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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Go Tribe's picture

When social security was passed as law, the death age was under 70. In no way do I want to pay for old people anymore, even my own relatives. No more social security, medicaid, medicare, food stamps, unemployment. Get rid of it all and let people take care of theirs and the churches the rest. Some politicians will balk, wanting to promise something for nothing and a global power grab. Those need to be dealt with expediently.

Karlus's picture

Its actually easy to explain. Their whole being and wealth depends on the system being intact. They cant see outside of the box, because they feel there is nothing outside of it for them.

They are "all in."

Most people here, while invested in the system, will be damned if they go down with the ship.

Anusocracy's picture

Why do people defend unjust, inept, and corrupt systems?

Why do we stick up for a system or institution we live in—a government, company, or marriage—even when anyone else can see it is failing miserably? Why do we resist change even when the system is corrupt or unjust? A new article in Current Directions in Psychological Science, a journal published by the Association for Psychological Science, illuminates the conditions under which we're motivated to defend the status quo—a process called "system justification."

System justification isn't the same as acquiescence, explains Aaron C. Kay, a psychologist at Duke University's Fuqua School of Business and the Department of Psychology & Neuroscience, who co-authored the paper with University of Waterloo graduate student Justin Friesen. "It's pro-active. When someone comes to justify the status quo, they also come to see it as what should be."

Reviewing laboratory and cross-national studies, the paper illuminates four situations that foster system justification: system threat, system dependence, system inescapability, and low personal control.

When we're threatened we defend ourselves—and our systems. Before 9/11, for instance, President George W. Bush was sinking in the polls. But as soon as the planes hit the World Trade Center, the president's approval ratings soared. So did support for Congress and the police. During Hurricane Katrina, America witnessed FEMA's spectacular failure to rescue the hurricane's victims. Yet many people blamed those victims for their fate rather than admitting the agency flunked and supporting ideas for fixing it. In times of crisis, say the authors, we want to believe the system works.

We also defend systems we rely on. In one experiment, students made to feel dependent on their university defended a school funding policy—but disapproved of the same policy if it came from the government, which they didn't perceive as affecting them closely. However, if they felt dependent on the government, they liked the policy originating from it, but not from the school.

When we feel we can't escape a system, we adapt. That includes feeling okay about things we might otherwise consider undesirable. The authors note one study in which participants were told that men's salaries in their country are 20% higher than women's. Rather than implicate an unfair system, those who felt they couldn't emigrate chalked up the wage gap to innate differences between the sexes. "You'd think that when people are stuck with a system, they'd want to change it more," says Kay. But in fact, the more stuck they are, the more likely are they to explain away its shortcomings. Finally, a related phenomenon: The less control people feel over their own lives, the more they endorse systems and leaders that offer a sense of order.

The research on system justification can enlighten those who are frustrated when people don't rise up in what would seem their own best interests. Says Kay: "If you want to understand how to get social change to happen, you need to understand the conditions that make people resist change and what makes them open to acknowledging that change might be a necessity."


RmcAZ's picture

"The less control people feel over their own lives, the more they endorse systems and leaders that offer a sense of order."

Precisely... thanks for the post.

edb5s's picture

MSM et al have done a great job of portraying government as the sheriff and corporations as wild west outlaws.  Corruption is ascribed solely to corporations.  Very few realize the facts of the matter, which are very grim.  The supposed regulatory mechanisms, in actuality, engender corruption.  Moral hazard is ubiquitous.   

Omen IV's picture

its not the government that is the problem its the OWNERSHIP of the government that is the problem- MIC and Wall Street

FreedomGuy's picture

I think this is a good development. Governments own, control and manipulate all markets, currencies, terms of trade, labor and most everything else. How do you trade that?

The first step is not to trust government. The second step is get government out of markets and trade freely. Give up the illusion of benificent, omniscient, omnipotent governments. We are better off on our own.

babylon15's picture

I'd love to buy the S&P 500 at 300 or 400.  That would be a great investment.  But at 1400?  Not so much.

fonzannoon's picture

If the S&P is at 400 and we still have a 17 trillion dollar debt the market is still overpriced.

ekm's picture

S&P at 400 will destroy a lot of debt by the collapse of swaps.

fonzannoon's picture

I will hold the line that S&P 400 equals the end of the stock market as we know it. Goodbye whatever shred of capitalism existed and hello government sponsered retirement plan.

ekm's picture

Oh I remember.

Well, I see 600 as fair value. At 400 is just below fair value.


