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The Myth of Retirement Meme and the End of the Bear Market

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Megan McArdle wrote a terrific piece in The Atlantic looking at the dilemma faced by underfunded private, state and local pension plans, Social Security and the overall dream of retirement leveraged to the stock market. The main takeaway is this:

"Whether Americans know it or not, they have spent decades basing their retirement plans on expectations of big capital gains in their houses and stock portfolios. But no system can completely protect us from the problem of lower asset returns. Schrager suggests that unless we suddenly become willing to save a huge chunk of our income every year, we may need to rethink our retirement plans. “I don’t know if it’s ever going to be realistic that everyone saves enough to spend the last third of their life on vacation,” she says."

The optimistic upturn in social mood laid the foundation of the last bull market. Optimistic people expect positive things to happen. They then act in a way that helps reinforce these expectations. Increasingly optimistic people are more likely to borrow money, spend money extend their time preferences so that long-term stock market investments make sense. In the early stages of that optimistic turn in social mood, this creates an accelerating economy, increased stock market investment. In the latter stages, however, it creates unwarranted optimism, delusions, even manic behavior; all part and parcel with the culmination in two major bubbles, stocks and housing.

But here's the thing: just as upturns in social mood begin with the best intentions and progress with many positive benefits before peaking out and unwinding the excesses, downturns in social mood also eventually bottom, giving way to another shift in social mood from a more stable base. Stocks are not inherently bad. Derivatives are not inherently bad. Real Estate speculation is not inherently bad. Instead, what happens is the perception and use of these vehicles shifts as a result of changing social mood. As Bob Prechter has documented, cautious business people cause recessions, recessions don't cause business people to become cautious. Outraged people seek out scandals. Scandals don't suddenly materialize causing people to be outraged.

How this relates to McArdle's piece is that we created expectations in the last bull market that ultimately are undeliverable: stock market returns, for example, housing price increases, retirement ideals. The new shift in social mood will temper those expectations, ultimately culminating in overly pessimistic expectations for the stock market, real estate and retirement. Just because we may not be able to spend the last third of our lives traveling the world at will does not mean we will never be able to travel. Just because stocks will not return the gains we became accustomed to in the 90s does not mean stocks will not be useful investment vehicles.

In fact, what is alluded to but not said directly in McArdle's piece is that there is a stark difference between investments and savings. A 401k is not a savings account. It never was and it never will be; nor is a passbook savings account an investment account. Savings is fundamentally different than investing. Before the last bull market began, this was well known. Over the past 30 years, it's been forgotten. We are in the process of remembering that lesson. The stock market is not dead, but it's very much hated. One day, in the not-too-distant future, no one will care about it anymore. We're much closer to that point than anyone realizes.
POSITION:  No positions in stocks mentioned.