Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Stock Market FOMO Hits September CRASH Brick Wall - Dow Trend Forecast 2021 Review - 20th Sep 21
Two Huge, Overlooked Drains on Global Silver Supplies - 20th Sep 21
Gold gets hammered but Copper fails to seize the moment - 20th Sep 21
New arms race and nuclear risks could spell End to the Asian Century - 20th Sep 21
Stock Market FOMO Hits September Brick Wall - Dow Trend Forecast 2021 Review - 19th Sep 21
Dow Forecasting Neural Nets, Crossing the Rubicon With Three High Risk Chinese Tech Stocks - 18th Sep 21
If Post-1971 Monetary System Is Bad, Why Isn’t Gold Higher? - 18th Sep 21
Stock Market Shaking Off the Taper Blues - 18th Sep 21
So... This Happened! One Crypto Goes From "Little-Known" -to- "Top 10" in 6 Weeks - 18th Sep 21
Why a Financial Markets "Panic" May Be Just Around the Corner - 18th Sep 21
An Update on the End of College… and a New Way to Profit - 16th Sep 21
What Kind of Support and Services Can Your Accountant Provide? Your Main Questions Answered - 16th Sep 21
Consistent performance makes waste a good place to buy stocks - 16th Sep 21
Dow Stock Market Trend Forecasting Neural Nets Pattern Recognition - 15th Sep 21
Eurozone Impact on Gold: The ECB and the Phantom Taper - 15th Sep 21
Fed To Taper into Weakening Economy - 15th Sep 21
Gold Miners: Last of the Summer Wine - 15th Sep 21
How does product development affect a company’s market value? - 15th Sep 21
Types of Investment Property to Become Familiar with - 15th Sep 21
Is This the "Kiss of Death" for the Stocks Bull Market? - 14th Sep 21
Where Are the Stock Market Fireworks? - 14th Sep 21
Play-To-Earn Cryptocurrency Games Gain More and Is Set to Expand - 14th Sep 21
The CashFX TAP Platform - Catering to Bull Investors and Bear Investors Alike - 14th Sep 21
Why every serious investor should be focused on blockchain technology - 13th Sep 21
SPX Base Projection Reached – End of the Line? - 13th Sep 21
There are diverse ways to finance the purchase of a car - 13th Sep 21
6 Tips For Wise Investment - 13th Sep 21 - Mark_Adan
Gold Price Back Below $1,800! - 10th Sep 21
The Inflation/Deflation debate wears on… - 10th Sep 21
Silver Price seen tracking Copper prices higher - 10th Sep 21
The Pitfalls of Not Using a Solicitor for Your Divorce - 10th Sep 21
Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
This Boom-Bust Cycle in US Home Ownership Should Give Home Shoppers Pause - 9th Sep 21
Stock Market September Smackdown Coming Next? - 9th Sep 21 - Monica_Kingsley
Crazy Crypto Markets How to Buy Bitcoin, Litecoin for Half Market Price and Sell for TRIPLE! - 8th Sep 21
Sun Sea and Sand UK Holidays 2021, Scarborough in VR 180 3D! - 8th Sep 21
Bitcoin BTC Price Detailed Trend Forecast Into End 2021 - 8th Sep 21
Hyper Growth Stocks - This billionaire is now using one of our top strategies - 8th Sep 21
6 common trading mistakes to avoid at all costs - 8th Sep 21
US Dollar Upswing, S&P 500 and Nasdaq Outlook - 7th Sep 21
Dovish Assassins of the USD Index - 7th Sep 21
Weak August Payrolls: Why We Should Care - 7th Sep 21
A Mixed Stock Market - Still - 6th Sep 21
Energy Metals Build Momentum; Silver & Platinum May Follow - 6th Sep 21
What‘s Not to Love About Crypto Market Fireworks - 6th Sep 21
Surging US Home Prices and Gold – What’s the Link? - 6th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Structural Reasons For A Long-Term Financial Markets Decline

Stock-Markets / Financial Markets 2015 Oct 12, 2015 - 06:06 AM GMT

By: Raymond_Matison

Stock-Markets

Markets advance and decline for a myriad of different reasons. But in the final analysis, the old maxim about more buyers than sellers making bullish markets, and more sellers than buyers making bear markets remains true.  Unfortunately such a simple observation is neither insightful nor helpful. However, by adding detail to this old market truth we can get great insight into the future of our current and future financial markets.


