In the stocks

The new American high is playing the stock market. Are we ready for the inevitable bummer?


Paban Raj Pandey
October 22, 1996 11:37PM (UTC)

only in paradise can bull markets go on forever. Unfortunately the
approximately 51 million Americans who hold shares seem to think they're
already in paradise. And no politician certainly not in this election
yearis prepared to suggest otherwise.

And why worry? The bulls have dominated U.S. stock markets ever since the
Dow Jones Industrial Average bottomed out in 1982 around the 800 mark.
Since then it has hit a record high every year since 1989. Last week, it
hit the 6000 mark. The 7000 mark could be just weeks away.

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In fact, the stock market makes Las Vegas look like church bingo.
Betting on this ever-faster roulette wheel, investors have
been shifting money from lower-yielding but safe vehicles such as bank
CDs to riskier mutual funds. Last year investors poured a near-record $128 billion into U.S. equity mutual funds. They followed that with another $55 billion in the first
four months of this year.

Over 30 percent of U.S. households own shares in a mutual fund, an astonishing increase from six percent in 1980. Despite a slowdown during the summer months, America's romance with the bulls is not abating. In other countries, people anticipate the return of the bears, augmenting other forms of personal saving in case
trouble hits. Americans, on the other hand, appear to have thrown all caution to the winds, putting their faith in "paper profits" from the stock market rather than the steadier, more boring accumulation of real personal savings. Dazzled by newspaper stories of people who accumulated a "stash" by age 50 or even younger and go off into merry retirement, Americans are continuing to save less. U.S. personal savings have crashed from 9 percent in 1981 to 4.7 percent in 1995.

But what if the bears return? With so many future nest-eggs being placed in the stock market basket, many of today's equity gamblers could face a ruinous future should their luck run out. Already there are longer-term trends that point to real trouble.

The 76 million Americans born between 1946 and 1964 will begin to retire
in 2010. As their number outpaces the number of U.S. workers paying
payroll taxes, Social Security the traditional savings pot for many Americans will cease to be secure. By 2031 it is projected to go insolvent. Earlier this year trustees for the Medicare trust fund reported that by 2001 Medicare will be $53 billion in the red. At the same time, more and more companies are switching from defined benefit plans under which retirees are paid a guaranteed monthly sum to plans like the 401(k)s in which employees do the bulk of the contributingincreasingly in the stock market.

Moreover, as Americans are living longer, parents are consuming assets
that would otherwise go to their children as inheritances. So they are
trying to make up for lack of assets and savings by hoping for even
higher yields from the stock market than those today.

In the 1950s, Americans saved twice as much as they save today. And most people trusted in Social Security. A decade later, when Medicare was introduced, few doubted that
government would be there for them. Today, amidst warnings that both institutions are heading for trouble, that confidence has eroded. Nor are people able to soothe their worries on the wage front. Last year the Economic Report of the President showed
that the average hourly wage, adjusted for inflation, has steadily
declined since 1973.

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All the more reason for Americans to take another look at the more traditional forms of personal savings. Some economists have argued for lower taxes as a stimulus for personal savings. Others insist that the government's own habits must set the example.
Right now, the federal budget deficit, though it has dropped from six percent of GDP in 1983 to about two percent now, is still a big drag on national savings. Were
government to achieve bigger savings through a balanced budget, borrowing
rates would drop, freeing up more capital for investment, leading to more
jobs and higher wages.

The net effect could finally encourage households to start saving again
as the best way to cope with their futures. Until then, Americans will
continue to ride the bull market
and pray, with their heads between their knees, when the bears eventually re-enter the ring.

) Pacific News Service


Quote of the day

As God is my mortgage

"My saying that the righteous should go into government is no different than the realtors celebrating one of their own going into politics."

Ellen Craswell, GOP gubernatorial candidate in Washington, who calls herself a "Christian radical." (From "Battle in Washington Brings Soul-Searching," in Tuesday's New York Times)


Paban Raj Pandey

Paban Raj Pandey is an economic analyst based in the San Francisco Bay Area.

MORE FROM Paban Raj Pandey



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