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The 401k flow into institutional investors did not disappear. No new sink for the money appeared. Limited supply of shares and financial products to buy and ne

by di4na 3y ago

The 401k flow into institutional investors did not disappear. No new sink for the money appeared. Limited supply of shares and financial products to buy and near infinite, constantly replenishing, demand for putting the money somewhere. Until the pensions get emptied (not happening for the next few decades) the trend can only be up. Money need to go somewhere. And yes, this means that it is nearly totally decoupled from "fundamentals". Same as with real estate and housing. Unless we actively force this money into the economy and wreck pensions, university endowments and charities funds, there is no way out anytime soon. The Boomers need their money somewhere. And yes. This is why productivity is down, every company has massive war chest and noone invest in fundamentals. The rise of the MBA is due to Boomers 401k, not to something fundamentally useful there.

beebmam 3y ago
Aren't we seeing LESS capital in the market now with boomers retiring?
- di4na 3y ago
  Not yet, it is not only boomers. Also return are still high and there is low supply because shares buybacks. So even if the retirement impacted it, it will take a long time. If ever.
- Temporary_31337 3y ago
  Probably the boomers are not liquidating their stock market assets until very last minute - after all it’s pretty liquid so personally I would only sell if I really needed the money or had an a idea of where else to put it for a better short term return. Many boomers also have rental income from properties and other forms of savings. Finally on average people of that generation tend to save more than they need and still have money leftover when dying. So based on that I would say don’t expect heavy liquidation from the boomers ever.
  - di4na 3y ago
    Yeeeep exactly. We have pretty good data on this nowadays. I have seen some research from the french INSEE, equivalent probably exist from the OECD if you search. The data is a pita to collect and compare but it supports this scenario.
mattmcknight 3y ago
I find index funds are nearly decoupled from the fundamentals except for the occasional adds/subtracts from the index. They might be optimal for the individual investor, but are adding so much noise to the price signal for the individual stock that you have to use option pairs to actually bet on a company doing well. So based on the boomer 401k theory, we should see steady declines as their investment rate goes net negative by 2030?
- detourdog 3y ago
  I cant believe the financial returns my wife’s financial advisor promises. He describes it as the magic of index funds. He should know he was in band before settling down and taking over the family firm.
- di4na 3y ago
  You are missing something. Where else would it go? The returns do not matter. What matters is finding something. Also it depends on share buybacks. If they mostly sell to shares buybacks, every sale actually prop up the price. Also uni endowment and charity funds keep growing with rules to never take money out, so they will be the one buying from pensions. I highly expect stuff to stay bear until we actively work on it.
  - mattmcknight 3y ago
    > Where else would it go? Where else would what go? > If they mostly sell to shares buybacks, every sale actually prop up the price. Only if companies have enough cash to do so. Buybacks made sense more sense in a low interest rate environment, but are riskier if they have to borrow to buy their stock back. > Also uni endowment and charity funds keep growing with rules to never take money out, so they will be the one buying from pensions. But again, is this amount as much as the amount that is to be sold, and at what price?
  - throwaway5959 3y ago
    High yield savings accounts at 5%, if real inflation is at 3% and you have 2 million saved, that’s 40k/year plus Social Security for another 40k/year. Combine that with a paid off house and Medicare and I would say they’d be doing fine.
yterdy 3y ago
>Limited supply of shares and financial products to buy Dunno about that one. Liquidity in even low-volume tickers seems to be "just fine". Market makers see to it that everyone who wants a share can get one, by any means necessary. >Unless we actively force this money into the economy and wreck pensions, university endowments and charities funds Or the REITS and SLABS so many are invested in turn out to be worth a lot less than we thought they were. Where's my Jenga set?
- di4na 3y ago
  Iirc the last solid stats i have seen are from 2019 when 82% of the public market was owned by institutional long term investors. And i doubt it went down. Liquidity is high because the market makers role has exploded and they invest a lot to make sure it stay high.
  - yterdy 3y ago
    You misunderstand. I'm saying that there's more than one way to skin a cat. Again, I would like to know where my Jenga set is. >Liquidity is high because the market makers role has exploded and they invest a lot to make sure it stay high. This is another way of saying that organic liquidity is low and we needed a middleman to preclude actual price discovery, for reasons.
fifteen1506 3y ago
What about tax havens? I get the feeling lot of money which could be reinvested or taxed is going into tax havens. Not an economist.
- gen3 3y ago
  GP is referring to the average worker’s retirement plan buying some form of target date fund regularly on payday. This forces the market up as a whole, since the money must go somewhere.
- scythe 3y ago
  Tax havens are generally pass-through entities of a sort, they're not spending billions of dollars on cocktails in the Caymans. The passage through is just disguised well enough to avoid being taxed.
wonderwonder 3y ago
This is a good point. Over 50% of companies offer a 401k. BLS says as high as 67% of employees have access to some sort of retirement plan. A good percent of those 401k / retirement plans include some sort of employer match. Lets say 50% of those with a retirement plan contribute. That's a massive amount of new money that has to go somewhere every month. Majority of these plans offer some sort of index fund variety instead of individual stocks the exception being that most of the smart publicly traded ones also offer the option to purchase employer stock as well. With all this money needing to find a home every month, index funds are as close to a guarantee of equities going up over time as you can get. https://www.bls.gov/opub/ted/2021/67-percent-of-private-industry-workers-had-access-to-retirement-plans-in-2020.htm https://www.bls.gov/opub/ted/2021/67-percent-of-private-indu...
Zyst 3y ago
That's an interesting take I haven't heard ever before. I'd love to ask some questions if you happen to know the answer: - Since people are constantly retiring, and selling the stocks they are holding at that point: Wouldn't that balance out the limitless demand problem? Boomers/Gen X/Millenials/Gen Z all have around the same segment of the population according to (https://www.statista.com/statistics/296974/us-population-share-by-generation/ https://www.statista.com/statistics/296974/us-population-sha...) wouldn't things earlier generations sell get distributed among the next generation, preferentially going to Gen X who will be at their peak earning potential at that point. (Which in turn will sell to Millennials and so on) - How would you actively force money into an economy?
- di4na 3y ago
  1. They don't sell that much, and more importantly they sell at a far higher price because the market went up. So they comparatively sell more. Studies we have on older people is that they do not actually liquidate theory holdings. What they do is get more loans to invest in rent, backed by their holdings. Or they reduce their money need, by stopping investing in their holdings. 2. Most Boomers are only starting to retire. And they have enormous needs. Plus university endowments, charities funds, etc also are institutional investors. The problem is do they sell. These days usually they only sell to shares buybacks, which actually reinforce the problem. 3. Move pensions to a government tax funded redistributive system, so the income of today pay the pensions of today. Tax land and housing ownership heavily, except for primary house (with a limit based on family size probably for primary house). Heavily (massively. Like 90% at least) tax inheritance. We have good economics support for these, even in heavily capitalistic and neoliberal economic circles. The problem is political. The Boomers will not vote for it, it would take away from them.
  - throwaway5959 3y ago
    I’ve only worked for 15 years but I already know if the inheritance I’ll be leaving to my nieces and nephews will be taxed at 90% I will just retire sooner. And I’m center-left.
    - 3y ago

