In Part 1, I asked Corporate America: “As you bask in the glory of your fabulous global free-trade utopia, maybe you can explain to me why your stock index topped out 10 years ago.”
And now for the answer:
In its prime, the motto of the American Middle Class was “shop ’till you drop.” What did they buy? Lots of products from Corporate America, right? And now that Corporate America has off-shored the Middle Class, they can no longer keep up the spending and have a new motto: “Save ’till the grave”.
That’s pretty obvious. But what else did Americans like to buy from Corporate America?
Stocks.
Lots of stocks.
In fact, during the late 1990s, Americans bought $740 million worth of stock every day.
No more.
Unemployed people don’t buy a whole lot of stock, now do they? As a matter of fact, they sell stock to put food on the table. Hardship withdrawals from retirement accounts are at a record level. And Americans who can save, now prefer bonds because they need the income.
This chart, compliments of DailyJobsUpdate.com, shows that over $100 billion has been pulled out of mutual funds (that invest in US stocks) over the past year (click chart to enlarge):
Is the American love-affair with stock-ownership dead? It’s starting to look that way.
Back here, I explained why Ben Bernanke had no power whatsoever to prevent those 1,100 Whirlpool jobs from going to Mexico. But now let’s consider the stock-market implications:
How many of those American Whirlpool workers do you think held WHR in their portfolios? Probably a good percentage of them, right? And now that their standard of living has probably been permanently reduced (compliments of free trade), chances are good that they will have to sell the stock at some point, if they haven’t already done so.
Now, how many of Whirlpool’s new Mexican workers do you think will add WHR to their portfolios? Do they even have portfolios? After paying for rice, beans, and tortillas, how much money is left over to buy stocks when you are making $1.75 per hour?
Not much.
So, by replacing its former well-paid, free-spending American workers with impoverished foreign workers in China, India, and Mexico, Corporate America has wiped-out its best customer for the stock that it issues.
And there has to be an impact to price/earnings multiples, does there not? While trillions of dollars of cash pile up in Corporate America’s bank account, the S&P 500 languishes. Should we not be expecting more “multiple compression” in our glorious global-economy future?
Recently, fund manager Ken Heebner said that corporate profits were growing so fast that “stocks have to go up.” Maybe they will, but do they “have to”?
I’m sorry Matt, I take it you don’t want MarketWatch stories posted here. Would you prefer a link to a story instead? I thought it was pretty topical (given our discussion of bonds lately) and short enough to just post. Thanks for responding.
2th,
I like to avoid violating copyright law. So, yes. Post a link.
Matt
Sorry matt….I thought if credit was given (a reference or footnote, if you will) that was enough to not violate copyright law. Sorry.
Okay, here is the “Bonds aren’t a Tech Stock Bubble” link…enjoy.
http://www.marketwatch.com/story/bonds-arent-the-new-tech-bubble-2010-08-20
Thanks 2th.
Good information and angle on stock investing Matt.
I recall many moons ago how the U.S. corporate world’s montra was “employee owned”.
SPY daily with two gaps to the upside. I see none to the downside unless someone else’s chart says differently (no two are alike, ya know).
http://i36.tinypic.com/294o48o.jpg
Clearly, there’s a sea change in the investing public as boomers retire and pursue income over riskier growth. What is incredible is that microyield bonds are perceived as a low risk alternative to stocks. Eventually, sanity will bring them back to dividend-paying stocks.