Social Control and the Stock Market

As I begin this, on the morning of (10/28/97) the largest 100 companies in America commenced massive stock buy-backs to reverse yesterday's 554 point market slide, and to convince the baby boomers not to redeem their mutual funds. (Confession time: with the market rising the Muse fled, and as I finish this on 10/29/97 the markets are heading South again and the Muse returned at the sight of smiling Joe Granville on CNBC talking about individual investors being the "smart money".)

OK class, lets talk about "critical thinking skills." You know, that's the buzz word you hear constantly from our public schools and our Colleges. Is the baby boom generation full of "critical, independent thinkers" as advertised, or are they over-stuffed woolly sheep with an intense desire to accept wildly implausible belief systems?

Montgomery Securities surveyed their customers about their attitudes toward the stock market in August. They found that 65% of their customers believed that the stock market would appreciate 34% per year, compounded, over the next 10 years!

Folks, that is not Dow 10,000 or 12,000 or even Dow 15,000 as some bullish analysts have suggested. it is Dow 151,000!

You cannot make money in any investment unless you understand the motives and beliefs of the other market participants that surround you.

And we all know that this notion of Dow 151,000 ten years from now is not even remotely possible.

The problem is that every one of these baby boomers wants to retire early with lots of money. Among boomers, it is a sign of failure if you cannot hit the links at age 55. Working beyond that age is declasse in the extreme (unless you are a CEO with lots of "power" which of course you may want to keep until you die).

The problem with stocks and the U.S. stock market is simple and obvious. The dividend yield on the S&P 500 is 1.6%. What does that mean for our typical baby boomer nearing retirement? It means that if they have a 401(k) account with a value of $500,000, the annual dividend income is $8000.

Now you cannot hit the links on $8000 per year!

Even if your retirement fund is an impressive $1,000,000, your dividend income is only $16,000 per year. Enough for a modest trailer somewhere along the Texas-Mexico border, but nowhere near enough to allow you to hit those links!

All of those retiring baby boomers are going to have to sell!

They can sell their stocks as soon as they retire and buy a bond that yields, in the case of our $500,000 retirement account, $30,000 per year, or they can buy an annuity (in effect, a bond that also refunds principal over your life based on the life expectancy of a pool of investors) that will pay almost $50,000 per year depending on when they retire.

They also have the choice of holding on to those stocks, collecting their dividends and then selling in dribs and drabs every year in order to get that income up above $30,000 per year.

The lead edge of the baby boom is now age 52.

The baby boom generation (born in years 1945 through 1964) numbers 70 million workers out of a total of 122 million. The youngest boomers are age 35. For the next 12 years, there will be far fewer workers hitting age 35 (the age at which people begin to save and invest) than there will be people retiring. In about 4 years, about 4.1 million boomers will retire each year. By law, the contributions of the new 35 year olds are limited to about $10,000 per year, while the larger number of retirees will have large account values, and stock to sell, worth around $200,000 on average.

There have been a few articles in the financial press admitting that the lead edge of the baby boom will reach age 65 in about 14 years. This is, of course, propaganda. You have a public disclosure room at the Department of Labor in which the actuarial schedules of every pension plan in the country are filed. And every large plan out there assumes the truth, which is that on average, pension liabilities walk out the door at age 57, not age 65.

Beginning no later than about 7 years, we will be faced with the reverse of the bull market that began in August of 1982. We will have 30 years of uninterrupted net selling, as the baby boom attempts to pull money OUT of the stock market.

So then the question becomes; "What are the odds that the George Soros's of the world will allow any substantial number of boomers to cash out at these high valuations in effect now?"

In other words, what are the odds that the hedge funds, the arbs and the Wall Street pros won't sell first, in advance of the certainty ahead, and administer a "haircut" to the great herds of woolly sheep who want to believe?

Or to put it in the vernacular of the Street, "Is the market an anticipatory mechanism?"

All of our "critical independent thinkers" out there went to college and understand the PV function on their spreadsheets. They use it often. But folks, that is the bosses' function and the corporation's function, not yours! The PV function presupposes that you have millions of dollars NOW to invest NOW. The corporation you work for wants to understand the present value of the future revenue streams from deployment of its millions.