Gov sponsored retirement plan, just minimal, just minimal and extended at age 70 it won't be the end of capitalism

Lucius Cornelius Sulla's picture

People are not jumping into stocks for the same reason that businesses are plowing their profits into stock buybacks and dividends instead of expanding production ... it is common knowledge that the only thing holding the economy up is government debt.  Therefore, it is not sustainable and when it ends there will be a massive reset.  Common sense.

Mercury's picture

What if they threw a rally and nobody came?

CH1's picture

What if they threw a rally and nobody came?

Silly boy... Bennie would buy it all!

TerminalDebt's picture

It's part of the grand plan.

Make people hold fiat and then hyperinflate.


alfred b.'s picture


    Good one!   I've been waiting for this article since the 1990's

  I lost trust in the gov't then, when culprits Rubin and Summers got rid of Glass-Steagall with the approval of prez Clinton.   From then on, Wall St ran the country with Gaitner as the go-between.

   Buy physical gold and silver!


Vendetta's picture

I started losing trust of govt in 1994 with NAFTA, then completely lost trust of it in 2003/2004.  Nothing has changed my sentiment since and every 'action' govt has engaged in since then has reinforced that lack of trust.

Goatboy's picture

Ahh this was so refreshing.. from usual (deified) market fundamentalism, gold-buggery and reactionary shenanigans.

It restores my faith in ZH as place worth revisiting.

Yes_Questions's picture



New Rule: you are not an Asset Manager unless you actually control an asset.  A fluffed up title if ever there was one, Asset Manager.



Dr. Engali's picture

If they would prosecute some fraud, stop picking winners and losers, and let this market correct they might be able to bring people back into the market. Who the hell wants to put money to work in a market that the fed is propping up? Most people think that the moment they do then the fed will pull the rug out from under them.

Lore's picture

Exactly. The trouble with these papers is that the writer feels constrained from speaking openly about every aspect of the problem, especially manipulation and lies from official and/or influential agencies. BREAKDOWN IN RULE OF LAW STARTS AT THE TOP. Moneyprinting and meddling in other people's affairs is no substitute for throwing psychopaths in jail. We are so far from that that it really gives you some perspective as to how long we have to wait before some semblance of REAL markets is finally permitted to surface. 

Buckaroo Banzai's picture

As they say in Sicily, the fish rots from the head.

Mike in GA's picture

This is one rotten sonofabitch then!

Karlus's picture

Good Doctor,

I doubt its really about getting people back in the markets or really even fixing tem at this point.

This is political fighting in a burning house.

"Winning" is all that matters, and their normalcy bias does not see the flames around them. People in charge have as little in common with you, than you have with a giraffe.

fonzannoon's picture

The irony is everyone thinks that a vote towards the bond market equals a vote against the stock market. The bond market collapse will dwarf an equity crash at this point. Then where will the sheep run?

Dr. Engali's picture

They will finally run to the one place they haven't, the only place left ..... Gold

Go Tribe's picture

The insurrection will be over gold and silver confiscation.

icanhasbailout's picture

Let them eat default-bait bonds.

Lucius Cornelius Sulla's picture

There has never been a major bear market that ended before the S&P500 hit a minimum yield of 5%.  It went over 10% in the 1930s.  Mean reversion is a bitch.


virgilcaine's picture

lost me at...working papers.

TheSilverJournal's picture

Trust is being lost of the government, but almost everybody is forgetting to ask the simplest of questions:

What is money?

The people are not holding stocks in exchange for Little do they know, it's cash, bonds, and dollar denominated debt that will be wiped out. All while they rush to sell their broken jewelry at "Cash for Gold." What people need to do is move out of cash, not rush into it.

Much less than knowing we're on QE4, the majority don't even know what QE is. Once again, the sheeple get fleeced.

Oh, and if you think there's going to be some sort of epic market crash here, think again. Maybe there's a dip in the very short term, but there's not going to be much of anything that will be crashing faster than the dollar. QE5 is right around the corner, Bernanke explicitly said on the QE4 announcement on 12/12/12 that if the fiscal cliff drags the economy down he would increase QE a bit. How long after that until QE6, then? A month?

This is not 2008. The dollar and bonds are no savior this time. This is the end, my friend, this is the end.

Lucius Cornelius Sulla's picture

Fiat money is debt so the money supply is measured by total debt.  Even with all the monetizing, M3 (total debt) is barely growing.  There is a whole lot of deleveraging going on.  I think we're turning Japanese.


TheSilverJournal's picture

The deleveraging can go on only until the malinvestments being exposed crash the banks and at that point, the choice will have to be made to print more or to let the monetary system collapse. The more we print, the more malinvestments are created and therefore the more printing is needed in order to keep the malinvestments from becoming exposed.

