Comment From Regular Correspondent: High Plateau Drifter Strikes Again

Surfing the zero bound along the permanently high plateau.

Is there no change of death in paradise?
Does ripe fruit never fall?
-Wallace Stevens, Sunday Morning

Since income from financial assets has largely disappeared, with junk bonds yielding just under their historical average annual default rate of about 5%, rising asset prices have attracted investor money for the past 6 years. Stock and bond price appreciation has been the only source of growth in wealth.

What happens when prices stop rising, as they must along a permanently high plateau? The S&P 500 is down slightly from its Dec. 29, 2014 high. That means zero yield for nearly 4 months. What happens if this continues for 9 months or a full year?

If I am Joe Retiree with a modest retirement stash, how long can I allow it to sit in a risky asset like stocks if they aren't appreciating? If it cannot appreciate, you move to a riskless asset like cash. We don't need a spectacular market crash. All we need is zero momentum and zero stock appreciation for 12 months and then a slow grind downward will begin and last for a very long time. We have seen a new S&P high on Feb. 25, 2015 and then two recent attempts that were turned back shy of that mark. Has the process begun before I expected?

Who would have thought that when Herrenstein and Murray were lamenting the dangers of social isolation in The Bell Curve, they could have been talking about the financial markets? For example I take particular delight in all those agitated posters on Zero Hedge who talk about “generational warfare” over social security benefits, as if Gen X and Gen Y do not have parents.

And are those Gen Xers and GenYs going to direct their anger at anything other than the fundamental dishonesty of the welfare state and those who created it when their parents must move in with them or otherwise require their support as their Social Security payments are cut or inflated away? Mainstream economists seem to suffer from the same delusion as most zerohedge posters, concocting this notion of a totally denatured society in which parents and children fail to feel each others' economic pain and fail to react as one against its causes. All generations are going to be hurt when the welfare state implodes and all will be angry. Everyone I know in my own age group has been paying out vast sums to keep the kids out of student loan hell, helping them with a house down payment, helping out with daycare expenses for the new baby, etc. etc. all of which depletes the retirement nest egg. None of the kids are plowing money into the stock market the way my generation did in the 1970's, 1980's and 1990's.

Next, of course we have those ridiculous mainstream articles that claim that retirees will keep their investment assets through old age. My coupon clipping aunt, who died 8 years ago did exactly that as her estate increased almost every year until her death. So did most of her friends and acquaintances in Florida. You could do that back when interest rates on single A credits were at 6 or 7 percent. No more. Similarly, my parents who died 7 years ago lived off their pensions and social security for over 20 years. Pension plans will be bankrupt if the zero bound continues for a few more years. At the zero bound, to claim that retirees are keeping their retirement assets whole is to claim that they are living on social security alone, a sum which will cover not much more than the real estate taxes for those of us living in McMansions. The truth is that prosperous baby boomer retirees are selling assets to maintain their life styles in retirement. Most are selling a small fraction of their appreciated stocks but have been lucky that stock price appreciation has thus far matched or overbalanced their asset sales. The middle class retirees with de-minimis stock portfolios are selling their big houses in the expensive suburbs and moving into smaller exurban houses to raise cash. This trend is evident throughout the flyover states. There is a reason why Warren Buffet has purchased all of the manufactured home builders. I am modestly short TOL and intend to increase that short.

If we have a sustained bear market while interest rates remain at the zero bound, those retirees with large stock holdings are going to freak out, sell and then cut back on their consumption and hope they perish before their non interest bearing cash runs out. In short, asset appreciation has been a substitute for interest and dividend income these past 7 years. When the appreciation levels off the stuff finally hits the fan.

And when the bear market comes, it will not be a short lived violent sell off which quickly recovers back to old highs, but a slow grind downward and then several years of sustained losses, restored dividend yields and interest returns, and little or no price appreciation.

[Past HPD posts/comments: Is Investing Groupthink Caused By The "Urban Versus Rural" Culture Divide?, High Plateau Drifter On the Pharma Bubble, "High Plateau Drifter" Writes On the Federal Reserve's True Priority: Its Own Survival, "Fun on the Permanently High Plateau", and the original "Skeptics To The Ramparts".]