, or what you thought I was saying, or what you thought I believed? Would you present your arguments with facts of your own? Would you get the irony in it, which is that we all have opinions and are far too often too opinionated because our predispositions, our “always already listening” mechanisms override our pursuit of objectivity.
You did great.
You overwhelmingly bashed me – something like 98% you, as one commentator tallied. And I deserved it.
Those of you who were taken aback that I would knock the movie without addressing anything specifically wrong in the movie – you were right. I had no right to level my opinion without backing it up in any way.
But here’s the thing. Because I didn’t back up my opinion about the movie, because I didn’t address anything specific, or state my case constructively in any objective manner, many, most of you, formed an opinion about me. You couldn’t help it. Right?
Opinions beget opinions. Opinions are subject to opinions. And if the facts aren’t openly debated, as to lay bare the sometimes two lenses that facts are subject to being viewed through, we have little choice but to revert to our predisposed positions on the things we think we know or are passionate about.
So, here’s a representative comment, from a subscriber named Ken, about what I said yesterday.
Take a look.
[Editor’s Note: Michael Muoio is an Insights & Indictments reader from Wisconsin who works as a trader and serves on various boards. Last week he submitted the original essay below in response to “Why America is in Trouble Now.” His ideas generated a lot of discussion among Shah’s readers, so today we want to share it with all of you. Enjoy.]
32 Years of Wrong Turns and Tax Amnesia
by Michael D. Muoio of Appleton, Wisconsin
As we endure the ceaseless political rhetoric surrounding our national budget and debt, I have come to the conclusion that we, as a nation, have actually chosen to put ourselves in this quasi-bankrupt insolvent position.
There are a number of critical turning points where our political and business leadership chose the wrong path – with our support.
Here are some of the major wrong turns that occurred over the last 32 years.
In 1980 we adopted “supply side economics,” also known as “trickledown economics,” and we adopted the philosophy that budgets never needed to be balanced.
The theory states that increasing the net wealth possessed by the economic elite generates the best stimulator of economic activity. These wealth-owners will invest any marginal wealth gain from tax cuts on things that increase “supply” – factories, new businesses, innovative goods and services, thus “supply side economics.”
Belief in this economic heresy continues, and many current candidates for public office actually advocate further tax cuts.
Because of this heretic belief, politically driven and popular tax cuts were put into place that were based on expanding our national debt from $907 billion in 1980 to $3 trillion in 1990 to $5 trillion in 2000 to $10 trillion in 2008 and $16 trillion in 2012. These tax cuts continue unabated and are expected to drive our national debt to $22 trillion by 2016 (or a 24-fold increase since 1980).
We also entered diabolical free trade agreements with tax incentives that encouraged manufactured product imports and job exports. In 32 years we have managed to export over 60,000 factories and over 23 million jobs. Our trade policy continues unabated.
We deregulated the financial sector and freed Wall Street to be “creative.” This permitted the destruction of $16 trillion of our collective wealth and returned us to 1992 wealth levels nationally. Financial deregulation essentially continues unabated, along with super-sized banker bonuses with no bankers in jail.
Following the 9/11 attacks, we committed over $4 trillion (off-budget) to occupy Iraq and Afghanistan. Taxes were not imposed to finance the occupation. The occupation continues with no end in sight.
We implemented Medicare Drug Plan D at an incremental cost of $180 billion a year. No taxes for this were imposed, and drug companies were not required to negotiate prices with Medicare. This mismanaged program continues and is growing.
Student loans now total over $1 trillion, as our public and private universities and colleges took advantage of the easy money available to students for education. At UW Madison, for example, resident undergraduate tuition in 1980 was $769; today it is $8,592 or an 11-fold increase. Sadly, it was reported recently that a new retiree was having their Social Security check garnished to repay student loans over 30 years old.
So are we broke? Indeed we are. And we have clearly chosen to be.
And that’s not all we’ve done wrong…
It’s a fact. Financial services are a huge part of the economy.
Twenty years ago, financial services accounted for somewhere between 5% and 7% of U.S. gross domestic product, depending what you include in the definition of “financial services.” By the time markets peaked, and just before the mortgage bubble burst, that number had shot up to between 17% and 20%.
What’s fascinating to me, and should be to you, is that shuffling paper for fun and outrageous earnings got as big as it did.
And just because some air in the bubble that drove a lot of those earnings gently escaped (not), that doesn’t mean the financial services machinery isn’t working overtime to pump up their earnings and profitability again. You know they’re working at it all the time.
I could go on and on about what this all means, and how problematic it is for the long term future of America, but that’s not the point of this message in a bottle.
The point is that we have become a nation of oligarchs (the powerful private interests of money men and oil men… same thing) running our government like a banana republic.
Let me show you what I mean…
We’ve arrived. We’re exactly in the middle between here and there.
The problem with being here is the “there” part.
I’m talking about where the markets are and where they’re going next. Is “there” backwards or forwards? Are we coming or going from here?
