For years, I referred to the investment bubble of the 1990’s as the DotCom Bubble and the bubble from 2003 – 2007 as the Real Estate Bubble. The entire time, overlooking the most obvious fact of what it really was…
This was the 401k bubble.
The DotCom/RealEstate bubbles were just merely the places that the 401k bubble landed!
Effective immediately, I will only refer to its smaller parts as “The Dotcom or Real Estate portion of the 401k bubble”. I’d advise for accuracy’s sake, you do the same.
THE PAST: (Trickle down greedonomics)
The year was 1997, my company at the time (OpCap) had just started participating in our new 401k program. 401ks had been around for 15 years at that point, but very few people in our office knew terribly much about them. We had a representative from our provider come in and walk us through the plan. When all was said and done, I was the sole employee railing against this ladies charts stating the “what if” scenarios of market collapses, and the concept of retirees selling of 401ks causing the market to collapse. (My father worked as a clerk on the NY exchange floor and lost his job during the ruff times, so I knew the possibilities.) All of my fears were nixed by both the presenter and my co-workers who spoke to the effect that. “what you put in, you will always have.” My retorts of: “what if ‘what you have’ becomes valueless because of a crash.” fell on extremely deaf ears.
Of the 200+ employees that were at our subsidiary, 1 person refused to participate. Guess who?
In the coming weeks, my refusal to sign off on elections/contributions caused a stink in the office. My bosses deemed it mandatory since they were automatically putting in 2% regardless of your election. (I was so stubborn that I was passing on that free 2% because the sheet we had did not have a 0% option to check off from my personal contribution) It eventually led to a meeting with HR, my agreement to invest 2% and dating a girl in the HR group. (the next year 0% became an option) – This is a very TRUE STORY.
The introduction of the 401k in the early 1980’s to the mix of IRA’s, Pension Funds and Defined Contribution Funds eased the complication of getting involved in retirement planning. The subsequent explosion of 401k investing coincided with their intermingling in Mutual Funds. In 1990, 401k investments stood at $385 billion and invested 9% of those funds in Mutual Funds. By 2000, nearly 50% of the 401k assets were then invested in Mutual Funds. In addition, from 1997 to 2007, US retirement plans doubled from $7.9 trillion to over $15 trillion. Of that $15 trillion, 60% sits in equity related investments and 17% in “alternative investments” both highly subject to market moves. (Only 23% sits in “stable” BD/MMKT/etc… funds)
What does this all mean. ???
In the name of “reducing risk exposure”, retirement plans have become so intermingled with mutual funds and equity markets, that any drain on the now massive 401k investment cycle, will cause a ripple effect to go through every possible asset that a Mutual Fund would hold. This Net Redemption in Mutual Funds, trickles into selling of all of its underlying assets.
If you take a look at the lifelong chart for the S&P or DOW, you will see the obvious trends. For the 50 years after 1932, the markets grew steadily. Come the early 1980’s, after winning the cold war and the creation of the modern computer age, the US saw growth take hold. Ironically, that also coincided with the birth of the 401k. Come the 1990’s we saw an explosion of investing in 401ks. During a parallel period, Investment Companies had grown from $2 trillion in 1995, to $12 trillion in 2006. (with over 93% invested in mutual funds, which further have equity investments of about 25%)
Similar to a CDO, where the mix of toxic assets crashes the value of the CDO, we have the parallel commingling of Mutual Fund / Investment Company Assets / Retirement Fund / ETC…. Instead of diversifying risk by spreading out losses… They are now multiplying the loss factor through diversification, and the net outflow of money mirrors the same problem that exists within the Social Security platform. The net in CAN NOT SUSTAIN the net out.
So we’ve essentially taken our 2 worst financial creations (Social Security and CDO/ABS/CDS/Risk Diversification) and placed them in our financial markets!
Who was the genius behind those ideas?
As you can see, we wrongly dubbed this phenomenon of gains as the “DotCom bubble”, followed by the “Real Estate Bubble”. they were neither!
As I stated above: This was/is the 401k bubble. The DotCom/RealEstate bubbles were just merely the places that the 401k bubble landed!
To further clarify my point, we have to take a look a “retirement”. (what I have to say here will not win me many fans.) …but let’s face it, when the DOW increase from 1,000 to 15,000 in only 25 years (an annual compounding rate of 11%) you have to realize something was wrong!?!?! Don’t you?
Retirement (The breathing wage)
The current view/concept of “retirement” is extremely flawed. Is there a more “entitlement driven” theory to life? …now before anyone gets furious about that statement… give me a moment to clarify. 30 short years ago, it was common for a household to have a sole provider. That no longer exists and we have grown accustomed to that being the norm. (We had to DOUBLE OUR HOUSEHOLD PRODUCTION TO MAKE ENDS MEET!!!) Well, why would we expect that the typical retirement age to stay the same? With our life expectancy increasing so much, why didn’t we expect to have to work a much longer time?
