Fooled by financial randomness – Number of millionaires back to late 1990s levels and the end of a 30 year bull market. Real estate and stock market speculators luck out but want to believe in Wall Street religion.

It is hard to convince a generation of Americans built on the “greed is good” motto that we have just lived through a once in a lifetime bull market in stocks and real estate.  I’m reminded of Michael Lewis and his semi-autobiographical book Liar’s Poker printed in 1990 that was to serve as a warning of the massive gambling and fraud by bond salesman on Wall Street in the late 1980s.  Instead of being taken as a siren call, many eager business students used the book as a how-to manual on how to get obsessively rich even if it meant destroying entire sectors of the real economy and helping to destroy the middle class in America.  Yet this financial crisis with the debt boom fueled by housing will never be rivaled in our lifetime.  I don’t think many in America can understand that we have just lived through a once in a lifetime bull market.  Wall Street has pulled back from the bottom reached in 2009 yet the real economy shows very little signs of economic life.  Many have been fooled by the random nature of the market.

The literature of the last few decades plays into this near religion in finance.  I was reading the Millionaire Next Door and find it stunning that the authors don’t focus on the fact that many of the people in the book became wealthy by being in the bull market.  Let us first look at the number of millionaires in the U.S.:

Source:  SpectremGroup

“As of 2009 we had 7.8 million households with a net worth of over $1 million.  This is up from the 6.7 million in 2008 but a far cry from the 9.2 million reached in 2007.  The number of millionaire households is back to 1999 levels (I would imagine that the number has remained somewhat stable in 2010 or dropped given the recent stock market performance).  Most of the wealth of those at the lower end of the millionaire ladder have money in stocks and real estate.  These two asset classes have just gone through the biggest bull market in history.  The recent stock market volatility is merely a reflection of the uncertainty in the market.  Given the low volume it appears to be artificially driven by large traders in hedge funds and pension managers.  The retail investor who believes in the buy and hold religion has gotten hammered in this market as the sharks use the market as one giant roulette wheel.”

A colleague here in California experienced the boom and bust in both stocks and real estate.  He purchased a modest home in a nice area for $200,000 back in the 1990s.  His stock portfolio at the time was roughly $100,000.  By 2007 his home was “worth” $800,000 and his stock portfolio was worth close to $400,000.  On paper he was a millionaire.  Today, his home would likely sell for $450,000 and his stock portfolio is down to $200,000.  How about we do a new millionaire next door book after the crisis has hit?  You will find some very different results.  I understand and even advocate for caution with finances.  But we have millions of Americans who are now careful and prudent with their money and they are certainly anything but rich.  The flaw with the book is that it tries to convey that it is enough to simply stash away money and live under your means to be wealthy.  Could it be that many of these people simply invested in real estate and stocks during one of the biggest bull markets of all time?  Of course.  The above chart shows that.

Even if we look at the recent run in stocks, we can see the bull market running out of steam:

The stock market went on a tear for 20 years.  Even the recent decline after the tech bust and 9/11 seemed to be ancient history by 2007.  Yet it wasn’t and you can see that the market has reached an apex.  This is the end of the bull market.  The stock market is still off by 30 percent from the recent peak.  This is a large amount if you had $1 million saved up for retirement and it is now down to $700,000.  But of course, we know that 1 out of 3 Americans don’t even have a penny to their name.  So this idea of simply putting money away into Wall Street and expecting a 7 to 10 percent return is absurd.  When Bernard Madoff claims this kind of return he goes to prison but when Wall Street does this it gets rewarded with trillions of dollars in bailout funds?

Old habits don’t go away easily and clearly the desire to believe in a perpetual bull market is part of this current generation especially with baby boomers.  As they carefully look at their retirement accounts you have a new generation of Americans that don’t expect anything from Social Security or even their retirement accounts.  What they want is a job and access to a middle class lifestyle.  Driven by the selfish interest built on the Wall Street propaganda many operate on the “we got ours so let them eat dirt” mentality.  This won’t fly for a very long time and you can see what kind of social unrest will happen as it did in Greece.  For the large part, it wasn’t the older generations out on the streets.

The major tipping point in this market came with the bust in real estate.  Even if stocks go up and down you could always depend on trusty old real estate for dependable returns.  That is, until Wall Street got its hands on financing the debt and started introducing every kind of toxic mortgage product under the sun.  The bull market here is undeniable as well:

From 1988 to 2006 real estate prices in the U.S. increased 250%.  This is equivalent to a $70,000 home going up to a value of $245,000.  Of course, this was a bubble and prices have now fallen 43 percent from their peak.  The issue with real estate however is that this is where the majority of Americans keep their financial wealth.  With financial wealth you have 1 percent of country controlling 42 percent of the wealth, in real estate over 65 percent of Americans own their home.  The real estate bust has impacted many more millions of people.  And prices have not increased from the trough here.  In fact, they are now trending lower again.

Book after book started talking about the easy path to riches with real estate.  It almost became dogma for many.  Yet these were random once in a lifetime events.  People mistook luck for skill.  Bull markets tend to turn people over confident about their own abilities.  A market that is efficient would punish those who took too much risk like the banks but this market is anything but.  This is an artificial market that is bank friendly and Wall Street owned.  Our government, filled by many elected officials with law degrees and no financial training, trust the Wall Street sharks as experts instead of looking at them as the pirates and charlatans that they are.

What we get is two mega bubbles and the end of a bull market era.  This happened during the Great Depression as well.  How did we fix it?  We made sure that Wall Street stopped acting like a casino and served the interest of the people.  Today, we have taken a completely different approach and have given Wall Street even more money.  The belief in the bull market forever era is still alive and well.  People want to believe it was their skill but clearly it was nothing more than being at the right place at the right time.  Human nature doesn’t like the random aspects of life especially when it comes to money.

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