It takes two to lie. One to lie and one to listen.

~ Homer Simpson

Update: This article was featured in the Carnival of Financial Planning #157 posted at The Skilled Investor.

Trust has rarely been so tenuous. More and more of us seem to be doubting concepts and people that we once trusted implicitly. I guess that’s to be expected at major turning points. You can call it growing pains or tectonic shifting or just plain chaos. When change is afoot, we’re bound to have a little pain and even more confusion. Discomfort is natural, and shouldn’t surprise us. But it does.

We’re starting to see some major shifts in socioeconomic paradigms that have been in place for decades. In the 1980s, it became quite fashionable to invest in stocks, especially via mutual funds. Cocktail party banter was abuzz with whisper numbers and hot tips – until the crash of 1987. Although the 1987 experience ended up registering as little more than a speed bump on the road to much broader participation in the equity markets, it did serve as a bit of a warning shot.

We have seen a few more crashes since then, with several of them clustering together over the past decade. The most recent bullet whizzed by as recently as May 6th, 2010 when the Dow Jones Industrial Average fell 1000 points in a matter of minutes before regaining a lot of its losses almost as quickly. Subsequently dubbed the Flash Crash, that incident seemed to serve as a bit of a last straw for retail investors with smaller nest eggs to invest.

According to many flow of funds reports, a lot of these investors are simply taking their eggs and going home. They don’t want to play the game anymore. They feel like it’s probably rigged, and even if it’s not, it just seems like the rules change too often – usually not in their favour.

When the Generals Bail . . .

Retail investors are often referred to as “the dumb money”. They are the lowest-ranked soldiers in the army of investors. Professional investors frequently profit from them, selling to exuberant retail buyers near the top and buying from them as they panic out at the bottom. Although smaller retail investors are notorious for chasing returns, some studies show that wealthy and institutional investors often exhibit the same bad habits.

Even seasoned investment managers are starting to find that the investing game is just too hard these days. This is not the same market they traded decades ago. Stanley Druckenmiller and Paolo Pellegrini are the most recent members of a growing congregation of professional investors who have decided to throw in the towel.

Likewise, surveys indicate that many millionaires did not put much money back to work during the massive market resurgence from March 2009 to April 2010. They missed the rally, and in spite of the predictable I-told-you-so chiding from long only/long always investors and advisers, they don’t seem to care. They favour return of capital over return on capital. Most millionaires have worked very hard to earn their wealth and they would rather preserve it than put it at risk, even if it means accepting lower returns. More recent surveys show that the wealthy have turned cautious once again, and that they are looking for transparency, simplicity, and safety in their investments.

Who’s Left Once the Golden Goose is Gone?

Average consumers have been the proverbial goose laying golden eggs for retailers, banks, financial advisers, and governments. But what if they really do take those eggs and go home? Who’s left to buy the SUVs, swag, and stocks on which our economic growth has depended? Governments incurred a lot of debt bailing out financial institutions and automakers. Where will the tax revenues to service it (not to mention pay it down) come from?

Increasingly, it seems consumers are answering “I don’t know, but it’s not going to come from me anymore.” A recent USA Today article outlined the case for a lost generation of stock investors. Zero Hedge took a victory lap, citing a Financial Times article confirming “dumb money’s” resilience to the Wall Street siren song. They have been warning for quite some time that our economy has become a Ponzi scheme. Indeed, a subsequent post asked Can You Hear Me Now? It reported on the 17th consecutive weekly outflow from equity mutual funds.

Investors don’t want to hear about how the market always comes back. They no longer believe in 7% annual stock market returns. They don’t care if they’re only earning 2% in their savings account or 3% in a GIC. They have debt to pay down. They need to save for retirement. They have kids to put through school. They’re tired of being left holding the bag and they’re passing that hot potato right back to those bankers, politicians and CEOs.

So if the golden goose is no longer willing to play, how will Wall Street continue to run the game? A recent Bloomberg article described how Wall Street Needs an Off-the-Charts September to Rescue the Quarter. It looks like the big investment banks will really need to turn some special dials on those computers if their algorithms are going to pay off this time. Perhaps the dumb money sitting in cash will have the last laugh after all.

Have We Finally Arrived at Enough?

During the course of the last decade, as we watched spending and debt balloon into the stratosphere, I can recall many conversations with my husband in which we both wondered: When will it ever be enough? With all of the negative views I just cited from so many sources, you might think that we’ve reached that point. Or you might take the contrarian stance that the time for bearishness has passed. With so much bearishness we must be due for a rally right? Probably. But how long will it last if the changes in consumer attitudes are not temporary?

Many financial advisers will continue to tell us to stay the course. Don’t be emotional. Keep spending. We all need to do our part to stimulate the economy. Deficits don’t matter. Whether or not consumers actually see these purported pearls of wisdom as lies, it seems they are no longer listening. If Homer Simpson is right and it takes two to sustain a lie, perhaps some of the economic delusions to which we’ve been subjected are about to crumble due to lack of participation by those who are no longer willing to listen.

Perhaps we have finally arrived at enough. We’ve had enough of big homes, cars, and televisions. We’ve had enough of financial geniuses who steered our economy into a ditch and then asked us to do all of the heavy lifting needed to pull it out. We’ve had enough of grown adults spending like teenagers without any sense of future consequences, and then blaming someone else for their problems.

We don’t want to stay this course. We don’t have to keep spending. We are not willing to mortgage our future for the sake of present economic growth. Deficits do matter. Whatever they’re selling, we don’t have to buy it. We can keep our golden eggs and hopefully, pass them on to our children someday.

Have you taken your eggs and gone home, or do you think it’s time to double down and put more to work?