Tuesday, August 7, 2012

Sorkin Too Simplistic

The following is my submitted reply to a commentary by Andrew Ross Sorkin in today's NY Times -
Why Investors Are Fleeing Equities? Hint: It's Not The Computers

Sadly, this commentary is just too simplistic. Andrew must be spending too much time in the sound bite world of CNBC.

To understand WHY INVESTORS ARE OUT OF EQUITIES, one needs to go much deeper. For while there are areas of Andrew's commentary that are accurate, the full story is far more complex.

Individual investors are out of the DIRECT OWNERSHIP OF EQUITIES but they are very much IN equities via mutual funds (often through their IRAs), hedge funds, and ETFs. All one needs to do is look at the Fed's Flow of Funds quarterly report to see clear evidence of this*. But this is the data of something more significant.

In most cases, the actions taken by individual investors out of direct ownership of equities and into managed money and derivatives (like ETFs) is rooted in a view of a world (socio economic, political, and financial) that is unrecognizable to many. In the case of today's financial markets, it is a world dominated by hedge funds and high frequency trading. In other words, this isn't your grandfather's stock market anymore.

Conclusion: The structure of the financial markets (and the global economy, too) has changed dramatically over the past several decades. Understanding the why of all this requires much more than a snappy commentary written for the sound bite world Andrew now populates. It requires a serious look at the multi level dynamic forces at work in the world today - a world that is quite alien to the average person.

*Mutual fund redemptions may be on the rise but the net value of equity mutual funds owned is much more constant thanks to rising equity prices. Therefore, one could easily argue that individual investors are engaged in prudent asset allocation strategies - i.e. keeping their equity exposure constant.

No comments: