Investors Worrying about Cheap Stocks?

Carter Dougherty writes in the New York Times under headline "Falling Prices Grip Major Stock Markets Around the World":

As the United States markets edge toward bear territory, losing nearly 20 percent of their value from last fall’s peak, investors might wonder where they can turn for relief.

The gloomy answer: nowhere.

This is a pretty typical viewpoint in the financial world. But there are two sides in every transaction: The buyer and the seller. There are a lot of people, predominantly young, that are currently accumulating their savings. They are looking for a place to park their surplus earnings.

These are the people that fit mostly under the headline of "investors". For these people, a stock market that goes cheaper is a very positive thing. Of course the situation would be better, if the price declines would not be preceded by even higher profit declines. But a lower price level is always preferable to a higher one if one wants to make long time investments.

The same situation was clearly visible in the real estate market. One person's unearned equity was another person being priced out of the market or going into crushing debt. There are a lot of young couples that are breathing a sigh of relief in the face of plummeting house prices. But there are also a lot of young couples in serious negative equity.

Then who are the people that are losing in a bear market? Naturally most damaging it is to people who are drawing from their savings, such as the baby boomers who are at the start of retirement. But they are not "investors" any more. They are more accurately referred to as "divestors".

So why are the baby boomers losing out on their savings? Simply, they have already eaten those savings, by letting the businesses that they have invested in take on huge debts to create premature earnings, dividends and market valuations. A huge part of future income has been already paid out, just like in the housing market. Many companies, like GM, are like squeezed oranges. Completely devoid of any significant equity. And this is at a time when those savings would really be needed.

Baby boomers have also taken out a significant portion of future taxes, which will be paid by the younger generations. Now that there is a day of reckoning, many divestors that are losing out on their investments are going to cry to high heavens. But one can't eat one's cake and save it too.