Please, by no means construe my comments as some form of justification for some of the outrageous valuations we're seeing out there in the US markets.
The US markets have several very negative systemic problems, IMO. The one that constantly bothers me is the proliferation of mutual funds out there acting as proxies for actual ownership of stocks. What I fear most is that we could see an event that causes the markets to be negative, or end flat, for the year. Given that mutual funds distribute their taxes to their shareholders at the end of each tax year, should there be no gains it will amount to Americans having to pay that tax obligation by selling at a loss. Now obviously this doesn't pertain to tax-exempt or deferred IRA's or 401Ks, but it could create a snow-ball effect that would take major action to counteract.
What MFs also do is concentrate liquidity into a select few companies within an index or sector. We see some 25% of the S&P500 companies constituting some 70-80% of its total value and that is because MF are under increasing pressure to act as traders and not investors in quality companies. There will have to be an inevitable shakeout of the MFs, with funds going to privately held stock with fee only managers and that is a trend we are seeing exhibited to a greater degree even now as MFs consistently underperform the over all indices.
On the other hand, the rest of the world needs what we have with regard to IT know-how and technology. They may be holding off on spending that money, but something will have to give eventually or our competitors will find themselves irretreviably behind the US. And that means a strong technology sector spurring continued economic growth. And since high tech requires high skill levels, that means overall wage stability or increases (inflation neutralized by increased productivity).
Final positive point is that as long as there exists a need for US technology, there will well paying jobs that pour increasing amounts of money in retirement plans. That will continue to be invested in equities (since that is the current mindset and where the growth is) quarter after quarter until the boomers decide protecting their gains is more important that making gains. (interesting point is that retirees can now work after retirement and make what they want without incurring penalties).
Regards,
Ron |
