The Real Crisis: "People Have Lost Trust In The Government And The Market"

Tyler Durden's picture

The death of the 'cult of equities' was a popular topic this year among both fringe blogs and the best-known institutional asset managers and sell-side strategists. As AP discusses in this excellent article, ordinary Americans - defying decades of investment history - are selling stocks for a fifth year in a row. It's the first time ordinary folks have sold during a sustained bull market since relevant records were first kept during World War II. The answer is both complex and simple but summed up best by a former stock analyst's comment that in order to buy stocks "You have to trust your government. You have to trust other governments. You have to trust Wall Street, and I don't trust any of these." With Fed policy trying to force investors back into stocks (at any cost), a former fund manager notes, presciently that, "When this policy fails, as it will, baby boomers will pay the cost in their 401(k)s." Are we the new 'Depression Babies'? We suspect so.


Investors, as you well know, are leaving the equity markets in droves...

Based on AP's calculations, individuals accounted for 40 percent to 50 percent of money going to U.S. stock ETFs in recent years.


If you assume 50 percent, individual investors have put $194 billion into U.S. stock ETFs since April 2007. But they've also pulled out much more from mutual funds - $580 billion. The difference is $386 billion, the amount individuals have pulled out of stock funds in all.


If you include the sale of stocks by individuals from brokerage accounts, which is not included in the fund data, the outflow could be much higher.

But why are investors not buying the propaganda this time and jumping in with both hands and feet...

"You have to trust your government. You have to trust other governments. You have to trust Wall Street," says Neitlich, 47. "And I don't trust any of these."


Defying decades of investment history, ordinary Americans are selling stocks for a fifth year in a row. The selling has not let up despite unprecedented measures by the Federal Reserve to persuade people to buy and the come-hither allure of a levitating market. Stock prices have doubled from March 2009, their low point during the Great Recession.


It's the first time ordinary folks have sold during a sustained bull market since relevant records were first kept during World War II, an examination by The Associated Press has found.


"People don't trust the market anymore," says financial historian Charles Geisst of Manhattan College. He says a "crisis of confidence" similar to one after the Crash of 1929 will keep people away from stocks for a generation or more.

What is at the core of this mistrust or doubt?

People who think the market will snap back to normal are underestimating how much the Great Recession scared investors, says Ulrike Malmendier, an economist who has studied the effect of the Great Depression on attitudes toward stocks.


She says people are ignoring something called the "experience effect," or the tendency to place great weight on what you most recently went through in deciding how much financial risk to take, even if it runs counter to logic. Extrapolating from her research on "Depression Babies," the title of a 2010 paper (embedded below) she co-wrote, she says many young investors won't fully embrace stocks again for another two decades.


"The Great Recession will have a lasting impact beyond what a standard economic model would predict,"

But it's not just ordinary folks, its professional investors too...

Public pension funds have cut stocks from 71 percent of their holdings before the recession to 66 percent last year, breaking at least 40 years of generally rising stock allocations

as old 'lessons' or myths are dismissed...

And old assumptions about stocks are being tested. One investing gospel is that because stocks generally rise in price, companies don't need to raise their quarterly cash dividends much to attract buyers. But companies are increasing them lately.


Dividends in the S&P 500 rose 11 percent in the 12 months through September, and the number of companies choosing to raise them is the highest in at least 20 years, according to FactSet, a financial data provider. Stocks now throw off more cash in dividends than U.S. government bonds do in interest.


Many on Wall Street think this is an unnatural state that cannot last.

As it seems, for once, a positive lesson is being learned...

"People aren't looking to swing for the fences anymore," says Gary Goldstein, an executive recruiter on Wall Street, referring to the bankers and traders he helps get jobs. "They're getting less greedy."


The lack of greed is remarkable given how much official U.S. policy is designed to stoke it.

But the powers that be are not happy about it...

"Fed policy is trying to suck people into risky assets when they shouldn't be there," says Michael Harrington, 58, a former investment fund manager who says he is largely out of stocks. "When this policy fails, as it will, baby boomers will pay the cost in their 401(k)s."

So, what are 'smart' retail investors doing with their money?

Instead of using extra cash to buy stocks, he is buying houses near his home in Sarasota, Fla., and renting them. He says he prefers real estate because it's local and is something he can "control." He says stocks make up 12 percent his $800,000 investment portfolio, down from nearly 100 percent a few years ago.


After the dot-com crash, it seemed as if "things would turn around. Now, I don't know," Neitlich says. "The risks are bigger than before."


Source: AP

Depression Babies paper embedded below:


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Moe Howard's picture

You are correct. Also, the RE market will not recover for decades due to this as well. The number one investment for many boomers is the macmansion in markets like NJ, NY, IL, etc, high taxes, and a huge value plunge. They can't sell them to other boomers, the new gen is drowning in debt for "education" so who is the buyer that supports high prices and can pay the energy bills and taxes?

