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$8.6T Flight of Capital from Equity Markets since 1999

Exodus from Equities

Real Estate, U.S. Treasuries... Major Beneficiaries 

PHOENIX, May 27 - You'd never know by today's market surge that a major flight of capital from equity market has been under way (Dow Jones Industrials index was up 180 points or about 2% on May 27).  But that's exactly what has been happening for over three years now.  More than $8.6 trillion has disappeared from the equity markets since 1999, according to the New York Stock Exchange (NYSE) Fact Book 2002.

Which is exactly what we predicted would happen - contemporaneously (see  THE GREAT AMERICAN HOOVER, 1997, and "From a Nation of Producers, to a Nation of Gamblers ", June 23, 1999).  So guess we can append the latter headline, " a Nation of Suckers."

That's just one of several important conclusions that one can draw from a myriad of numbers that the NYSE publishes diligently every year. Another is that the increases in concentration of market power in the hands of institutions continues unabated, despite the steep drop in equities.

As you can see from the above chart, the institutions' share of equities rose from 7% in 1950, to 50% in 2002.  Meanwhile, the individual investors' ("households" in the above chart) share dropped from 90% to 37% during the same period.  

Which means that Wall Street continues to wag Main Street's tail more than ever before in the nation's history (for more details, click here to see Table 1).  Welcome to a plutocracy?

One reason for that is a huge increase in the share of equities attributable to U.S. pension funds.  It rose from 1% in 1950, to 21% in 2002.  But that also means that pension funds are now among the big losers as a result of the capital flight away from equities.  No wonder so many of them are now underfunded (see "Money CAN Buy Longer Life," May 6).

Allowing the pension funds to gamble with future incomes of its contributors and beneficiaries has been one of the travesties that had caused us to observe four years ago that our country has gone "From a Nation of Producers, to a Nation of Gamblers ".  Perhaps the best way to illustrate just how gullible and careless we had become is the following chart:

As you can see, at the peak of the Wall Street-induced and greed-driven gambling madness (1999), the money poured into equities accounted for 2.1 times the nation's Gross Domestic Product (GDP).  Pension funds were at the forefront of the madness.  And the precipitous drop that you can see above chart since that time is an $8.6 trillion monument to greed and human gullibility.  

So is this the end of the capital flight from equities?  You'd think the answer to that question would be "yes," based on today's market action.  Buoyed by fresh economic news that consumer confidence was up, and that home sales surged during the month of April, the stockmarket staged one of its biggest rallies of the year.

We are afraid, however, that today's Wall Street surge may end up but a small upward blip; a temporary short-term "correction" to declining long-term trends. 

Why?  Because we have demonstrated on numerous occasions in the past that Wall Street Casino is mostly driven by investment cashflows, not by economic news (see Salomon/Gutfreund: Wall Street Casino - June 21, 2002, for example).  And that long-term investment cashflows went into real estate, U.S. Treasuries (see the chart on the right) and bonds - all main beneficiaries of the capital flight away from equities. 

We also think that this may not be the end of the capital exodus because the remaining equities continue to exceed the amount of money traditionally held in the stockmarket based on historical trends.  For most of the four decades prior to the Era of Greed (1990s), the equities' share of the U.S. GDP ranged from 49% to 81%.  It stood at 61%, for example, in 1990, at the start of the Era of Greed. 

Today, even after the $8.6 trillion "correction," the U.S. equities represent about 105% of the GDP - well above the traditional levels in the last 50 years (see Table 1).

During the 1990s, the number of individual shareowners in the U.S. went from 52 million (in 1989) to 84 million (in 1998), according to the latest available data (Shareownership 2000, that uses data from the 1998 Survey of Consumer Finances, a household survey conducted under the auspices of the Federal Reserve Board, to update the New York Stock Exchange’s Shareownership 1998 study).  

And this total probably rose to over 100 million Americans by the peak of the Era of Greed (1999-2000).  Here's an excerpt from a survey that profiles such gamblers:

Shareowners Profile

Baby boomers - Percent

Senior citizens - Percent

Employed? 87.8 20.7
Completed College? 39.4 33.6
Did Post Graduate Work? 16.6 16.0
Professional or Executive Occupation 39.1 37.3
Clerical, Technical, or Sales Occupation 21.9 16.8
Married? 85.6 72.8
Has Brokerage Account 29.3 45.6
Willing to Take Risk 83.8 61.5
Owns IRA or Keogh Account 49.1 69.0
Owns at Least One Mutual Fund 30.4 45.7

(for a complete NYSE survey, click here)

As you can see, the vase majority of gullible American gamblers are well to do Baby-boomers or senior citizens.  Are these the folks on whose behalf the President lobbied to have the dividend tax lifted... to ease the pain of gambling losses they had suffered since 1999?

Meanwhile, we have a feeling that there may be still more suckers left in the market who are hoping wait out the equities' decline with a hold-and-pray (for a market upswing) strategy, rather than throw in the towel and cut their losses short with a painful hold-and-sell (at a loss) move.

As for those Americans who chose not to succumb to the allure of the Wall Street Casino during the 1990s, and who invested their money either into their own businesses, or into real estate and/or government bonds, well... they are probably looking at the equity exodus and saying, "the more, the merrier."  The more gamblers flee the stockmarket, the more capital will be freed up to go into non-equity investments. 

Happy bargain hunting!

Bob Djurdjevic

For additional Annex Research reports, check out... 

2003: "Exodus from Equities" (May 27), "Money CAN Buy Longer Life" (May 6), "Global Investments Plummet" (Jan 23)

2002: Greed Bites Back (Nov 29, 2002)Salomon/Gutfreund: Wall Street Casino (June 21, 2002)

A selection from prior years: "From a Nation of Producers, to a Nation of Gamblers " (June 23, 1999), "When Will Wall Street's Bubble Burst?" (1998), "Wall St.'s Conquest of America" (1998),   THE GREAT AMERICAN HOOVER (1997)

Or just click on and use appropriate  keywords.


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Volume XIX, Annex Newsflash No. 2003-07
May 27, 2003

Editor: Bob Djurdjevic
Published by Annex Research, Inc.

P.O. Box 97100, Phoenix, Arizona 85060-7100
TEL/FAX: (602) 824-8111

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