I guess I just have a hard time with the concept of EVER NOT BEING PRODUCTIVE. Let’s face it, retirement is us saying… OK, I’ve done enough. Time for payback. Now I clearly understand that working people have spent their lives “paying into something” with the belief that someday when they look to retire, it will be there for them. As a 36 year old, am I to believe the same??? I’ve spent 22 years of my life paying Social Security Tax. Why? Why should I be paying that tax? I KNOW IT WON’T BE THERE FOR ME! …but I’ve been “paying into something” all this time too. How is it different? I’ve also been contributing to 401k. Should I expect 11% annual returns until my retirement?
In its simplest terms, you have to look at retirement as a salary for living. There is a pool of money that all retires are pulling an hourly wage from just for staying alive. That pool is large enough to sustain a certain percentage. Then, when you add the increased life expectancy, and the baby boomers population size to the mix, what you have is frightening. Instead of paying a living salary to 15% of the population, we will be looking to pay a living salary to 25%-30% of our population… and not just for a few years… but for growing length of time as these new retirees live 15+ years beyond their retirement. At the same time, you no longer have 63% of the population working and contributing… but instead only 55% contributing. This pool of money to draw the living salary was not created with that in mind, so naturally, the 401k concept was created to add to the pool.
Now, the 401k pool (which is the market we know) will consistently feel the drag of that outflow drain.
Could this come at a worse time?
Feeding those 2 pools are the working population through SS tax and 401k investments.
Of the working class paying into these 2 retirement funds, the boomers are far and away the largest contributors. They earn the most money, so their taxed SSTax contribution is the largest, and they also pump the most into 401k to “make up for lost time” (and their higher salary = larger contribution by percent).
What does that mean??? You have to look at what % of net 401k subscriptions are made up by the retiring class of boomers (that will no longer be coming in). At the same time, look at the incoming job force to see how they make up the difference.
We’ve let our defective Social Security concept infect the market. We are at the front end of the 401k’s platform to take money out of the system. This net outflow will drag on the system every single year that the retirement percentage that is collecting a living wage, grows. Plain and simple! The only logical conclusion I can see to keep net subscription/redemption level in 401k investing, is A SERIOUS RAISE IN PAY FOR THE EXISTING WORKING CLASS. …which doesn’t seem too feasible in the current environment.
For demonstrating what I’m saying in simple terms, I have created a mock model below: (this is over simplified, but done this way to make an easy point)
Year 1 – +$2, -$0 (yearly net = $2, overall net = $2)
Year 2 – +$3, -$0 (yearly net = $3, overall net = $5)
Year 3 – +$5, -$0 (yearly net = $5, overall net = $10)
Year 4 – +$10, -$0 (yearly net = $10, overall net = $20)
Year 5 – +$11, -$1 (yearly net = $10, overall net = $30)
Year 6 – +$13, -$2 (yearly net = $11, overall net = $41)
Year 7 – +$15, -$3 (yearly net = $12, overall net = $53)
The transfer of personal saving accounts for retirement led to a consistent net inflow of cash through the 401k models. In years 5, 6, 7, you see outflow starting, but the net in continued to outpace that outflow.
Now with the highest paid workers shutting down their investments, (along with “catch up contributors) and the size of the groups numbers that is moving towards retirement, we will see a reverse in that trend. (A rise in unemployment and companies shutting down employee “matching” programs will accelerate the trend.) An eventual balance will be reached, but not before the market feels the shock of the size and shape of its first outflow and the subsequent downward push of future net outflows. Here you see the turning point below: (remember, this is just the net outflow of 401k contributions… as a sample, it does not show the net selling across the market in other mediums)
Year 8 – +$13, -$5 (yearly net = $8, overall net = $61)
Year 9 – +$11, -$7 (yearly net = $4, overall net = $68)
Year 10 – +$9, -$9 (yearly net = $0, overall net = $68)
Year 11 – +$7, -$11 (yearly net = -$4, overall net = $64)
Year 12 – +$6, -$12 (yearly net = -$6, overall net = $58)
With the commingling of all types of funds, and cash that has been withdrawn from the markets over the past 25 years and used elsewhere, the market is in a death spiral of self perpetuating withdrawals and asset depreciation. I fear that Nouriel Roubini is correct in his assumptions that the market will likely need to be frozen at some point in the near future to straighten this mess out. When I is “straightened out”, I still believe the current levels Are not too far off of where we will be. (but that will take “help” to achieve)
You know the scams and you see them every day… Hell, some of the readers here have likely partaken (or continue to partake) in a scam!
From the small (double dippers, the disability abusers, tax cheats (the “red flag” limits abusers), to the large (CEO executive greed, Wall Street power brokers, etc…), it’s so painfully obvious where it all went so wrong… and yet so little action will ever get done.
How many people can we see retire from their jobs, collect a pension, and get hired back as consultants for even more money? …thus collecting 2 paychecks!!! How can organizations (like the a particular Long Island Train Co) have 90% of their retired staff collecting disability? DISABILITY!!! For punching holes in tickets! How can the “heroes” of NYC who “work 20 and out” with 75% pay (who work massive overtime their last few years so their pension is inflated – based on their final year average pay) be called “heroes”? How can teachers unions hold the communities for ransom, forcing bills and pay raises through… or they’ll strike, thus forcing you to miss time from work? (even when the work 180 days and are off 185!!!) WHO’S STOPPING THIS?