There are many fundamental reasons why markets may advance or decline.  Among these is the strength of an economy, the dynamics of a particular market sector or industry, expected earnings growth, return on equity, price to earnings, equity, and sales ratios, and a number of other measures.  There are also many market, or outside influences that an investor needs to heed.  For example, the aphorism of “don’t fight the FED” in recent years has been more important than any fundamental consideration, and has been the most important driver of market performance.  As important as all these preceding considerations are to markets, the following presentation looks beyond them, and considers the future flow of funds that may be available for new investment versus prior periods, and the possibility that there will be conditions that requires money managers to reduce invested assets. 

There are approximately $50 trillion invested in our domestic bond and stock markets.  Excluding shares owned by company founders or their descendants, the vast majority of investments are dedicated to fulfilling pension obligations of employees working for corporations, our educational system, and municipalities. The balance of such investment  comes from individual investors who are trying to provide additional income or savings for their future livelihood.

Much has been written over the last several years about dramatic pension underfunding of municipal and state employees. Corporate auditors have also shown that such pension funds are currently, often substantially underfunded.  Various evaluations suggest that pension funds are 30%-60% underfunded. Only the federal government is different since they collect Social Security taxes, yet do not invest funds to satisfy pension liabilities. Rather they can simply use general tax funds or, issue Treasury bonds, which to an ever increasing degree are purchased by the FED, and dollars spring into existence to pay pensions.
 
There are a number of strategic, long term reasons why there is and will be a slowing in the rate of growth, or actual reduction of pension fund contributions, assets, income, and cash flow to satisfy beneficiaries.  This implies reduced new investment, and may require an outflow of funds characterized by the selective sale of pension assets. These reasons include low interest rates, continued seeking by corporations to improve productivity and efficiency, and demographic considerations.

Interest Rate Considerations
 
In addition to benefit levels, pension fund assumptions with respect to a long term expected rate of return on invested fund assets determines the level contributions. While the industry has veered away from defined benefit plans to defined contribution plans, the rate of return over decades of employee contributions is still the most important determinant of pension fund accumulation.  In our investment rate environment of the last decade with historically low rates of return, pension funds necessarily become increasingly more underfunded, as contributions are difficult to increase. 

Such funds are directed by a corporate or municipal investment policy which determines a mix in both fixed income and equities.  The rate of return in the fixed income portion of the portfolio has declined, adding to that level of underfunding. Consequently, the amount of benefits available to pensioners will decline, requiring them to sell portions of their personal invested savings and investment funds to maintain their standard of living.

Investment managers have relied on long term equity investment to provide a higher level of overall return than provided for by fixed income, both combined to satisfy the actuarially determined required rate of return.  However, reliance on higher equity returns in the future is not warranted.  Fundamental valuation of equity securities is determined by formulas discounting future dividends, cash flow, or earnings of companies.  The higher the discount rate, the lower will be the valuation of any company.  At the present time with interest rates being at historic lows, no improvement in stock performance can be expected from a decline in the discount rate.  Quite the contrary, we are justified to assume that future direction of interest rates, whenever it happens, is going to increase – reducing the calculated expected value, and the actual market value of stocks.

Of course an increase in overall interest rate levels will also dramatically reduce the value of fixed income securities. Some economists and market pundits have predicted that interest rates may remain low for a number of years, and thus maintain bond prices at current levels. OK, but bond values cannot increase, and eventually market forces - not FED policy - will dictate increased interest rates undermining the value of both fixed income and equity securities.

Productiviy Considerations

At a corporate level, we have seen companies continually seek improved productivity, usually increasing automation, resulting in decreasing the number of workers.  While having fewer workers will reduce the overall amount of corporate pension liabilities over the long term, in the short term it makes it more difficult to pay retired workers.  Fewer workers decrease the total amount of contributions made to a pension fund, and make it more likely that in the environment of low investment earnings, assets may have to be sold in order to provide contractual benefits. Our fictionally low unemployment rate masks the fact that the number of people in the workforce has been declining for years, reducing cash flows to pension funds for new investment.

