Where We're Going Part II, Bargaining Chips

Now we talked last about what the middle class is going to be offered in terms of the great give- up that is going to be expected of them as their promised benefits are cut in Social Security. The chip that will most likely be played will be some kind of expanded retirement accounts, after tax incentives to provide us with the means to fund these future liabilities. For most of us the two vehicles open to such investment are bond & equities markets and real estate, namely here residential as in your home.

But as governments have a more vested interest in the returns that these markets might provide, the more they will be interested in seeing a certain amount of stability (over a longer time period). To actuaries looking at reported real returns on Social Security at around 2%, the 7-8% historic long term return on equities looks mighty appealing. And the more that this becomes an attractive option the more pressure they will exert on these institutions. As far as stocks go, hundreds of billions of new investable dollars most probably passively invested (monies indexed to certain equity indexes) will likely mean a much bigger floor or cushion than we are currently experiencing.

It will also mean that the Government will probably be more proactive in seeking to eliminate or contain investment manias and market bubbles in their early stages before they are fully formed. In this scenario markets that can range say 4-15% in a given year with an occasional down period are preferable to the 1998-2005 period where stocks have in essence given a big fat 0 return. The Federal Reserve has a particularly effective way to do this by raising margin rates-the rate that is charged for those looking to borrow money to buy or sell stocks.

So look for stock prices to at some point have much more of an underlying cushion or base as all of this new money is cycled into the markets. But say goodbye to bubble mania for it could be a thing of the past. No more "Roaring 20's or Roaring 90's"!