Bernie Madoff, after being arrested in 2009.  If only he had called it "saving for retirement!"

Bernie Madoff, after being arrested in 2009. If only he had called it “saving for retirement!”

The stock market is booming! On Wednesday, February 25th, 2015, the Dow Jones Industrial Average closed at an all-time record-high of 18,224.57 points. This is getting awfully close to triple the March 2009 lows and is, according to all the experts, a sign that the economy is officially Back (TM). It’s also a sign that everyone should always invest all expendable capital in the market because it has a unidirectional future: up!


Well, as long as people keep buying into the pyramid. Your investment will definitely pay off as long as you can convince five more people behind you to make the same investment. So far, this has been a pretty effective strategy for keeping the empty engine of stock market growth churning and covering up for gaping holes in the economy, like the fact that unemployment is actually over 11%.

But you don’t need to convince anyone to buy into the pyramid! That work is already being handled by the private equity firms that manage your 401(k) and IRA funds, your replacement for savings accounts in the New Economy. They keep using the recent past performance of skyrocketing market growth to convince more and more employers and individuals to ditch silly things like interest in favor of the big-money roller-coaster of US corporate equities. The percentage of individually held assets in these funds is becoming dizzying, especially when measured as a percentage of the total market capitalization of the stock market as a whole. And it can only go up, as long as regularly forced increments of investment continue to be drawn from every working man, woman, and child in the United States.

According to the World Federation of Exchanges (WFE), the total market capitalization of the two major US markets is a little over $26 trillion, a number that no one alive is possibly capable of understanding. The world’s market capitalization is approaching $64 trillion, which, ditto. We can at least pretend to understand the relationship between a number like 26 and a number like 64, so maybe just forget the trillion? I dunno.

Meanwhile, according to the Commerce Department, US asset managers are running about $19 trillion worth of US pension assets, mostly through 401(k)’s and IRAs, though I’m sure there are a smattering of larger pension funds in there as well. Though that number is from the end of 2012, so I’m sure the last two years have seen vast growth in that category. After all, something called the Investment Company Institute put the 2012 figure at $19.9 trillion and the 2013 figure at $23 trillion, a 15.5% increase in one year. So it’s probably much higher by the end of 2014, which is where the $26 trillion market capitalization figure comes from.

Now, granted, not all of that money is invested directly into the US stock market. Some of it goes into the global markets, though a pretty small percentage. Some of it is managed by stodgy old conservatives who put it into negative-savings-rate fixed income funds or the like. We’re not actually to the point of craziness where the entire market is held by pension and retirement funds of one kind or another (at which point the pyramid will be looking mighty unstable indeed). But let’s try to get an estimate of what the percentage really is, a number that no one seems to want to report and has to be extrapolated from various reports.

Here, I made you a chart:

Based on data from the ICI and a couple extrapolations.

Based on data from the ICI and a couple extrapolations.

Please note that the 50% figure for other institutions was just a super-conservative figure I threw together that by all accounts is probably much higher. It’s too hard to scrape together data from individual investments and national, state, and local pension funds and all that extra jazz. It’s also worth noting that the 61% figure is extrapolated from the average between investors in their 60’s (~50%) and investors in their 20’s (~72%) as far as equity holdings, so that number may actually be a bit aggressive. So let’s round this chart down to $15 trillion to be extra-extra conservative.

What was that total US market cap again? $26 trillion?

Again, I know that not all of these equities are US stocks. Some people are buying UK companies or investing in China and Russia. So it’s not actually 58% of the US stock market that’s held by these kinds of funds. Maybe it’s 50%. Maybe it’s 45%. But whatever it is, it’s an unbelievable and unprecedented percentage of total investment in the market that’s been generated by a few wealth managing companies auto-investing into the stock market.

It should be noted that they don’t invest in the stock market because it will have a good return or because stocks are safe or something. They just invest in the stock market because you’re supposed to invest in the market. Which is kind of the definition how pyramid-scheme buying works. You buy something because other people buy it and, as long as everyone unthinkingly follows this mantra, the returns will increase.

