One more reason why stocks will be dropping

[fccool]

I've just finished reading "The rich dad Prophesy" in one sitting in borders, which some may equate with "piracy". Nevertheless, the author put a different spin on why the market will not be doing too well in near future.

In 1974 the government enacted the ERISA ( Employee Retirement Income Security Act ), that was supposed to guard the retirement accounts of people from company abuse. Basically, to make it plain and simple, ERISA moved the fund management responsibility from the business managers to the employees. This act resulted in what we now know as IRAs (Individual Retirement Accounts).

The IRS was very concerned about the timeframe of when their taxable revenues from IRAs would begin to come in, and they paved the road for a provision that would force people to begin withdrawing the money from the accounts by the time they hit 70.

To really drive the point home:

Here's Dow from 60s-80s

And here's Dow from 80s-00s.

As you can see, the government pretty much boosted the market by channeling the retirement money into the market. Sure, the cheap credit had some part to play in this, yet it was only a part.

Now, there were many false assumptions that came out of the 80s-00s era. One of these assumptions is that markets will always go up.

The assumption completely undermines the law of supply and demand, and it is the icing on the cake of today's economic crises.

One of the mechanisms behind the crises is the provision tagged on to the ERISA, that some of you may be familiar with. It's the provision that was pushed by IRS that requires people to begin withdrawing the funds from IRA by age of 70.

Why is it of any importance? The baby boomer generation constitutes the largest portion of the US population, and the wealthiest one also. Once they start pulling out of the Stock market as mandated by the law, this will tip the demand into the negative and the prices will be dropping fairly fast.

So, the result is yet another pyramid scheme, where people who got in early enough will benefit the most, and the late investors will be left holding the bag thinking that they will not loose anything until they sell.

A couple important conclusions to keep in mind:

1) Stay away from long term stock investments. Just because Buffet buys stocks, does not mean that you can do the same and win.

2) Invest in Asian markets. I know, this may sound as "unpatriotic", but when it all goes down the drain you may be one of the few people who could positively contribute to economic reconstruction.

Asian markets will survive because these are the only ones that practice the CAPITALISM in its true sense... i.e. raising the capital through saving and sales of real product.

3) Don't buy into the hype. There's much hype going around about buying the stocks because these are undervalued. Don't buy into it. If the the markets will come back, the comeback will likely be short lived.

4) If you do have some savings in the Mutual Funds, consider diversifying into something else. Long term these are very shaky, and will not last.

It's funny that the majority of other investment books that I've looked through predicted the markets to keep rising possibly to 40k point, in the next 5 years. Some predicted the dow to be at 20k now, which may be the reason these books will remain on the shelves for some time, until these are moved to the bargain section.

I hope I've demonstrated why stocks will not keep rising without some major law amendments, which would restrict access to the baby boomer retirements funds.

[Dr. Shane]

McCain has been talking about this a lot and regardless if he becomes President, it is very likely the law will be adjusted to allow retirees to take their money out at a later time.

[fccool]

How exactly would that solve the problem? It would just delay the effect.

[Dr. Shane]

The problem is that certain people have to sell their stocks when they reach a certain age. So these stocks get dumped on the market when the market is down. By allowing them to sell their stocks later or leave them as an inheritance, the stocks can be sold when the market is doing better. If sold when the market is doing well, it won't compound a falling market.

[fccool]

A couple of the questions that I think are relevant.

1) The IRA accounts are that... retirement accounts. For people to leave them as is would mean to block access to these accounts. Otherwise they will use the accounts for , ahm, ... retirement. That's what many people today already live off.

2) If the stocks can be sold when the market is doing better... that sell of is what would create the bust in the first place.

3) People invest today not to get a return on dividends. They invest with bets that the prices will keep rising. The prices will only rise if there is capital on hands to keep "investing" these money into Wall Street, thus continually propping up the market. People today don't have money to invest.

In spite of the recent 40% losses , the Dow is still 100% up from a decade ago. The income increase was around %20 over the fame period, while the compound inflation was over 30%. The income increases are not keeping up with inflation, and yet Dow did not reflect the overall lack of investment capital. Where did it come from? From nowhere. It was people simply paying for stocks more than these really worth, generating the demand...while borrowing the money to invest. Their decisions were not based on P/E, but based on existing demand for these stocks... speculating that the demand would increase.

Do people even look at P/E anymore?

In addendum, this is what triggered the 1929 depression to begin with. People buying stocks on margin with loaned money, trying to get the piece of the fast prosperity action.