by di4na 3y ago

beebmam 3y ago

Aren't we seeing LESS capital in the market now with boomers retiring?

di4na 3y ago
Not yet, it is not only boomers. Also return are still high and there is low supply because shares buybacks. So even if the retirement impacted it, it will take a long time. If ever.
Temporary_31337 3y ago
Probably the boomers are not liquidating their stock market assets until very last minute - after all it’s pretty liquid so personally I would only sell if I really needed the money or had an a idea of where else to put it for a better short term return. Many boomers also have rental income from properties and other forms of savings. Finally on average people of that generation tend to save more than they need and still have money leftover when dying. So based on that I would say don’t expect heavy liquidation from the boomers ever.
- di4na 3y ago
  Yeeeep exactly. We have pretty good data on this nowadays. I have seen some research from the french INSEE, equivalent probably exist from the OECD if you search. The data is a pita to collect and compare but it supports this scenario.

mattmcknight 3y ago

I find index funds are nearly decoupled from the fundamentals except for the occasional adds/subtracts from the index. They might be optimal for the individual investor, but are adding so much noise to the price signal for the individual stock that you have to use option pairs to actually bet on a company doing well. So based on the boomer 401k theory, we should see steady declines as their investment rate goes net negative by 2030?

detourdog 3y ago
I cant believe the financial returns my wife’s financial advisor promises. He describes it as the magic of index funds. He should know he was in band before settling down and taking over the family firm.
di4na 3y ago
You are missing something. Where else would it go? The returns do not matter. What matters is finding something. Also it depends on share buybacks. If they mostly sell to shares buybacks, every sale actually prop up the price. Also uni endowment and charity funds keep growing with rules to never take money out, so they will be the one buying from pensions. I highly expect stuff to stay bear until we actively work on it.
- mattmcknight 3y ago
  > Where else would it go? Where else would what go? > If they mostly sell to shares buybacks, every sale actually prop up the price. Only if companies have enough cash to do so. Buybacks made sense more sense in a low interest rate environment, but are riskier if they have to borrow to buy their stock back. > Also uni endowment and charity funds keep growing with rules to never take money out, so they will be the one buying from pensions. But again, is this amount as much as the amount that is to be sold, and at what price?
- throwaway5959 3y ago
  High yield savings accounts at 5%, if real inflation is at 3% and you have 2 million saved, that’s 40k/year plus Social Security for another 40k/year. Combine that with a paid off house and Medicare and I would say they’d be doing fine.

