mindmeld,
re: lack of interest being a "requirement", something like 52% of households have exposure to equities now vs. 19% in the late 70s. what is the difference? the difference is there is a lot more capital available to markets. just as scarcity of capital pushes returns upward (scarcity value), a surfeit of capital pushes returns downward. this is apparent in two respects: business investment in capex, and investor returns on investments in equities. the capex boom of the late 90s created excess capacity which drove down returns on investment for businesses. that is one "prong" whereby excess capital drove down returns. the other "prong" is excess investor interest in stocks (the 52% of households vs. 19% thing). excess investor interest has driven up PEs, so future real returns on stocks will be low.
this is a double whammy: excess capital created too much capacity, so businesses have poor returns. and it also drove up equity prices, so returns on stocks (which themselves have poor business returns) are also poor.
in the case of the US, i believe eventually we will return to an environment of good forward returns, once the market crashes sufficiently. for the capex prong, we are already in a capex recession. eventually, existing capacity will be used up or become worthless, at which point a low availability of business capital should bring back some scarcity value.
in terms of investing in equities, a large portion of our excess capital is due to foreigners (obvious when one considers our humongous trade deficit, etc.). due to the falling markets, foreigners will reduce their exposure to US assets. this will drive down our equity markets further even as bond yields rise. once the markets fall enough, the stock religion which US retail investors (and institutional investors) currently follow will fall apart. markets will crash to attractive levels and investor capital will then have scarcity value.
at that point, the two prongs of business and investor capital will be scarce instead of plentiful, and will demand high returns instead of low ones.
all the above is just in my humble opinion. |
