11: The Common Stock Legend

The Common Stock Legend is that diversified portfolios of common stocks maintained over many years, through market highs and lows, will always lead to an increase in real wealth greater than any investment alternative.

12: The Role of Demographics

As the composition of the population changes, so do markets. Orthodox economists assume that behavior is rational. However market players reflect shifts in society.

Patterns of saving, distribution of wealth, changing occupations, population aging, and other demographic shifts must be examined.

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12a: Demographics: Patterns of Savings

The most striking change in US investor behavior in the last fifty years has been the increased emphasis on pension reserves in the household balance sheet.

Money market funds and mutual funds became popular investment vehicles.

12b: Demographics: Rich and Poor

90% of the U.S. population has not made significant material progress in twenty years while the Super-Rich have become even richer.

Deindustrialization and a regressive income tax have contributed to widening the gap between rich and poor.

12c: Demographics: Changing Occupations

The formation of engineers in the U.S. reached a peak in 1986 and has declined steadily thereafter.

This decline is consistent with deindustrialization and a slow erosion in technical leadership.

In the last century, self-employment has fallen drastically.

12d: Demographics: Old and Young

In the United States, since 1929, the population cohort over 65 more than doubled relative to the rest of the population.

This 'aging' is given as the reason for the expected collapse of the social security system.

13: The Asset-Lite Movement

The emphasis given to short-term improvement in ROE by hired corporate executives led to a diminished supply of equities over twenty years.

Together with Worker's Capitalism and the Common Stock Legend, this has been a factor in the Great Bubble of the 1990s.

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14: The Baby Boomers

The radical change in the American capital market from 1980 to 2000 was not the result of a business cycle.

The cause was cultural transformation and demographic upheaval. The world-view of the Baby Boomers pushed stock prices to record highs during the 1990s.

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15: Buybacks and Options

Between 1980 and 2000, rising stock prices were driven by companies spending more than one trillion dollars to take their stocks off the market.

Buybacks created a shortage of stocks at a time when small investors were putting savings in mutual funds without concern for investment merit.

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16: Workers' Capitalism

The relative position of entrepreneurs in American society can be seen in the structure of government. Since most voting Americans are employees, the government pays attention to their interests.

The supply of equities depends upon the number of entrepreneurs and their success.

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17: Democracy's Snare

American founding fathers never foresaw that the number of government employees could expand to the point that public servants would have more votes than the private sector.

Democracy's Snare is that a permanent governing class of voting civil servants may become the nation's rulers.

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18: End of the Great Age

Some see the end of a Great Age – the era that stretches back 300 years and encompasses the Enlightenment, the Industrial Revolution, and lives of economists from Adam Smith, David Ricardo and Karl Marx, to Franco Modigliani.

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19: The Almighty Dollar

In the United States – the owner of the world currency franchise – a strong dollar reduces competitiveness of American industry.

However, having the dollar as an international reserve currency leads to constantly increasing trade deficits that provide a rich flow of funds for the bond markets.

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20: The Five Horsemen

It is not so much interest rates that drive the economic machine as the exogenous forces of war, leadership, demographics, and technology.

The extreme uncertainties brought to projected dividend streams by these exogenous factors, argue for a conservative bias in calculations of intrinsic value.

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