yterdy 3y ago

>Limited supply of shares and financial products to buy Dunno about that one. Liquidity in even low-volume tickers seems to be "just fine". Market makers see to it that everyone who wants a share can get one, by any means necessary. >Unless we actively force this money into the economy and wreck pensions, university endowments and charities funds Or the REITS and SLABS so many are invested in turn out to be worth a lot less than we thought they were. Where's my Jenga set?

di4na 3y ago
Iirc the last solid stats i have seen are from 2019 when 82% of the public market was owned by institutional long term investors. And i doubt it went down. Liquidity is high because the market makers role has exploded and they invest a lot to make sure it stay high.
- yterdy 3y ago
  You misunderstand. I'm saying that there's more than one way to skin a cat. Again, I would like to know where my Jenga set is. >Liquidity is high because the market makers role has exploded and they invest a lot to make sure it stay high. This is another way of saying that organic liquidity is low and we needed a middleman to preclude actual price discovery, for reasons.

fifteen1506 3y ago

What about tax havens? I get the feeling lot of money which could be reinvested or taxed is going into tax havens. Not an economist.

gen3 3y ago
GP is referring to the average worker’s retirement plan buying some form of target date fund regularly on payday. This forces the market up as a whole, since the money must go somewhere.
scythe 3y ago
Tax havens are generally pass-through entities of a sort, they're not spending billions of dollars on cocktails in the Caymans. The passage through is just disguised well enough to avoid being taxed.

wonderwonder 3y ago

This is a good point. Over 50% of companies offer a 401k. BLS says as high as 67% of employees have access to some sort of retirement plan. A good percent of those 401k / retirement plans include some sort of employer match. Lets say 50% of those with a retirement plan contribute. That's a massive amount of new money that has to go somewhere every month. Majority of these plans offer some sort of index fund variety instead of individual stocks the exception being that most of the smart publicly traded ones also offer the option to purchase employer stock as well. With all this money needing to find a home every month, index funds are as close to a guarantee of equities going up over time as you can get. https://www.bls.gov/opub/ted/2021/67-percent-of-private-industry-workers-had-access-to-retirement-plans-in-2020.htm https://www.bls.gov/opub/ted/2021/67-percent-of-private-indu...

Zyst 3y ago

That's an interesting take I haven't heard ever before. I'd love to ask some questions if you happen to know the answer: - Since people are constantly retiring, and selling the stocks they are holding at that point: Wouldn't that balance out the limitless demand problem? Boomers/Gen X/Millenials/Gen Z all have around the same segment of the population according to (https://www.statista.com/statistics/296974/us-population-share-by-generation/ https://www.statista.com/statistics/296974/us-population-sha...) wouldn't things earlier generations sell get distributed among the next generation, preferentially going to Gen X who will be at their peak earning potential at that point. (Which in turn will sell to Millennials and so on) - How would you actively force money into an economy?

di4na 3y ago
1. They don't sell that much, and more importantly they sell at a far higher price because the market went up. So they comparatively sell more. Studies we have on older people is that they do not actually liquidate theory holdings. What they do is get more loans to invest in rent, backed by their holdings. Or they reduce their money need, by stopping investing in their holdings. 2. Most Boomers are only starting to retire. And they have enormous needs. Plus university endowments, charities funds, etc also are institutional investors. The problem is do they sell. These days usually they only sell to shares buybacks, which actually reinforce the problem. 3. Move pensions to a government tax funded redistributive system, so the income of today pay the pensions of today. Tax land and housing ownership heavily, except for primary house (with a limit based on family size probably for primary house). Heavily (massively. Like 90% at least) tax inheritance. We have good economics support for these, even in heavily capitalistic and neoliberal economic circles. The problem is political. The Boomers will not vote for it, it would take away from them.
- throwaway5959 3y ago
  I’ve only worked for 15 years but I already know if the inheritance I’ll be leaving to my nieces and nephews will be taxed at 90% I will just retire sooner. And I’m center-left.
  - 3y ago