At the federal level, much recent discussion has centered on the fact that there are far fewer workers to support the pension of a retired person today when compared to a decade or two ago.  This increased mismatch between the numbers of workers when compared to the number of retired is working to the detriment of our Social Security system.  Social Security and federal income taxes collected from illegal immigrants from Mexico may be the primary reason why politicians have allowed our borders to remain porous.  Millions of younger workers will not be collecting benefits for decades, but they contribute to the system, helping it remaining solvent.

Demographic Considerations

On a scale affecting pension assets comparable to low interest rates is the powerful demographic trend evidenced in most developed countries.  In the U.S., we are witnessing the maturation of the post WWII baby boomers which are now retiring, and will continue to increase in number over the next decade. Hence the Social Security imbalance between the number of workers supporting the number of retired will grow dramatically worse.  Our current birth rate in America barely produces enough persons to replace the number of deaths, thus foretelling a future time when our population will stabilize or eventually decline.  Such trends are manifest in the rest of the developed world, with large reductions in population expected in Europe, where births are not sufficient to replace deaths.

A recent noteworthy article on the sovereign fund of Norway (http://www.zerohedge.com/news/2015-10-05/worlds-largest-sovereign-wealth-fund-forced-begin-liquidating-assets) notes that due to low oil prices and continued increases in budgets, in part related to pension benefit payments, its $830 billion fund for the first time ever will decline. Such a decline will be accompanied by sales of securities – and a flow of funds out of their assets. This may be the first major example confirming a reduction of pension contributions, and likely net sale in assets.

Conclusion

The confluence of our long term low interest rate environment, contributing to increased pension underfunding, the reasonable expectation of continued productivity improvements from automation and robotics resulting in overall decreased number of employed, and demographics which reduce that number of pension fund contributors when compared to beneficiaries – all signal that there will be a reduced level of new investment funds when compared to previous decades, and possibly a concomitant necessity for pension fund liquidations.  Given the size of these funds on a global basis, it is easy to see that over the next decade or more, there will also be a more compelling need in the sale of pension and individual savings and investment funds to maintain living standards, as opposed to increased investment.

The change in the flow of funds will also have a dramatic effect in the selection of investment securities.  Fewer investable funds imply that the selection of these securities will be scrutinized more than ever.  Perceived lower grade or diminishing growth of a company may create a two tiered equity market as portfolio managers are increasingly more selective in their choice of investment.  It implies that some sectors of the market may be ignored, and some securities within a specific sector may be avoided. Not all boats will be raised by the grainy tide of future cash flows and its investment.

The result of these strategic trends is that there will be more sales of securities as opposed to new purchases.  More potential sellers than buyers means that markets can be expected to decline over the next decade. 

Compounding this effect is the fact that continued increase in national debt, manifested by expanded fiat money creation reduces the purchasing power of every dollar, further building pressures for savings contained in private investment funds to be liquidated in the goal of maintaining living standards.  Adding to this is the real possibility of a dramatic reduction in the value of the dollar stemming from its continually reduced role as the leading global reserve currency, which will increase domestic prices, requiring a further dramatic expansion in sales of financial securities.  These trends in the U.S. and other developed nations are similar and are likely to remain in place for a decade or more. 

The confluence of these established trends does not bode well for financial markets, their asset valuation, nor the adequacy of funds for retired or working citizens.  This means that  there are and will be more institutional and retail sellers than buyers over the next decade, causing the market in financial securities to decline.  Caveat emptor - buyers beware.

Raymond Matison

Mr. Matison is a U.S. patriot who immigrated to this country in 1949. With a B.S. in engineering physics, an M.S. in Actuarial Science, work in the actuarial field, and as a financial analyst at Legg, Mason Inc., Lehman Brothers, and investment banking at Kidder Peabody, and Merrill Lynch provides a diverse background for experience.  First-hand exposure to fascism, socialism, and communism as well as the completion of a U.S. Army military intelligence course in the 1960’s have inspired a continuing interest in selected topics in science, military, and economics.  He can be e-mailed at rmatison@msn.com
Copyright © 2015 Raymond Matison - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in