The drought in the Midwest continues to be one of the biggest stories of the year. The resulting jump in food prices is affecting consumers and businesses and consumers alike, and the government is scrambling to help farmers amid the crisis.
After reading the latest batch of headlines today, about modest rain failing to stem the crop losses, I couldn’t help but think about the similarities between this meteorological drought affecting U.S. farms and the metaphorical drought affecting the markets.
I know finance analogies are cumbersome and often overused — lines about consumer belt-tightening or stocks getting a dead-cat bounce or governments kicking the can down the road seem to be mandatory these days.
But allow this English major a little room to run with the drought metaphor for Wall Street right now.
Drought is, at its core, “a lack of liquidity.” There isn’t enough water — a fundamental necessity — to go around. The stock market, too, is suffering from a lack of liquidity in the business sense. Namely, money.
Fewer With Means to Invest: For many people, there isn’t as much money as there used to be after the recession. The average American family’s net worth dropped almost 40% between 2007 and 2010, according to a Federal Reserve study released in June. And anyone who has looked at the ugly charts about income inequality in America knows that a small-but-very-wealthy portion of the U.S. is doing all right, but the middle class is being squeezed. Investing in stocks is the last thing on their mind right now.
Fewer With Motivation to Invest: Beyond the practical limitations of household finances, there are many who could invest in the market but choose not to. Some of that is a good thing, with Americans deleveraging and paying down debt — cutting the nation’s average credit card balance by 11% in 2011. But some of that reluctance to invest is born from fear or cynicism. A great National Journal article shows that battered Americans don’t trust banks, big business or … well, just about any institution. That’s not about to change anytime soon, either, given the younger generation’s sentiments. The Financial Literacy Group, in a report cited by American Banker, surveyed 878 students at 18 high schools across 11 states. And three-quarters agree with the statement, “The stock market is rigged mostly to benefit greedy Wall Street bankers.”
Fewer With Money in Stocks: Those who do have the money are reluctant to put that cash behind stocks. A July fund flows report from Lipper indicates that investors pulled money out of conventional funds in three of the last four months, to the tune of a $27.8 billion withdrawal in June. These folks are chasing bond funds instead, a trend that seems to be continuing based on the weekly report from ICI on WSJ.com that cites equity funds had outflows of $6.89 billion while bond funds had total inflows of $5.07 billion.
No Shortage of ‘Rainmakers’
Film and literature love the idea of a good rainmaker. Whether it’s the classic film Rainmaker featuring Katherine Hepburn and Burt Lancaster or the John Grisham novel of the same name featuring an idealistic lawyer, the metaphor of drought as hardship and rain as new life is a pretty common one.
But while Hollywood might like “rainmaking” in its art, Wall Street has a different context for the term. Rainmakers are commonly the guys and gals who bring in new clients and new money. And sometimes (gasp!) they do so through unscrupulous means.
There’s no shortage of rainmakers these days. And despite the fact that the dry spell continues for many investors, they foolishly keep paying these hucksters in hopes that they can in fact control the weather.
Facebook (NASDAQ:FB) was ripe for rainmakers with its overhyped and exclusive IPO that would value the social media giant at more than $100 billion. Underwriter Morgan Stanley (NYSE:MS) was able to dangle hopes of a stake in this highly sought stock to prospective clients to win their business. But with FB stock down 42% from its initial offering price with no bottom in sight, clients have been left high and dry.
ETF firms continue to launch the latest fad investments — including chasing yield via leveraged dividend funds or yet another sad imitation of a hedge fund. Who cares if you actually make money in these when the issuers can collect their fees?
High-pressure marketing scams and the illusion of profits persist on Wall Street in any marketplace. But when the earth is parched and investors are thirsty for profits, it’s perhaps more important than ever to be on guard against opportunists.