How many CEO sweat heart deals do we need to see before someone actually does something??? How do executives cry for help, and lay off employees, while taking private jets to bailout meetings? How do Brokers get away with betting the futures money, for a profit today, and get to walk away with a percentage of today’s profits, with no liability on the futures losses? The legal system slows to a crawl when pursuing the rich and powerful, but can put 2 million poor people in jail expeditiously! The Powers That Be and there lobbies are so powerful that even banded groups of people are powerless against them. WHO’S STOPPING THIS?
DAMNIT!!! Wake up people. The ghost of Paul Revere has hung himself in shame!
What needs to be done?
Take a look at every thing you owned in 1982. Assign it a 1982 value. Now assume we have grown at 3% every year for the past 25 years. Multiply the value of your net assets by a compounding rate of 3%. The figure you get is what the average person’s assets should now be worth. Anything over that figure… get out your checkbook, and write a check in the amount of the excess to the public who will be paying for the current mess!
If your assets were worth $10,000 in 1982, then you should have $21,500 now. Anything over that is playing with money that didn’t really exist so you shouldn’t own.
OK, lets take it a step further… Lets say you were more productive then your neighbor during that time. Lets say you deserve 5% every year. OK, then your $10,000 should now be worth $35,500. Once again, anything over that amount… get the checkbook out!
As for the brokers, the CEO’s and the various others who cashed in on production-less work; through financial chicanery in higher math and knowledge of how to use formulas to legally rob a system that was not geared to catch ever evolving financial “innovation”, I say: returning the money and asking forgiveness may be your only salvation.
It’s rather funny that so many posters have taken to calling for “pitchforks”, when in actuality a much scarier day looms! (Bloggers, in general, are not do-ers. They enjoy anonymity, and sitting behind the comfort of their keyboards and PC screens. The reality of their organization through pitchforks is comical. Maybe, they’ll adopt a symbol for the pitchfork??? =====E How was that? It kinda looks like a sideways pitchfork.)
The reality of overseas war coming to an end is just around the corner. We will soon see an influx of military soldiers returning to a country that is (given its current course) far worse off then it was when they left. When the reality of job losses hit, in sectors that typically employ ex-military types, you will see a large degree of a new type of disgruntled worker. A worker that actually put themselves in harms way to find out that scammers and CEO’s are running away with the loot while the people they thought they were fighting to protect are suffering.
It’s my opinion that these ex military, whom will have a better sense of what America is supposed to stand for, will not blog about their displeasures. I do not condone violence or people becoming vigilantes, but if a true depression hits, I see this as a likely reality. Especially if the justice system is not swift enough or equitable in holding the perpetrators accountable and punishing them. The American public is armed to the teeth!
As for me, I’m part of the problem. I own an SUV, had to have an HDTV, and have been known to drop change upward of .99 on the ground… and not pick it up for shame of looking desperate! (I’ve also been known to crop dust the cube farm for giggles… but that’s a story for another time!)
…but I’m looking to change. I’m getting involved. I’m focusing in on fuel efficiency. I’m watching less TV, and spending my free time with my kids and write blogs about social and financial awareness; I’m picking up that loose change and putting it in a big bucket for someday down the line. I have the audacity of hope. I no longer have my blinders on. I’m no longer a ghost in the background. I’m joining “braintrusts calls” and prepping for meetings.
Thank you all for reading (and breathing). I may have made some enemies with what I said here, but I felt it had to be said. Now it’s your turn to speak.
All the best, Miss America, Rich Hartmann
p.s. What we should expect is: Stag-re-de-inflation light, with hyper-stagnation reflating, followed by a double mocha latte chino.
C’mon folks??? What’s with these ridiculous terms? Why do we try to pinpoint past conditions that can’t possibly mirror this unique crisis with these old terms? Why can’t we coin my term and spread it around the world: (Started here on the RGE)
…and when someone asks what it means, you just say: “There was a whole lot of value there yesterday… that isn’t there today. Now the debt needs to evaporate the same way the credit did!”
Professor Roubini, I’d be honored if you dropped it in an interview.
p.p.s. Kudos to Outerbeltway on step 1 of what could be a very promising enterprise. (I think funding is step 2. Check out the Soros’s project “Center for American Progress”. I’d bet you there’s someone out there ready to 1 up Soros with a better group/concept/mission. I can’t stress the power of the “emergency room” analogy!!) Miss Italy I hope you can follow in those footsteps.
p.p.p.s. Detlef, thank you for spreading the good word. I only hope it can help someone somewhere.
p.p.p.p.s. Thank you Paulson and Bernake. Though we all complain, without the current stimulus steps and hard work you have put in, we would ALL NOT HAVE RECEIVED OUR LAST FEW PAYCHECKS!!! Now get back to work and start coming up with a better solution!