This One Group Is Driving Stock Market Prices, and It’s Not Mainstream Investors

One of the most perplexing things about stock markets today is that, while most people understand that they’re bound for a correction some point soon, they continue to keep climbing near their all-time highest levels. That’s despite all the pessimism surrounding the trade war with China, the worsening business climate, and an overall gut feeling in millions of investors that something bad is about to happen, and soon. So why aren’t stock markets reflecting that investor sentiment?

The reason is because stock markets aren’t being driven by investors anymore. Gone are the days in which those looking to build their wealth bought stock in a young and growing company, or a mature corporation that paid healthy dividends, and hitched their wagon to the engine of American industry. Stock markets today are all about gambling, guessing which stocks will move which way, placing bets on those predictions, and cashing out if those guesses pan out.

More importantly, with trillions of newly-created central bank dollars out there chasing stocks, Mom and Pop investors are horrendously outgunned. Main Street investors today are counseled to buy and hold, buying passive index funds and holding them come hell or high water. Meanwhile Wall Street and major corporations are playing with house money, borrowing cheaply thanks to the Federal Reserve, and making money hand over fist while laughing at all the little fish who think their investments will get them ahead.

The new reality of stock market investing calls for a radical rethinking of retirement planning, portfolio diversification, and investment allocation. We’re currently in the midst of one of the weakest periods of long-term stock growth in history and on the cusp of yet another major stock market crash. Unless investors rethink their strategies and jettison conventional wisdom, they’ll find out the hard way that past performance is no guarantee of future performance.

Who Is Buying Stocks?

A shocking chart from BofA Merrill Lynch shows that over the past decade, corporations have been the largest net buyers of stocks. In fact, if you factor out corporations and foreign buyers, Americans have been net sellers of stocks over the past decade. That means that corporate stock buybacks are literally the only thing keeping stock markets afloat.

Those corporate buybacks are fueled by the ability of corporations to finance debt at historically low levels. Not surprisingly, corporations have taken on massive debt burdens in order to raise money to buy back their stock. By buying back their stock, they increase their earnings per share, a key metric used to determine executive compensation.

Of course, once stock prices decrease during the recession the buybacks suddenly don’t look so hot. Investment analysts look at the tens of billions of dollars wasted by buying back stock and think about where that money could have gone, like training workers in new skills, upgrading capital equipment, or pursuing more research and development. But so many corporate executives today are permanently short-sighted, looking to enrich themselves as quickly as possible until they can pull the golden parachute and float on to some other lucrative business opportunity.

For more and more investors, that means that investing in stocks is a fool’s game. They’ll be up most of the time, but once the music stops they’ll be the ones left holding the bag, while the corporate insiders long since cashed out. And what exactly will bring this whole charade to a halt?

The Coming Corporate Downgrades

Right now corporate America is in the middle of a massive debt bubble. Trillions of new dollars worth of debt have been issued in order to make these huge stock buybacks. But once corporations can no longer find buyers for their debt, they’ll have to bring their buybacks to a halt. That will be the signal that the stock market crash is right on top of us.

Right now there are numerous corporate titans such as GE, Verizon, and others whose corporate debt is tottering right above junk grade status. And Ford’s corporate debt was just downgraded to junk status by Moody’s, possibly the first of many to suffer that indignity in the coming years.

As business activity slows down, corporate debt downgrades ensue, and interest rates on that debt rise, numerous corporations are going to have to stop their buybacks. And with just about everyone else in the markets having been net sellers for the past decade, the only way for stock markets to go will be down.

That’s not good news for those who are betting their financial futures on the health of US stock markets. Many investors still remember the last financial crisis, in which stock markets lost close to 55% of their value and many investors lost even more than that. Those massive losses shaped the mindset of many investors who vowed never ever to let those kinds of losses occur to them ever again.

And that is one of the reasons so many investors are flocking to gold now that a recession and stock market crash are in the forecast. Those investors are hoping to get ahead of the curve and position themselves so as to minimize their losses during the next crisis. And of course it doesn’t hurt that gold often makes massive gains when stocks decline, as in the 2008-2011 time frame when gold went on a phenomenal bull run.

Gold is set to break out in the same way in the coming years, it’s just a matter of when, not if. In fact, its performance over the past 20 years has been nearly double that of stock markets on an annualized basis, which has greatly benefited those investors who thought outside the box.

Investors who have already invested in gold are ready to reap the rewards of gold’s coming price surge. But for those who haven’t made the decision to invest in gold, it’s not too late. They’ll have to act fast before stock markets plunge and gold takes off, but if they make that decision it will be one they definitely will not regret.

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