We're in the middle of the worst global health crisis since 1918. That in turn has precipitated the worst economic crisis in 12 years, though it may very well prove to be worse than the decade-long Great Depression of 1929.
Unemployment is at record highs, despite Friday's better than expected news. Friday's report that unemployment dropped to "just" 13% would have been unthinkable as recently as Presidents Day.
The world is wracked by the worst geopolitical tension since the fall of the Soviet Union in 1991, and our cities are inflamed by the worst civil unrest since Martin Luther King, Jr., was assassinated in 1968.
And the markets are within sight of their February highs. As of this writing, the Nasdaq is up almost 8% for the year; the Dow Jones and S&P 500 are off just 8% and 4%, respectively.
The market is a big, complicated, discounting mechanism. In Business 101, we're taught stock prices reflect future earnings.
But, on balance, companies are not going to make 4% or 8% less than they would during good times. No, the drop in earnings for the second quarter of 2020 is going to be much, much steeper.
But if you listen to the news media, or investment banks' analyst desks, or to government officials, they'll repeat this old story about "future earnings" anyway.
Folks, this is probably the biggest Reality Gap in the country right now. It's the Reality Gap of the decade. And, as always, there are big profits to be had in that gap.
You see, stock markets are no longer about owning a share of a company's future earnings. It's no longer an arena where investors win by making the best long-term predictions and traders win by predicting what investors will do next.
The truth is that the Big Four - News Media, Madison Ave, Big Government, and the Wall Street Heavyweights - have together turned stock markets into something else altogether.
The Big Four have turned rising markets into a public good, much like tap water, libraries, and electric utilities.
Once you see how and why that's happened, profits await...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
At their advent at the end of the 1970s, 401(k)s were a simple and flexible way of encouraging us to save a little bit more for our retirement. Your defined contribution was put to work in the market, you could take it with you if you switched jobs, and you could defer taxes on it. What's not to love?
That was the idea, at least. Until the Big Four got their hands on the 401(k) idea and used it to corrupt the stock market.
Today, Ted Benna - known as "the Father of the 401(k)" - and other early proponents of defined contribution plans now regret their earlier claims. The promise of 401(k)s has failed. Those early boosters cite two main factors behind this failure.
First, we live longer in retirement than they expected.
And second, market returns have not been nearly as high as we were told.
One early booster, economist Teresa Ghilarducci, said in congressional hearings that people would have to save as little as 3% of their annual paycheck to be able to retire.
That assumed that markets would go up 7%, year in and year out.
After the 2001 and 2008 crashes, she now acknowledges this was much too optimistic.
Many 401(k)s are still far behind where they need to be because of those two crashes. Of course, that doesn't include the "COVID collapse" we just saw.
Now, on its own, this wouldn't have been a huge deal. After all, defined contribution plans such as 401(k)s were just supposed to be an add-on to Social Security and to your company pension.
It was just a little extra to make retirement more comfortable.
But then the Big Four realized the true potential of defined contribution plans.
To see what I mean, take a look at this chart from The Wall Street Journal:
As you can see, defined contribution plans (the blue line) didn't supplement pensions (the purple line).
They replaced them.
In less than a decade, 401(k)s and similar defined contribution plans replaced pensions as the main source of retirement income.
That's put our retirement at the mercy of investments.
The reason for this switch is simple: For individual employers, a defined contribution plan is cheaper and carries less risk than a defined benefit plan. A defined benefit plan is a promise of spending a large amount of money on every worker in the future.
With a 401(k), the employer simply has to contract with another company to set it up. If they're generous, the employer will even match some of their workers' contributions.
In other words, this shift from pensions to 401(k)s was an inevitable cost-cutting move, pushed along and "mainstreamed" by the Big Four.
As the chart from The Wall Street Journal shows, more than half of all households in America now have an investment account.
For many, that investment account will be their main source of income when they retire. If they can ever afford to retire, that is.
The only way that can happen is if markets keep rising.
And that suits the Big Four perfectly. Which is why they made it this way in the first place.
After all, it was Big Government that allowed companies to replace defined benefit plans with defined contribution plans.
It was Big Government that, in 2006, allowed companies to opt in workers to 401(k) plans by default. Unless you look, you might not even know that a portion of your paycheck may very well be going into a 401(k) plan.
But now the government has set up outrageous expectations for ever-rising markets.
Meanwhile, the switch from defined benefit to defined contribution plan has been a gold rush for Wall Street Heavyweights.
According to the Employee Benefit Research Institute, Americans had a total of $5.28 trillion in 401(k) plans as of 2017. Some 65.3 million American households had active 401(k) plans in 2015, the last year for which records were available.
Or put another way, 65.3 million American families have given a combined $5.28 trillion to Wall Street to play around with.