Right next to the PV function is the FV function. Like the legendary Maytag repairman, it sits there largely unused. Now folks, the FV function is YOUR function. It is the one that all you "critical thinkers" out there can use to calculate the term of your own freeway commuting servitude.

And once you do a few "what ifs" with that FV function, you will figure out that high yields and high rates are good for YOU (but not for the corporation that employs you), and low interest rates and low yields are very bad, because they extend the period of your serfdom and lower your living standard in retirement.

Indeed 7 years is an eternity for the investor, so lets talk about what is happening right now, and what is likely to happen over the next couple of years.

The pundits on CNBC prattle endlessly about the fact that the currency turmoil now occurring in Asia will export "deflation" to the U.S. This is supposed to be comforting to the great herd of woolly sheep. After all "deflation" means that financial assets are "the only place to be" right?

Well folks, that depends!

A critically important article was published in the Wall Street Journal on October 17, 1997 and had the following to say:

But for investors, what happens to World's population is nowhere near as important as what is happening right now to the populations of the countries with the largest investment markets.

The U.S. stock market represents more than 50% of the value of all stock markets on earth. Add in Japan and Europe, and it is well over 80%. Birth rates in Russia, all of Europe, North America and Australia declined by 1995 to 1.5 births per woman. This means that the European populations of the world are shrinking by 30% with each generation. This population decline is not confined to white Europeans. Japan also has about 1.5 births per woman, as has China (although the data from the countryside is a little less reliable) with its draconian "one child per couple" policy backed by abortion and infanticide.

Birth rates are still high in Latin America and the Indian subcontinent, but are projected under the U.N.'s "low variant" model (following conquest by Coke, Pepsi, MTV and the pill) to decline to less than 2 per woman by 2020, at which time their populations begin to decline. Sub-Saharan Africa is expected to follow by 2040.

The populations of Latin America, the Indian subcontinent and Sub-Saharan Africa have very little impact on the economies of the developed world. The parts of the world with real economies and real demand have falling populations right NOW. We don't have to project, assume or speculate. Falling population in all of the world's major economies is a present unarguable fact!

What does this fact mean?

First, all economists are the progeny of Thomas Malthus, (1766-1834) the famous English economist who believed that there was no point in pursuing general prosperity through economic growth because people would quickly breed themselves back into poverty and the edge of starvation.

We all think of a business cycle, in which population is rising and temporary excesses of investment produce temporary "deflationary" periods in which demand from the rising population must be allowed to catch up with supply.

Falling population is a brand new thing. Unique in Human History at least since the last Ice Age about 35,000 years ago!

Economists have never had to sit down and think about what would happen in the face of declining population. The first symptom of a falling population is that the workforce gets older. As the workforce ages, its productivity increases, and its savings increase as well. Thus, in this first stage, you have a "virtuous circle" for investment markets in which interest rates fall and stock prices rise in parabolic fashion.

But as the population keeps aging and falling in numbers, the ratio of retirees to workers rises, and you get dramatically falling demand all across the developed world. This produces a vicious circle of economic contraction, excess capacity, falling profits and falling stock prices as far as the eye can see. A falling population is wildly deflationary, but that is not the kind of "deflation" that Wall Street is thinking about when it uses the term.

Wall Street loves "deflation", because "deflation" is one of their belief systems that sustains high stock prices and allows them to peddle paper to the baby boomer public with a straight face.

The belief system or "Wall Street deflation" includes moderate economic growth, falling real wages, and rising corporate profits.

Problem is, that with a falling population, you need rapidly rising real wages all across the economic spectrum in order to have any economic growth at all. Given stable wage rates and stable prices, you will have perpetual recession and perpetual business contraction as far as the eye can see.

For investors, it will feel like a nuclear winter of falling demand, falling real interest rates and rising credit risk, as companies default and go bankrupt in the general contraction of demand.

Governments will attempt to reverse the effects of contracting demand though two devices, the first is easy money - more units of currency chasing fewer goods, and the second is immigration.

Easy money is the classic prescription for price inflation. Given what we know about modern Liberal Democracies, a falling population will mean perpetual stagflation.