Before I give you my own forecast, and recommendation, let me say this about that…
Here are the two best forecasts I’ve ever heard:
- “It will fluctuate,” which was what J.P. Morgan famously answered when asked what the market would do, and
- “I cannot forecast to you the action… It is a riddle, wrapped in a mystery, inside an enigma,” which is what Winston Churchill famously said, not about the market, but about Russia. (The full first line is, “I cannot forecast to you the action of Russia.”) But you get the picture.
American markets are touching their highs. It’s as if everything is clear and sunny. It’s as if forecasting is as simple as looking out the window and calling out what you see.
It’s clear and sunny. Haven’t you looked outside? If only it was that easy…
But when you do look outside, let’s say, through a window, you only see in one direction. The question can then be asked, is the weather you’re looking at coming or going, or is it here to stay?
America, and indeed the global financial markets, came to the precipice of a cliff and barely caught their balance before plummeting into an abyss so deep and black that no one knows where it would have taken us. But my guess is to Hell.
The rope that held us from going over was stimulus, massive stimulus.
That stimulus was never mopped up. It’s been left out there like water on everything after the fire has been doused; and there’s more coming.
The Federal Reserve, which isn’t playing just 18 holes, but seems like it’s playing a marathon round of swinging hard and gently, but constantly swinging, is teeing up another ball with some little marking that reads QEsquared, or something like that.
Here’s my guess on what the Fed is going to do…
America is slipping into darkness.
One by one the lights are being turned off in our “shining city on a hill.”
And Wall Street’s greedy hand prints are all over many of the darkened switchboxes.
Of course, politicians’ grubby, filthy fingerprints are everywhere too; but there isn’t enough cyberspace to launch into when discussing that black hole.
Besides, this e-letter specializes in Wall Street indictments.
You’ve heard about regulatory capture. I just wrote about its dark side in this space.
Regulatory capture is when regulators become captives of the individuals and firms they are supposed to be watching, regulating, and disciplining when they break the law.
“Industry capture” is beyond just regulatory capture.
Here’s what I mean…
Let’s try and be insightful today, shall we?
Equities have been rallying; we’ll call it the summer rally.
Major benchmarks are only a few percentage points off their highs. It’s all good, right?
I don’t think so.
We could use the old “can’t see the forest for the trees” adage, which means, sure, you can look at all the trees around you and see they’re still standing, because you’re in the middle of the woods. But you can’t see the whole forest, because you’re too flat on the ground and too deep under the canopy.
Let’s rise above the treetops and market highs and look down, to get the big picture.
Here’s what I see…
I got hundreds of questions and comments this month from you about my stance on regulations. Let’s see why.
Q: I agree with you on the need for some regulations. However, they must be simple and clear… How would you write the regs? ~ Cory B.
A: Cory, all the regs I would write would be one-liners. That’s no joke.
Q: What we need is a hammer. Not the kind carpenters use, but a judicial hammer which treats serious crime seriously. No more civil trials for criminal offenses, such as the debacle surrounding Richard Fuld. These thugs know how to weigh odds, and most of them will gladly risk 15 months in a white-collar prison at hard tennis for, say, a few million in ill-gotten gains. You can’t fix fraud, but you should be able to make the punishment so severe that only the dumbest of the dumb would give it a try. ~ Ron S.
A: That’s what I’ve been saying. How come so many of you say it so much better than me? I’m always learning from you all.
Q: To put faith in regulation and the regulators is to assume they can’t be bought. They can always be bought. Whaddya gonna do? Reform the existing corrupted agencies? Get rid of the Gensler/Goldman-run CFTC and replace it with something else? And who would run that? Somebody from JPMorgan? ~ fallingman
A: I want teachers (grade school and junior and senior high school teachers) to be our regulators. They obviously aren’t about the money and they obviously are civic and civil minded. Why not?
Q: Who is going to put the “black and white” rules in place, the regulators? lol! Regulators are currently paid by the banks they regulate, umm, but, isn’t that a conflict of interest, or, am I just stupid?~ Domina L.
A: Stupid is as stupid does. If we go back to the way regulators regulate, we’re all stupid. We need a new breed of regulators. Expecting that we’ll ever get them to come down from Olympus is proof that I am stupid. But a boy can dream, can’t he?
You made me promises, promises,
Knowing I’d believe.
You knew you’d never keep.
Those lyrics are ripped from the early ’80s band Naked Eyes’ hit song “Promises, Promises.”
I use the word ripped, not because it’s a term used in the music business, but because of its more common meaning, as in ripped-off.
Because that’s what we’ve been – ripped off.
This time, which has been going on for a long time, I’m talking about how grossly underfunded both private and public pension funds are, and how we’ll all suffer the consequences.
I’m going to strip out the mumbo jumbo so you see the truth with your own naked eyes.
Retirement is getting further and further away for most Americans. And if they get there, they may not be reasonably compensated by the pension plans they thought they were paying into along with their co-payers, their private and public employers.
That’s because a lot of those co-payers aren’t paying up.
And that’s only part of the problem…
Here’s the other, even more insidious, naked truth…