Main Street vs. Wall Street: And the Winner Is…

The political marketers were out in full force on this one. They did everything from the visit of Bernanke's childhood home (which is now in foreclosure) to the close up of “Main Street” sign to the conversation on the street side bench in rural South Carolina. It was the perfect image of “I'm like you” kind of PR the government decision-makers are looking for right now.

They want to be trusted again. And they're pulling out all the stops to get back into the public's good graces after scaring everyone to get the $787 billion stimulus package pushed through.

Then add to that the AIG bonus debacle.

Is it the government's right, as a majority business owner, to determine which contracts are valid and which are not? Will this mean that I will be able to decide, as a business owner, which contracts I want to comply with and which I don't?

Or is this just some big political PR job. That is if the AIG bonuses are still an issue, something will get done. Or if they just fade off into the distance and become forgotten as either commercial real estate or credit card defaults spark the next leg down (the race is on).

The jury is still out on whether all this political posturing is doing any good or not. History should guide our expectations towards the latter, but there is at least one good thing we investors should be seeing in all this mess. The government has finally seemed to have realized the stock market must go up if there is going to be any recovery anytime soon.

Main Street is Wall Street

Granted it is a bit more complicated, but one thing is for certain, there is little chance of any recovery without the stock market coming back to life. Here's why.

Right now, we're watching a struggle between the “haves” and the “have not's.” It has been built up as an epic showdown between Wall Street and Main Street. That's not the issue here though. Wall Street and Main Street are more closely linked than ever.

Despite all the relationships pointed out repeatedly by pundits and politicians, this is not the same set-up as 1929 when the stock market collapse was blamed for kicking off the Great Depression. This time around, Wall Street and Main Street are joined at the hip.

As you can see in the chart below, less than one in 10 people owned stocks before the 1929 crash. Now six in 10 people own stocks (directly or indirectly through mutual funds, 401K's, etc.):

Percentage of American's Who Own Equities/Mutual Funds

1900

1%

1928

3%

1930

10%

1952

4%

1959

11%

1970

15%

1980

13%

1989

32%

2000

52%

2008

More than 60%

Source: PBS , RCP

That's just the start of it. There are two more “hidden” groups at risk here.

The first group is the millions of folks with life insurance policies. Since the advent of the bank/broker/insurer a few years ago (which we're now seeing why they were separated in the first place) most people with a bank account or brokerage account were cross-sold some sort of life insurance and vice versa. So this probably doesn't hide too much of the exposure, but there are bound to be a few people unwittingly exposed to the financial markets.

The second “hidden” group is the workers who are banking on government or union pension funds for supplemental retirement cash. These funds, often run by individual states and unions, are running dangerously low.

To make matters worse, a few years ago many of them upped their exposure to stocks to get a greater return to catch up to their liabilities. Pension liabilities are a ticking time bomb just as big as a lot of what we have already been through.

You can add even more people to the list who took a hit during this market downturn to include those who may have never personally risked a dime in stocks to eventually be materially impacted by this downturn.

That's why the government has been pulling out all the stops to try and get the markets back on track. And it helps explains why this market downturn will play a much more critical role than it did in the 1930's. This is a destruction of wealth and savings that will take a long time to recover – probably not enough time considering the U.S. demographic situation (recall a previous conversation we had with noted demographer Harry S. Dent here ).

All this is why I'm very concerned this rally won't last and encouraging people to get prepared for the next leg down. It may be weeks or months away, but if it comes, the impact on the economy will likely be even bigger. There's still time to get prepared though.

A Matter of Trust

I'll never forget the words of David Burrows . If you recall, he is a consistently top-performing portfolio manager in Canada. He's not one to hold onto any position for too long if it goes against him. And the strategy has served him and his investors well over the past decade, during good times and bad.

He looks at the stock market a bit differently than most people (most very successful investors do). When he talked about his philosophy, he referred to a relationship between the stock market and investors and the role of a sense of trust.

I never thought of it that way before, but it made complete sense.

Trust is imperative to a bull market. Take a look at what got us here. For a little over 20 years (between the 1987 crash and today's crisis) the stock market laid a strong foundation of trust with most investors. If investors were willing to regularly put more money in, then stocks would generally rise.

Sure there were ups and downs, but the big trend was up. The rising tide was so strong and everyone's portfolio rose with it.

It was a good deal – while it lasted.

All that changed this year though. The trust has been broken. Although many people have been willing to ride out the downturn so far, any more significant downturn will send the markets much lower.

For now though, the government is pulling out all the stops when it comes to keeping the markets propped up. And they'll surely help keep this upturn going as strongly as possible.

In the end though, the government will probably not be able to overcome Mr. Market – it never has before. So if you're an active trader, enjoy this run to the upside. At this point, it seems like Dow 8,000 or Dow 9,000 is within reach. Beyond that though, there will be some big roadblocks and the markets will probably take a turn for the worse.

The government PR programs are working. The rule changes (nothing more than Band-Aids on a fatal wound) are working. And the markets are lapping it all up.

Good investing,