We have already seen the "easy money" response to falling demand in Japan. Japan is about 7 years ahead of us, with a population that is about 6 years older. Their stock market began its slide from 39,000 in 1990 bottoming at 14000 a couple years later. It was a decline of 64%. Individuals owned 40% of the Japanese market at the top through mutual funds. That percentage sank to less than 5% where it remains now.

In the years since, Japan has been growing its money supply at double digit rates in an effort to counteract the contraction in demand. Easy money has led to zero or negative real rates of interest in Japan, but there are few borrowers because there are not many investment projects in Japan that can make a profit in the face of this declining population and falling demand.

Rapid money supply growth has occurred in Europe as well. In the face of a falling population and falling demand, businesses will not have the ability to raise prices of goods and services. So indicators like the CPI (which is riddled with phony "quality improvement" adjustments and is heavily influenced by falling import prices) will not pick up the excesses. Rather, the excess money finds its way into securities markets which inflate in parabolic bubbles and then collapse in wild panics precipitated by currency attacks and devaluations.

Easy money will be the tonic all governments in the developed world administer. During 1990 through 1994, annual growth rates of our broadest money measure, M-3 slowed to less than 2%, hitting 0% in 1993 (a disinflationary number under any definition). To counter this decline, the Fed leaned against the wind and grew Monetary Base (a very narrow measure of money that the Fed directly controls) at double digit rates. In 1995, M-3 began to grow, crossing the 6% annual growth level in October of 1995 and rising gently from that point to its present rate of 8.5 % annual growth.

Inflation follows M-3 with a two year lag. And right on schedule we had a producer price index increase of .5% for September (which, if continued in each of the next 12 months, equals a 6.1% annual rate of increase). On 10/28/97 the employment cost index (wages and benefits) for the third quarter showed an increase of .8% or a 3.2% annual rate of increase.

Stagflation is coming back!

With this backdrop of falling population, it is no wonder that our elites have quietly opened the borders despite 75% disapproval in public opinion polls.

By opening up their borders, the developed economies are likely to ingather disproportionate numbers of new welfare recipients who add to the tax burden and the deficit. The young, the talented and the productive are unlikely to come, for the simple reason that they can make more money by staying in their countries of origin which will have expanding populations and expanding demand for the next 20 years. The World wide acceptance of free markets following the collapse of communism means that a child in Mexico or India with an IQ above 130 can remain in his land of birth where his talent is relatively scarce and make more money than he can make by moving to the U.S. and overcoming its language and cultural hurdles.

The European world will discover that immigration will attract primarily more low wage workers not wanted in their country of origin. At minimum wage levels, these immigrants will not produce enough to finance the education of their children, medical care for their family, nor old age pensions to be provided by the government. To the deflationary burden of falling populations, immigration will only add the additional burden of higher taxes - unless - the liberal democracies are willing to administer IQ tests and deny admission based on the results.

But we all know that Western Democracies are incapable of upholding standards of any sort.

The declines in the foreign markets you have witnessed over the past few days, and the volatility in the U.S. market, are the very first overt symptoms of a trend that will gather strength and power over the next 30 years starting now.

It is profits and stock prices that will deflate.

In fact, declining populations and falling demand are likely to produce a kind of nuclear winter for investors where there is little place to hide. Falling populations mean falling housing prices, as high real estate taxes put pressure on the growing numbers of retirees to sell and move to smaller quarters.

Collectibles (coins and stamps) will benefit initially from the reappearance of stagflation because collectibles are not taxed. Loose money will drive down interest rates, keeping real interest rates and living standards in retirement low, while falling profits and falling demand will drive down stocks and increase the risk of default on bonds that pay above average rates.

Easy money will mean a succession of currency crises which will profit only professionals with an eye on their screens at all times. As long as the arbs precipitate the crisis, politicians can engage in competitive devaluations (belligerent acts of aggression in international trade) and blame "speculators." Despite falling demand, goods prices measured in those units of belief we call currencies are likely to rise dramatically.

But the real fallout of falling populations in the developed world will be political.

In America there are 70 million taxpayers. 3.5 million of them, the top 5%, pay 50% of the income tax. It is impossible to provide a meaningful tax cut to the average citizen because the bottom 35 million of those returns pay only 5% of the tax. Back in 1955, Corporations paid 40% of all income taxes collected. Now they pay only 9%. Our society is being financed by a smaller and smaller group of very productive and highly compensated people. Approximately 15 million families finance 80% of the costs of the welfare state. Understandably, these are the very people who so eagerly look forward to early retirement.