The problems here should be obvious. All this investment is not being made by shrewdly calculating people hoping to garner safe and viable investments for their clients, whatever the rhetoric is. At best, it’s blind pyramid-scheme buying and at worst, it’s directly manipulated. There are countless articles all over the Internet about the fact that most hedge funds and money management companies are directly using their clients’ money to serve the interests of the company’s direct investments instead, often ensuring that they profit off the decline of the held accounts. The moral hazard of managing other people’s money is well documented. And then there’s the more common and popular critique of 401k’s as discussed in this Salon article, demonstrating the enormous fees levied for the privilege of dumping your money in the market. At best, they are skimming massive percentages off the top that consume your return; at worst, they are making these charges for the courtesy of squandering and mismanaging your retirement.

One of the only reasons this massive wealth transfer and propping-up of the stock market has been able to be perpetrated is the obsession with destroying interest rates. If interest rates were close to their traditional rate of 5%, stock market returns and their commensurate volatility would not look so attractive. But when most retail banks straight-facedly offer “savings” accounts with interest rates that you need several decimal places to see a number that is not zero and the highest-return online savings are capped at 1%, the desperation of those trying to save becomes quite high. Especially when the inflation number was manipulated to exclude fuel and food costs, or what most people spend most of their money on, as they skyrocketed through most of this decade (admittedly, this trend is now substantially altered with $2/gallon gas, but we don’t know for how long).

And then, of course, you have all the lobbying to move the behemoth government-run pension funds into equities while further deregulating the behavior of the investment bankers running them. This is pretty well chronicled in this Intercept article, further fueling the campaign to prop up the entire market.

Maybe 45%-50% of investment doesn’t sound like a lot. But without it, the Dow Jones would be at 9,000 or 10,000 points right now instead of 18,000. You know, a figure that’s a little bit off the lows, but still nothing like a recovery. Or, in other words, exactly where employment actually is, or where the economy feels like it is to everyone except the top echelons of society. And I know defenders of these practices would point out that all those investors with all this money in the market have made huge sums for their retirement investment in the last few years, as proof of this working. But you know who made tons of money in returns before they suddenly didn’t? Bernie Madoff’s clients.

You may say this is an oversimplification, but I challenge anyone to come up with something that’s behind the rally other than just a vast over-investment of forced stock buys for retirement accounts on the fundamental assumption that The Market Always Goes Up. Yes, some of the balance sheets of these companies have improved by laying off workers, paying workers vastly less, draining more work and hours out of workers, and keeping the supply chain extra-lean. But that’s not why 401(k)’s and IRAs are pouring money into these companies. They’re pouring money into these companies because it’s the theory of how these investments are designed and we have several recent years of inflated return percentages to justify it.

Even if we weren’t comparing things to the 2008 lows, do you really believe that the landscape of the US economy is the best it’s ever been? Do you really believe that corporations are fiscally healthier than ever before? Because that’s what the market is trying to sell you on, conceptually. Even the biggest bulls in the world don’t actually believe that this is true. The pre-crash high of the stock market was 13,895 points, reached in late September of 2007. This figure, as we all now know, was vastly inflated by the housing bubble and irrational exuberance. But the market now tells us that things are 31% better than in 2007. Just stop and think about that for a minute. Admittedly the economy was doing pretty well in the 90s and maybe even part of the 00s, but we all know that the 2007 number was fakely generated by phony investments, mortgage-backed securities, and blind faith in the boom. And stocks are ONE-THIRD HIGHER than they were then?!

People made fun of people for not realizing that there was nothing behind Bernie Madoff’s get-rich-quick investment scheme. And I know, deep down, that there is actually nothing behind money of any kind, that currency (fiat or otherwise) is all a fake belief system that we generate for ourselves. But there are still levels of fabrication. And this one, my friends, is a real whopper.

Bernie Madoff had 162 pages worth of clients, whose losses totaled $65 billion. That’s a lot of money, but it’s $0.065 trillion. The exposure to retirement investment accounts in the US alone is $26 trillion (exactly 400 times the Madoff investments) and covers pretty much everybody. I don’t think many of you reading this out there fail to have one of these accounts in some form or another.

After all, the people will more easily fall for a big lie than a small one.