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Friday, December 28, 2012

Ordinary folks losing faith in stocks

A must read AP article (hat tip Zero Hedge) discusses how ordinary folks are losing faith in stocks because of a lack of trust.
Andrew Neitlich is the last person you'd expect to be rattled by the stock market. 
He once worked as a financial analyst picking stocks for a mutual fund. He has huddled with dozens of CEOs in his current career as an executive coach. During the dot-com crash 12 years ago, he kept his wits and did not sell. 
But he's selling now. 
"You have to trust your government. You have to trust other governments. You have to trust Wall Street," says Neitlich, 47. "And I don't trust any of these." 
Defying decades of investment history, ordinary Americans are selling stocks for a fifth year in a row. The selling has not let up despite unprecedented measures by the Federal Reserve to persuade people to buy and the come-hither allure of a levitating market. Stock prices have doubled from March 2009, their low point during the Great Recession.
The Baupost Group summarizes how the Fed's efforts to force people to buy riskier assets undermines trust.
Finally, we must question the morality of Fed programs that trick people (as if they were Pavlov's dogs) into behaviors that are adverse to their own long-term best interest.  
What kind of government entity cajoles savers to spend, when years of under-saving and over-spending have left the consumer in terrible shape? 
What kind of entity tricks its citizens into paying higher and higher prices to buy stocks? 
What kind of entity drives the return on retiree's savings to zero for seven years (2008-2015 and counting) in order to rescue poorly managed banks? 
Regular readers know that trust in our financial system is the result of transparency.

This is why transparency is at the heart of the FDR Framework and the government is given one simple responsibility:  ensure market participants have access to all the useful, relevant information in an appropriate, timely manner so they can independently assess this information and make a fully informed investment decision.

Market participants are willing to accept either a gain or loss on their investment decision because they "trust" the independent assessment they performed or had a third party perform.

The financial crisis that started on August 9, 2007 showed both opacity across wide parts of the financial system and the degree to which the government has failed to perform its responsibility of ensuring transparency.

Up until August 9, 2007, investors were willing to "trust" the independent assessment of third parties like rating agencies and the government when it came to structured finance securities and banks.  After August 9, 2007, investors knew that neither of these entities could be trusted to provide an accurate assessment.

From the AP article, the result of this opacity and the governments failure to ensure transparency is
"People don't trust the market anymore," says financial historian Charles Geisst of Manhattan College. He says a "crisis of confidence" similar to one after the Crash of 1929 will keep people away from stocks for a generation or more.
So the collapse in trust among ordinary folks was completely predictable.

In fact, they have been adopting Mark Twain's non-trusting view on investing:  more concerned about the return of their capital than the return on their capital.  Remember, ordinary folks understand that under the principle of caveat emptor (buyer beware), they are going to have to absorb any losses.

One of the entities that failed to ensure transparency was the Fed.  The Fed is responsible for regulation and supervision for the largest banks.  As the Bank of England's Andrew Haldane says of these banks, they are 'black boxes'.  Black boxes that leading up to the financial crisis the Fed insisted contained very little risk.

This is the same Fed that is now trying to force ordinary folks to take more risk by buying opaque securities that they don't trust.  And the Fed thinks this will work why?

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