The average all-in fee for a 401(k) plan, mind you, is 2.22% annually.
That's over $116 billion in fees to Wall Street every year.
And 2.22% is just the average. All-in 401(k) fees can be as high as 5% or more, if you're unlucky.
With so much skin in the game, with our retirements at stake, it's no wonder Americans are so interested in what happens to the stock market.
We can't afford not to be.
Which suits Big Media just fine. They get to write inane articles day in and day out that don't tell you anything about how to actually make money on stocks. But regular investors read them, because they think they have to.
Meanwhile, they're selling Madison Avenue's ads on every page or Internet link, making sure both are happy. And Madison Avenue, of course, gets to make ads for brokers, annuities, reverse mortgages, and other bad ideas that Wall Street Heavyweights come up with to sell to those desperate for a livable retirement.
But it doesn't end there.
Billions of dollars a year in fees isn't the only benefit Wall Street Heavyweights get from the switch to 401(k)s...
With so many Americans depending on investments for so much, we're desperate for them to rise.
Thanks to Big Government, interest rates have been zero or close to it since 2008. So the only investments worth putting in your 401(k) for years now have been stocks.
I'm sure Wall Street appreciates that.
Even better for them, that means at least those 63.5 million American households need stocks to go up.
Much like clean water or electricity, rising stock markets are now essential to our retirement.
Wall Street Heavyweights, of course, would also like stocks to rise. It makes it easy for them to make more and more money.
And here, finally, we come back to why Big Government was so eager to put America's retirement in the hands of the stock market all those years ago.
After all, only Big Government has enough clout to make sure stocks keep rising. We're seeing that right now, with stock markets flat or up for the year despite everything that's happened during the COVID-19 pandemic.
Big Government made this stock market miracle happen with almost $3 trillion of Fed stimulus so far:
That includes things that would have been unthinkable for the Fed not too long ago: buying junk bonds, buying exchange-traded funds (ETFs), and corporate paper - bailing out companies that would not otherwise be able to survive.
Not to mention the more than $2.2 trillion in stimulus Congress has passed so far, most of which is also destined for corporate coffers.
Somehow, all that regular people got was a $1,200 check.
With more than $5 trillion worth of fiscal and monetary stimulus, the stock market keeps rising, even if the underlying economy doesn't have the prospects for doing any better for months.
Because the stock market is essential to our retirement.
It's almost a right, a public good. Like other public goods, life would be very difficult without it.
And Big Government is only too happy to provide this new public good. In exchange for... Power. And your vote.
Yes, they do it because rising stock markets win elections. Since 1928, the incumbent party has won the U.S. presidential election almost every single time that the S&P 500 was in the green three months before the vote.
But don't be fooled. These ever-rising markets, completely disconnected from economic reality, are not for your benefit.
The Big Four will always have more skin in the game, will always profit more, than you. They just use you and your taxes to turn markets into ever-rising sources of money and votes for them.
However, now that we see this Reality Gap for what it really is, we finally know the rules of the game.
And that means we can win it...
To be successful investors, we have to accept markets for what the Big Four have turned them into. Once we do, we can see how, allowing for the odd pullback, markets will keep rising.
We'll see the kinds of stocks will lead the way.
We've been seeing it for years now. The same few stocks, pushing higher and higher as Wall Street Heavyweights buy them, Big Media hype them, and Madison Avenue advertise them.
These favorites of the Big Four are no surprise, seeing as how we hear about them constantly: the FANGMA clan.
Facebook Inc. (NASDAQ: FB), Amazon.com Inc. (NASDAQ: AMZN), Netflix Inc. (NASDAQ: NFLX), Google/Alphabet Inc. (NASDAQ: GOOG), Microsoft Corp. (NASDAQ: MSFT), and Apple Inc. (NASDAQ: AAPL).
All of them except Apple posted double-digit revenue growth in the last earnings quarter. That's right - they're the largest companies in the world and they keep growing by double digits.
And now that you know that the Big Four has their back, you know why I keep suggesting you buy them on every pullback.
Of the FANGMA family, my two favorites continue to be Amazon and Microsoft. Not only is Amazon.com the biggest online retailer and biggest cloud infrastructure service provider, but it will be opening a standalone delivery service to compete with UPS, FedEx - and yes - the United States Postal Service. Its upcoming foray into healthcare has to be one of the worst-kept secrets on Wall Street.
Microsoft has so many cash cows that it's tough to get them all in one barn. In addition to the ubiquitous Windows operating system and business software suite, it is the second biggest cloud player with "Azure," and it has a big Xbox gaming platform rollout scheduled for the fall - just in time to capture some more "remain at home" revenue.
The bottom line is this: The Big Four have seen to it that these stocks essentially can't fail. These two companies have to be in your nest egg retirement portfolio. Add more on any pullback.
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