Winston Churchill's picture

Sure should be rotating out of stocks into something else once they hit 55.

aerojet's picture

It's the "something else" that is the problem, though.  Nothing pays any interest at all and there is reason to believe that soon negative interest rates will be in play such that the banks will charge you just to store you money there because basically they don't need it or want it. 

Cdad's picture

All you have to do is look at this afternoon's algo induced ramp job to know that the market is simply a laughing stock.  It is broken beyond repair.

Commence tens of thousands of layoffs on Wall Street, already.  Those folks are no longer needed.

ClassicalLib17's picture

If the financial sector starts laying off, what happens next?  I don't know what is scarier,  a newly unemployed psychopath, or paying for his subsistence and not knowing what he is occupying his time with? 

Alcoholic Native American's picture

I recently lost my EBT privledges, damn right I've lost faith in the Gov.  I never had faith in the market though.

Ineverslice's picture


Ben Shalom, 

    You got a tool for this, yes?

yogibear's picture

He been using his tool a lot the last 4 years on savers. He likes using his tool on savers.

Kinda like Bubba uses his tool on new young inmates.

Rearranging Deckchairs's picture

Is it possible that in addition to having lost all faith in the system ( its why I won't buy life insurance products) that a large segment of the population is forced to liquidate their stocks to survive on. In other words isn't some of this people using up savings in a wage declining and zirp environment with higher than reported inflation?

Caviar Emptor's picture

Yup. You got it dead right. It's worse than "loss of confidence", which implies that once people wake up they'll be buying stocks hand over fist. It's worse. Simply because most "investors" need the cash to live on, pay debt, deal with sprialing cost of living, working and doing business. When there's a little left over, nobody's in the mood to gamble or hand cash over to thieves. Madoff proved that the head of the NASDAQ can also be in the Mafia. What does that tell ya? 

fonzannoon's picture

85 bil a month going to the banks to buy bonds and stwaks. We may be on this ride for a while.

Caviar Emptor's picture

Yup. And the thing is, the more they all try to reflate (Ben, Abe and all the other lunatics) in the midst of a depression the more they will cause a biflationary burn of savings and cash reserves. Net net: standard of living will decline, the status pyramid will unravel and we become more like a bannana republic

Vendetta's picture

What?  We're NOT a banana republic already?

Dr. Engali's picture

How fucking stupid do you have to be to ever trust government to begin with? They always have and always will look for ways to fleece the people.

fonzannoon's picture

Doc I spent the last week with several people who make upwards of a mil/yr and all of them trust gov't implicitly and find the problem to be that it is too small. These are people across a wide array of professions. They just take for granted that a sound system is in place and is uncorruptable. For real. That is what these people think.

easily the smartest dumb motherfkers I have ever met.

ekm's picture

Easy explanation. They work in businesses that exist only with gov contracts.

Like working in managment for Boeing or any company providing parts for Boeing.

Boeing can't exist without gov contracts, hence all providers to Boeing wouldn't exist without the gov.


These are the rich that I despise, these ones only. These are extractors, not creators

fonzannoon's picture

"They work in businesses that exist only with gov contracts."

It's as if you were there EKM. Beautifully put.


Intelligence_Insulter's picture

The government does not create jobs.

ekm's picture

Just pay attention to the words I used:

Extractors vs Creators

Alcoholic Native American's picture

Rent extraction? You mean investing?

ekm's picture


What's your field of work?

fonzannoon's picture

My field is very labor intensive. I have to push paper from one side of the desk to the other. Well techinically now I can scan and email that paper so I don't really have to push it. Which is good because one time I pushed it and almost spilled my coffee. Workplace hazards these days. Without getting too specefic this disaster of a market is my vocation. I'm 35 and I have been in this since 22. I don't know much else. Which is why I fear what I see and almost every one of your posts. Because I think your accuracy is scary, and most others.

ekm's picture

Ah, you are inside the black box called finance.

Good for you to read. 

My comments are about life experience and logic, not theory.

Each time I talk theoretically, I state it.


But I've learned a lot reading from other's experiences. Your experience during Sandy when the ATM machines were not working, was of great, great, great help.


fonzannoon's picture

That ATM experience proved Kito right. Cash is king still.

I have extended family in Belarus. They still live your nightmare. They get paid and immediately go buy a toaster or something of tangible value. That is how little they trust their currency. I don't think it is impossible for it to happen here. No one knows which way this shakes out.

ekm's picture

Oh God help them.

Lukashenko, pheeeeeeeeeew

ekm's picture

Due to that story I've got $2000 cash here at home.

