What turns the tide in favor of equities? How do we get people back in to own stocks instead of hiding on the sidelines?
Simple. There has to be a concerted effort by everyone who stands to gain from stock ownership to speak up and talk about its advantages versus other classes.
Unfortunately, that has not been the case. In fact, it's been pretty much the other way. The brokers -- both big and small -- the exchanges, the mutual funds, they've all pretty much abdicated this central role, and the government, through its usual laissez faire attitude toward anything that's financial engineering, has abdicated, too.
So in the interest of trying to figure out how to sustain this market's advance, and this market desperately needs to advance, let me put out some ideas that can attract more capital given that, once again, the sidelines just can't make you a lot of money in a low-inflation environment where the Fed is unlikely to increase short rates any further, for now.
First, the endless creation of ETFs has to stop. They are draining the life out of the markets, allowing fast money to whip in and around all sorts of what would have been rules to prevent rapid declines or advances. Of course, declines, ore more accurately, raids, are far easier to engineer, hence why President Franklin D. Roosevelt had the SEC's 1934 act specifically try to block the kind of rumor raids that so successfully brought down peak capitalization stocks during the Great Crash and its aftermath.
Do I want the uptick rule, which Roosevelt thought so important to stop attempts by rogues to break stocks, to come back? Of course. Anyone who favors the public investing does. But that's precisely what I am talking about. We are not wanted by the powers that be.
The uptick rule gets in the way of how ETFs operate. They need the equal ability to short and go long. That was a fear for seventy years by the regulators. But they have been captured by the industry that's got a bias to institutions, not individuals -- and now no one speaks up for individual investors... except, well, me.
You would not get the kinds of hideous, lightning-fast selloffs like we had around Christmas time if we changed the rules back. But I know that's hopeless. I would just be happy if the SEC would assess the impact of all of these ETFs on the lack of liquidity and the exclusion of the retail investor.
Second, we have return to the days where individuals could own one hundred shares of stocks that they liked. In the old days, when a stock hit $100, then a CEO, in order to show faith and a need for more individual owners, not just fickle institutions and, subsequently ETFs, split her stock. You would usually get a three for one. It was something that excited individuals who could then come in and buy 100 shares, their preferred amount. (I have done years and years of research on this, so just back me on the 100 unit).
But the great stocks of this era, the Alphabets (GOOGL) , the Amazons (AMZN) , the Netflixes (NFLX) , by keeping their stock well above where an individual can afford 100 shares, have forced the retail investor into ETFs of dubious quality that give you a false sense of diversification. The anti-split crowd's best defense is that institutions pay fewer cents per share in commission if they are buying 1 share of Amazon -- rather than, say, four shares, after a four for one split. If you are an index fund owner, you would be sympathetic to the institutions' plight.
But these high prices have driven off the little owner who has missed so much of this rally because stocks seem too expensive to them. I know this is irrational. I know we should be able to convince people to buy 100 shares of Amazon. But it is too big a chunk of their cash and all attempts to introduce fractional shares only brings more fright. You split the shares, you bring in more money. Plain and simple.
Finally, we need the heads of the exchanges and some key industry CEOs and the SEC to come forward and have town hall meetings about how to bring the individual back in to the market. Fifteen years ago, I could make five calls and have a town hall ready. Now I don't even know who to call! Doesn't that say it all?
The system's broken. We aren't going to bring back smaller investors, even if we keep going higher. Eventually we will run out of fuel -- but that's because after 2007-2008 and the multitude of flash crashes, frankly, what do you expect?