A 6-Year Bull Market in Stocks or a 6-Year ZIRP Wealth Transfer

 By Pam Martens and Russ Martens: March 10, 2015

BubblesPundits were out in force yesterday celebrating the six-year anniversary of the bull market in stocks. Notably, no one was talking about the fact that the runup in stock prices has coincided with a six-year zero interest-rate policy (ZIRP) by the Federal Reserve, making the stock market a dandy casino to borrow low on margin and speculate high on risk; or, in the case of corporations, to issue tons of new debt and buy back their own stock.

As mind-numbing as it is to comprehend, it was December 16, 2008 when the Federal Open Market Committee of the Federal Reserve released this statement: “The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.” And there we have stayed for six long, arduous years with nothing but periodic threats to hike rates coming from the Fed.

Seniors who were subsidizing their meager Social Security checks with interest from Treasury securities or Certificates of Deposit have watched their supplemental income cut by 50 to 75 percent, depending on the maturity of the instrument, as a result of the long period of low interest rates.

The elderly and those unemployed or underemployed might have been able to withstand these low rates for a year or two without dipping into principal to make up for the yield loss, but after six belt-tightening years, many have succumbed to simply eating into the principal to make up for the shortfall.

The Federal Reserve reports that: “Rates of ownership of certificates of deposits fell markedly between 2010 and 2013, from 12.2 percent to 7.8 percent. The amount held in those accounts also fell, with the median declining 25 percent and the mean declining 17 percent. These declines are, at least in part, attributable to low interest rates over this period…”

ZIRP has effectively been a wealth-stripping mechanism for millions of Americans. In August of last year, the Federal Reserve released a study showing that 52 percent of Americans would not be able to raise $400 in an emergency by tapping their checking, savings or borrowing on a credit card, which they would be able to pay off when the next statement arrived. That statistic puts into somber perspective just who it is that’s benefiting from the six-year bull market in stocks.

The wealth stripping aspects of ZIRP have likely contributed to the marked decline in the number of individuals participating in the stock market since the bull market began. Despite the runup year after year, the participation rate of those buying individual stocks has been on a steady decline.

According to the most recent Federal Reserve Survey of Consumer Finances, which is conducted every three years, direct stock ownership was 15.1 percent in 2010 but fell to 13.8 percent in 2013, the date of the last Survey. That’s down from 17.9 percent in 2007, the year before the financial collapse in 2008.

Combining direct and indirect stock ownership, such as through mutual funds and Exchange Traded Funds (ETFs), stock ownership is still sliding, from 53.2 percent in 2007 to 48.8 percent in 2013.

So exactly who has benefitted from the runaway stock market? The Fed’s Survey of Consumer Finances states that for the top 10 percent income group, the rate of ownership increased 3.9 percentage points from 2010 to 2013, reaching 92.1 percent.

Typically, at a market top, insiders begin to “distribute” their stock to the less savvy investor – the dumb money. Today, there are few willing participants with enough principal left to play the part of dumb sucker. This may turn out to mean that the super rich become, by default, the dumb money. Unless, of course, the corporations continue to play the dumb sucker by buying back their stock at elevated price-to-earnings levels as their own insiders exit.

David Stockman has a clear idea of where ZIRP is taking the U.S. economy, writing that the “Fed’s free money cascade” is causing “financial distortions and deformations.”(Not to put too fine a point on it, but financial distortions and deformations on Wall Street are how we got into this mess in the first place.)

On November 20 of last year, Stockman wrote the following:

“…ZIRP has fueled myriad financial bubbles and speculations owing to the desperate scramble for ‘yield’ that it has elicited among traders and money managers. Indeed, the financial system is literally booby-trapped with accidents waiting to happen owing to the vast mispricings and bloated valuations that have been generated by the Fed’s free money.

“Nowhere is this more evident than in the subprime auto loan sector. That’s where Wall Street speculators have organized fly-by-night lenders who make predatory 20% interest rate loans at 115% of the vehicle’s value to consumers who are essentially one paycheck away from default.

“This $120 billion subprime auto paper machine is now driving millions of transactions which are recorded as auto ‘sales,’ but, in fact, are more in the nature of short-term ‘loaners’ destined for the repo man. So here’s the thing: In an honest free market none of these born again pawnshops would even exist; nor would there be a market for out-of-this-world junk paper backed by 115% LTV[loan-to-value]/75-month/20% rate loans to consumers who cannot afford them.”

When it comes to Wall Street, bull markets and the Fed – let the buyer beware.

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