Few people I know did the same thing after I told them your story.

fonzannoon's picture

Not a lot of downside to having it and it literally saved my ass.

ekm's picture

Good to hear. At least the little girl was well fed.

fonzannoon's picture

Nothing else matters to me. Nothing even comes 2nd. I wish everyone on here the best for themselves and their families as well.

ekm's picture

Well said. True father.

kito's picture

ekm try to accumulate more than is what people will lack by decades end.....cold hard cash will be such a precious commodity.......its everything everybody will want when this all plays dollars are like stars in the sky....trillions of them lighting up every asset...but out of reach....just a dream......

ekm's picture

I agree.

I actually carried few thousands back to my original country when on vacation in Sept and told my mother to keep it cash like that, in CAD.

She's got Euros, CAD and USD cash also, for herself plus few napoleon gold coins from my grandfather's former wealth.

Never One Roach's picture



I am a paper pusher too and sustained a near life-threatening paper cut the other day.  Not to mention almost slipping and falling on the newly polished Florentine marble floors my boss installed. Almost broke my back!

Hazards are pervasive in this line of work. I may apply for w/c or disability next time this happens.

Ineverslice's picture


Gov. of the last rugs that has yet to be yanked.

Ask a Russian, or most Europeans about trust in the Gvts....Rofl.  The people of The Great Experiment are still so naive.

Buckaroo Banzai's picture

Bingo. When it's incredibly profitable to be part of the problem, then why wouldn't you want to make the problem bigger?

toady's picture

Just about all of them are simple extractors anymore. Maybe a few tech guys are still a little subsidy-free, but nearly everyone else has legislated a government handout.

Dr. Engali's picture

It's the exact opposite here in Indiana, most people I deal with think the system is coming apart at the seams and that Washington has their head up their collective ass. I guess the further you get away from them the less you have in common with them.

fonzannoon's picture

It's coming apart Doc because these goddam repubs want everyone starving to death and want no social net whatsoever. (paraphrasing).

By the way gold is an an illusion and the dollar represents the greatest rabble rabble rabble in history.

ekm's picture

Gold PERSONAL ownership of up to 20% of your net worth is an insurance, not illusion. Not sure myself about a monetary system based on gold.


Check Japan that introduced welfare for everybody since 1950. It's dying.

Basic welfare is ok, you know few months of unemployment insurance, emergency medical services, but that's it. The rest, one must be on his or her own.

I lived in communism. I know what I'm saying.

fonzannoon's picture

EKM you lived communism which most people have not. The key is, can you see it coming again? Or are you so happy to have gotten away from it that the idea of living that nightmare twice is incomprehensible?

Don't answer that question. I just wonder if you have contemplated it.

ekm's picture

Communism or any system does NOT come from the top and it is never imposed.

It comes from the bottom,from the people. The system is held by army and police, but both army and police come from the people.

Freedom is a choice, but slavey is choice too.


In USA the 50% who voted for Obama would love communism. Not enough yet to be fearful of, but it is scary.

Dr. Engali's picture

Under any other circumstance I would agree with you about communism coming from the bottom, but the way I see our current fascist state is that they try to blur the lines between communism and capitalism as they legislate us a little closer each day.

ekm's picture

LEGISLATION works only if people obey.

People obey if they like what the legislation provides, namely some bread, some water, a shelter and shut up.


There are millions and millions of people in former soviet union and eastern europe who would literally love to go back to the same system. Not exaggerating at all, I'm speaking quite literally.

Moe Howard's picture

My wife is from Poland, and we visit at least once a year. You are correct. Esp. the young "have nots", they eat up the redistribution line right away. They suffer from envy, and feel it is better to take from someone else rather than earn your own.

Ghordius's picture

100% correct. I see this whenever I notice how happy people most people look when they are about being scanned before boarding a plane

I belong to a very small minority who would choose a smoking-permitted flight without security checks

and before you agree with me ask yourself if your family would board it with you without complaining

Ineverslice's picture


unfortunately, I think I get ur well spoken words.

We (here at the Hedge) are all screwed....the Obamaphomes will outnumber us a 1000x.  An impenatratable hoard....

ekm's picture

Not sure yet about it.

lemonobrien's picture

not when the niggas gots guns.. aka police/army/navy/air forces/marine.


Freedom ain't a choice; i was born into this fucked up system and programed like a slave, to only understand the way of the slave... and you say i had a choice; sheeeit... nigga. that's like say'n a niggas a nigga cause he chooses to be a nigga; hads nothing to do withs da ghetto arounds him.

Mike in GA's picture

you give dems waaaay too much credit.

Both parties deserve tossing out of power on their collective asses, never to be entrusted with the public trust again.

It's parties that have usurped the power and the sustenance from the people.  They've grown too big to exist and consider the individual too small to count.

CaptainAmerica's picture

fonzannoon you ignorant slut....when will you GET it ??

whenever your type gets lost in thought you blame the republicans or the tea party!

what is wrong with being fiscally responsible? the spend spend mentality is what got us all in this shit hole in the first place!!!