US Government Tops Equity Investors in 2009

Bailout/Stimulus Programs Make Federals a Major Equity Player

Jun 18, 2009

Investment tactics by investors have been a mixed bag, since the National Bureau of Economic Research (NBER) established in December that the nation is in recession.

It's the 11th business cycle and recession since 1945. In the ensuing erratic market behavior, stock investors seem driven more by the tactics of short-term necessities, rather than long-term investment strategies. This disarray is understandable, considering the financial storm battering them.

Flow of Funds Report Shows Investor Disarray

The Federal Reserve Bank’s most recent Flow of Funds quarterly report shows that in the five quarters of the recession so far, eight of the major investor categories acquired more corporate equities than they disposed of, while seven disposed of more corporate stock than they acquired, on balance.

Those acquiring corporate equities were:

The seven that disposed of more stock than they bought were:

Reflecting these extraordinary financial times and Washington’s remedial actions, the biggest buyer of corporate equities through five quarters--the Federal Government--makes its first appearance in the FED’s Flow of Funds reports, at least going back to 1945.

Not only is the federal government making its first appearance post WW II , its acquisition of $1,373 billion in corporate equities occurred in only the final two quarters of the five-quarter span. Its acquisitions are over 85% of the combined $1,608 billion by the other net buyers.

Another way of looking at the federal government’s clout now is that were the federal government position subtracted, the liquidation of corporate equities in the recession so far would exceed acquisitions by $94 billion.

Equity Participations by Feds Is Result of Bailout/Stimulus Programs

Presently, fiscal policy in Washington D.C. is the 800-pound gorilla, in the investor’s dream house and Wall Street’s McMansions. Singling out only stocks, the financial arms of the US government have funded a virtual kaleidoscope of equity investments, in efforts to stabilize the reeling financial system and an economy in recession.

As to the future, $454.1 billion of the $1.1 trillion bailout/stimulus package is unused, as reported by ProPublica.com. Further allocations will depend on needs yet to be determined.

Federal Government Is Now a Major Player

This hyper activity by the US Treasury and Federal Reserve Bank, in exercising their prerogatives under the various bailouts and economic stimulus plans authorized by Congress, has become a vital force in today’s markets.

While the federal government is unlikely to acquire equities or semi-equities in healthy companies, their very presence is a huge boost for the stock market; for in removing volumes of so-called toxic securities, they are leaving relatively more prosperous companies. This purging translates into lower risks for private investors. (What misguided stock pickers can now buy stock in General Motors, Chrysler, or WAMU?)

Among the other acquirers, the report indicates banks and insurance companies are shoring up cash reserves, while individuals in households are replenishing their retirement nest eggs, burned scrambled eggs now from the stock market bonfire of valuations in 2007 and 2008.

Pension Fund Predicament Is Critical

The most critical element of the FED’s new report is the anemic condition of pension funds, as reflected by their rush to sell. According to the seniors' mouthpiece AARP, strapped federal government retirement funds and state/local government retirement funds are currently raising money to pay benefits to pensioners. A pay-as-you-go retirement plan is a little shaky.

Like many of their private pension cousins, in many cases, they are underwater. As for the private sector, the AARP organization says the nation's 100 largest corporate pension plans were underfunded by $217 billion at the end of 2008, holding only 79% of the reserves needed to cover estimated liabilities.

A Penetrating Question Confronts the White House

As the Obama administration grapples to repair the financial system and sick economy, like the little Dutch boy plugging holes with his finger in the dike, it must keep in mind an ominous possibility. The forces at work could be another 50-year super cycle.

If so, the White House question becomes: Do our Draconian strategies still apply?

The copyright of the article US Government Tops Equity Investors in 2009 in Shares/Stocks is owned by Howard Bryan Bonham. Permission to republish US Government Tops Equity Investors in 2009 in print or online must be granted by the author in writing.