Smell that? That’s disaster.
I don’t follow Bloomberg. I consider it to be market porn, breathlessly conflating correlation with causation (“The Dow is up three tenths of a percent today on news that Apple has trademarked the color white. Asian stocks are down amid fears of a Pacific paper shortage.”) and much too cozy with its subject to be trusted.
But this article by Bloomberg TV’s editor-at-large, Tom Keene, was recommended to me on LinkedIn today and the condescension was too much for me to resist. Go ahead, read it.
Done? Well, if you didn’t read it, here’s the run-down: Basically, kids aren’t doing the smart thing and investing in 401(k)s because y’all (presumably Baby Boomers) are scaring them about the market. You see, investing is responsible and, at 7% growth per annum, a sure thing. Right? Stupid kids. Stupid media.
This galls me.
This is the same sort of crap I got an earful of when I graduated from college. Housing, back then, was a sure thing. A “good investment”. The market had a few, tiny, historical slumps, but in the long run it was supposed to be like printing money.
Instead, it turned out to be Tulip Mania all over again.
Investment is risky. Investing in a stock market that’s been co-opted by traders who make money on transaction fees and short-term swings is even more risky. Investing in a market driven entirely by speculation — not value — is worse still.
The fact of the matter is that our economy is more volatile now than it ever was for our parents. We live in the age of the flash crash and the false bottom. And when the bottom drops out now, we plunge much further.
I mean, just take a look at this inflation-adjusted graph of the historical Dow Jones Industrial Average. Does this look like a healthy market on the upswing?
This is what a bubble looks like from the inside
We young workers can’t afford the security of ignorance. We’ve already witnessed two huge bubbles and two massive recessions, and we’re not even middle aged, yet.
So this is why I get angry at articles like the one above. The risks of 401(k) and other stock-based investment vehicles are criminally under-represented. They are the very definition of irrational exuberance.
The argument for investment in the stock market is based on several key assumptions by omission, namely:
- 401(k)s aren’t subject to management fees, transfer fees, vesting periods, and early withdrawal penalties.
- Capital gains taxes will never rise.
- Past performance is an indicator of future returns.
- The fundamentals of the economy haven’t changed since 1948.
- The market price is reflective of its current value.
- The market will continue to grow in value.
- The market won’t crash at an inopportune time (also known as the “Nobody planned to retire between 2008 and 2013, right?” blind spot).
With those assumptions in mind, consider the following:
Previous boom cycles were fueled by a growing middle class. But today, the size and earning power of the middle class is shrinking by the month. Our consumption-based economy has managed a “recovery” without a corresponding increase in jobs or incomes.
Doesn’t that sound a bit fishy? All things being equal, these graphs should roughly mirror each other. Instead, we’ve managed to move 2% of the working population off the books in only three years.
So if we’re not adding jobs or growing wages, who is going to spend us into recovery?
Previous boom cycles were fueled by the gradual extension of consumer debt. As we saw in 2008, the financial strain of rising medical costs and accumulated debt has reached a saturation point. The student loan system is on the brink of collapse, city and state budgets are contracting wildly, the federal government is furloughing its workers, and the national banking system is kept afloat by bailouts, guarantees, and tax rebates.
What makes anybody think the same disaster won’t strike twice?
Previous boom cycles were fueled by manufacturing exports. The boom came during a period of massive rebuilding in Europe and Asia, where the US was a major exporter (and lender) to WWII-devastated regions. Domestic manufacturing was the engine of our growth. As the slow collapse of the Midwest continues unabated, it’s clear just how far we’ve allowed that engine to rust. The same regions that we helped rebuild are now cash-strapped, work-starved and rapidly imploding.
So who’s gonna buy our stuff now? And what makes us so sure we’re insulated from Europe’s insolvency?
Previous boom cycles saw widespread post-secondary education for the first time. No more. It’s too expensive. Student debt is crippling and still the price tag gets bigger. Check out this graph of total educational expenditures. No, those aren’t nominal dollars. That’s inflation-adjusted, in billions of 1982-84 dollars:
And before you try to tell me that it’s about educational quality, that we don’t need exports because the world is going to buy our brains (the vaunted “intellectual economy”), remember that the developing world is beating us there, too. As that graph clearly shows, our educational system is much more expensive and delivers less value for the dollar than the competition.
With the cost of a college education outstripping inflation and wages and everything else, how is this situation expected to get better?
Previous boom cycles were relatively low-cost. The 1960s-1980s saw the largest proportional workforce increase we’ll likely ever see. They called it the Baby Boom for a damn good reason. The ratio of workers to dependents was unfathomably high, and so those boomers had relatively low welfare costs during their working years. They could save. They could spend.
Now? Well, now we’re on the other side of the coin, forced to support an aging population with longer lifespans and higher social costs, even though there are fewer of us, our costs are higher, and we’re earning proportionally less. The last decade has seen the lowest personal savings rate in modern US history.
And remember that employment graph above? Well the reason the employment percentage has remained flat even while unemployment dropped is because many of the long-term unemployed have been pushed by the states onto long-term disability. We are now literally paying taxes to keep people away from work.
So it’s not as simple as “the market’s grown by 7% per annum”. There’s much more to it than that. And when you look at the wider picture, there’s not a single indicator that looks good. Nothing structural has been done to address rising debt, slumping wages, a bulging welfare state, a declining manufacturing sector, and spiraling education costs.
This, more than anything else, scares myself and a lot of other young professionals. America’s liabilities are huge and they’re only getting bigger. We can’t afford to keep sweeping them under the rug for much longer, banking on another bubble to save us.
Inertia’s the only thing that’s kept us going this long. We live and work in an economy based largely on the Wile E. Coyote Effect. But gravity will kick in. There’s no question about that. It’s just a matter of time. There’s simply not enough value in the American economy to justify the asking price.
Perhaps the decline will be slow, but I doubt it. These corrections tend to be devastatingly quick. And when that time comes — or when a personal emergency (cancer, layoff, auto accident, pregnancy, etc.) strikes — it’s a far better thing to have cash on hand or money in the bank.
My young family’s future is much too important to hand over to a Wall Street cowboy who has nothing to lose.