Folks, there is no way our government can allow these people to retire early!

In 1961, there were 19,000 students who scored above 700 on the verbal portion of the SAT test. In 1995 (the last year before "recentering") there were 8000. The productive, taxpaying sector of our economy cannot be replaced!

National wealth is now dependent not on capital, but on the efforts of highly trained and highly motivated knowledge workers - software engineers. The decimated ranks of our youth can replace only one out of 2 at comparable levels of ability and talent. Ultimately wealth creation and tax payment will decline.

Our woolly sheep will discover that they have accepted a belief system under which they, individually, would forgo the expense and bother of having capable children, firm in the faith that someone else would certainly have them, pay the $120,000 it costs to educate each one, and speed them into the economy to pay taxes to finance social security.

The problem is that about 60% of our "critical thinkers" had the same dumb idea at the same time.

In truth, the government need not worry. Greenspan and Rubin know perfectly well that the Wall Street pros have a plan to keep you baby boomers from retiring.

The plan is called "Buy the Dips".

You see, unlike a bond, which pays you interest, and then on maturity repays your principal, issuers of common stocks make no promise to you at all.

The NYSE and the NASDAQ lists together have a market value of 11 trillion dollars. Mutual funds hold 4 trillions of this total.

But there is not one dollar on deposit to pay back investors from either of these systems. In order to get money out of the stock market, you have to find a NEW buyer willing to pay for your stock.

And that is why all the propaganda reinforcing the belief system we all know as "Buy the Dips" is so very important. This belief system guarantees that the Wall Street pros will have someone to sell to all the way down.

Each time the Dow goes down 200 points, the boomers will think it's another "dip" and will supply more money to the pros who know better.

When the scales fall from the eyes of a significant fraction of the boomers, the mechanism for the final triumph of the pros is already built. Up until the mid-1980's most retirement and 401(k) plans used to have quarterly or monthly fund switching. This meant that the retirement saver had to wait until the end of the quarter to sell his mutual funds and duck into the fixed income fund.

But now, all 4 trillion can switch daily.

But remember that mutual fund sales orders flow in all day long, but the actual sales or redemptions occur only at the end of the day based on closing prices.

Now what do you suppose the Wall Street pros will do when they find out, mid-day, that a small fraction of the boomers have picked up the phone and ordered the sale of a relatively modest amount, say 300 billions?

The system is rigged in such a way that the Wall Street pros get this information in advance, and have time to act on it. They will pull their bids, and the market will go into a free fall until the dividend yield on the S&P 500 hits the treasury bill rate. (Dow 2500) at which time the Pros will be compensated, once again, for the risk of owning stocks.

80% of individual investors arrived in the markets after 1990. They have never seen a 10% correction, much less a bear market.

Our woolly sheep baby boomers desperately want to believe in the "win-win" transaction. They want to believe in a nicey-nicey world in which the mutual fund managers and Wall Street pros will somehow protect them from harm.

But companies go through a cycle of growth, maturity, and death.

Our woolly sheep baby boomers are going to learn that the purpose of a stock market is to have a place to hang the paper of contracting companies - those in their death cycle of decline. And the ideal place to hang that paper is on the individual investor.

And in the face of declining populations all over the world, virtually all companies are going to be in decline.

Alan Greenspan, our Fed chairman, knows this, and so does our Treasury Secretary, Robert Rubin. So does every actuary in the Social Security Administration and every statistician at the Census Department.

But they don't want you to think about it because nothing can be done to change the situation.

Ultimately our woolly sheep baby boomers will discover the Darwinian truth about markets, so aptly summed up by Carl von Clausewitz in is treatise "On War."

I live under a dual code of amity toward my fellow white nationalists, hopeful patience toward my fellow Europeans, and enmity toward all others.

My purpose in writing this is to ensure that white nationalists reading this understand the risks they face when they buy stocks.

Ironically, the best strategy to ensure a comfortable retirement may be to have 4 intelligent children capable of solving problems.

May you all prosper!


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