Thursday, September 9, 2010

Retail investors continue to flee the stock market

Retail investors continue to flee the stock market en masse. According to zero hedge: "In the week ended September 1, domestic equity mutual funds saw a near record $9.5 billion in outflows: the biggest one week outflow in 2010 since the $13.4 billion redeemed in the Flash Crash week." Last week's exodus marks the 18th consecutive week of withdrawals, a clear indication that confusion has turned into distrust, and distrust into a full-blown retreat.

SEC Chairman Mary Schapiro realizes that the May 6th "Flash Crash--which sent stocks plunging nearly 1,000 points in a matter of minutes--has had a withering effect on investor confidence. But, so far, SEC investigators have been unable to figure out exactly what went wrong.

The new market architecture, which includes high-frequency trading (HFT), allows algorithmic-computer trading to dominate market volume and distort prices. Normally, this is not a problem, but irregularities in trading can cause computers to withdraw liquidity at a moment's notice sending stocks plummeting.

Schapiro admits that this is a problem, but has refused to take steps to suspend HFT for fear that the big Wall Street firms will suffer losses. As a result, the credibility of US markets has been called into question and retail investors are heading for the exits.

Ostensibly, the main regulatory agencies no longer have the power or inclination to reign in the deep-pocket speculators that are manipulating the markets.


This is from a survey taken by Strategy One Insight:

"There is near universal agreement (92%) that the US is still in a recession, and a strong majority, 79%, disagree with experts’ characterization that the recession is over.

Additionally, more than half of the public (57%) believes the U.S. economy is either in a deep recession (48%) or in a 1930s style economic depression (9%). Only 4% say the economy is doing fine and 39% say the economy is in a “mild recession”. ("Americans fear Double Dip Recession and European Financial Problems", Allison Quigley, Strategy One Insight)

Ordinary working people are not buying the "Recovery Summer" storyline any more than investors believe that US markets are free from manipulation.


Barack Obama improved his party's prospects in the upcoming midterm elections on Wednesday by abandoning his "summer recovery" campaign and taking the heavy lumber to his GOP rivals. Obama pointed out that the economy was in freefall when he took office in 2008 with all the main economic indicators plunging and unemployment rising at 750,000 per month. He noted that the Republican's governing philosophy has not changed at all since Bush left office. The focus is still on cutting taxes for millionaires, slashing regulations for special interests, and pairing back on popular social programs. Obama also said that the GOP still has "blind faith in the market" believing that if corporations are allowed to do whatever they want, America will prosper."

Obama is likely to get more pugnacious as November gets closer which will force Republicans to clarify their position on the issues. In that regard, House Minority Leader John Boehner's speech on Tuesday was a major blunder that only reinforces the belief that the GOP has no new ideas. Boehner suggested cutting spending in the middle of a recession (an idea that even conservative economists reject!) and making the Bush tax cuts permanent. As Obama notes, these "policies will only lead to stagnant growth, eroding competitiveness, and a shrinking middle class."

Score 1 for Obama.

Boehner appears to be out of touch. Cutting spending now will only weaken demand, lower government revenues and widen the budget deficits. Virtually every country in the EU that has implemented austerity measures has found the same thing; slower growth, larger output gap, higher unemployment and bigger deficits.

Obama must now make the case that the Republicans (if elected) will lead the country into a deeper downturn. That will require a communications strategy (PR) that focuses on the 8 years of Bush rule, where the national debt doubled, "deregulation" blew up the financial markets, working class incomes stagnated, and job growth (between 2000 and 2008) was slower than any time since World War II. Obama has plenty of ammo; it's just a question of whether hell use it or not.

(For what it's worth--- I voted for Ralph Nader)

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