We would be lucky to be turning Japanese. Japan was a huge exporting nation, which they are now no longer. The US, on the other hand, has been running trade deficits for decades and is now racking up a trade deficit at a pace of $40B+ every month. This is not a good formula and since the dollar is the world's reserve currency, when the dollar crashes, it will be all fiat coming down.

Lucius Cornelius Sulla's picture

The FED can only print so much before confidence is lost and yields start to rise.  If yields rise, then the USG will not be able to service the debt.  If the USG defaults then the game is over and the bond market crashes.  The only way out is for the debt to be destroyed.  The same fate awaits Japan.  They are holding on a lot longer then most ever thought they could.  Perhaps the USG has at least few more years left in the game.

TheSilverJournal's picture

Maybe, I'm giving it sometime between 3 months and 3 years. The only reason yields are so low is because of how much is being printed. But the FED can and will print enough to keep rates low straight into hyperinflation.

So the real warning is when prices start to rise rapidly. By far, oil is the largest commodity, so the price of oil is a key. Gold and silver as well because they are real money, so it literally represents how much wealth is flowing out of the counterfeits and into the real  thing. Maybe watch a few other essential commodities like corn, wheat, and copper to complete the gauge. $200 oil, $5,000 gold, $500 silver won't go over so well. Who knows what wheat, copper and corn are, but $10 milk and $10 bread won't go over very well.

Room 101's picture

So we're doomed. DOOMED!  I get that.  Dogs sleeping with cats, the apocalypse, etc.

The question is: so what to do?  While I would very much like to count stacks of PMs in some beautiful offshore haven, that's not likely to happen for most of us.  Any suggestions other than stack PM, bitchez?


Lore's picture



Set SMART objectives for yourself.

Consider what others have done and are doing now. There are oodles of resources. You need only look. Ask questions.

Be organized. Be diligent. Be discrete. Be careful. Know your limits. Know when to hold 'em. Know when to fold 'em. Know when to walk away. Know when to run.

You're taking career exploration to the next level. It should be fun. Don't neglect the spiritual side. Remember what really matters. Respect serendipity.

Best for 2013.

TheSilverJournal's picture

Good stuff Lore. Don't focus on government, service sector, construction, or financials because they will all do horrible. You may want to move out of major cities. Do focus on real goods that people need like food, energy, real resources, making things that Asia likes. Thrift stores and repair shops may flourish. Maybe start a business tearing down abandoned houses. Or start an agency helping people to move out of the country.

Pareto's picture

I agree.  I think increasingly people have to start getting used to the idea of providing/servicing/producing for others without necessarily getting paid for it exante.  I was talking with my brother inlaw about this exact thing last night....about education and how students and graduates have this expectation that "if i just get this education, then I can get a job." This is the wrong perspective, and the government keeps shoving it down their throats.  The right perspective is to say "if I just get this education, then I can help people solve problems.  They confuse getting a job, with something of a lottery, rather than as an opportunity to make somebodyelse better off.  They are not taught to solve problems - just memorize and regurgitate.  Somewheres, we have forgotten about ownership and responsibility in the cirriculum and what it means to be accountable to and for the final propduct.  So, I say go with your gut.  Aim to make others become more self reiiant.  Become part of the change that needs to happen, rather than waiting for it to happen.  If I sound preachy, I apologize.  Its only because I've asked myself the same questions too and this is the road that seems to make sense to me.  cheers

TheSilverJournal's picture

You want to do what makes the most money in an honest way. Profit is literally the measure of the value you provide to others minus your costs. As long as it's honest, maximize that profit. Get that silver. Every dollar of profit stored in silver now is like making $30 in profit if held until currency collapse.

Pareto's picture

yup.  work and stackety stackety stack!

Room 101's picture

+1. Yes, good stuff and thanks for posting it.

Mike in GA's picture

Learn how to grow your own food and learn how to defend it and yourself.

Colonial Intent's picture

"The division of the United States into federations of equal force was decided long before the Civil War by the high financial powers of Europe. These bankers were afraid that the United States, if they remained in one block and as one nation, would attain economic and financial independence, which would upset their financial domination over the world. The voice of the Rothschilds prevailed… Therefore they sent their emissaries into the field to exploit the question of slavery and to open an abyss between the two sections of the Union."
- German chancellor Otto von Bismarck

Room 101's picture

This is interesting.  So where is all the cash going?  The bank of posturpedic?  The alternative economy?