"Spreading the Wealth Around" - a Stock Trader's Perspective

As promised, President Obama is out to "fundamentally transform" America by "spreading the wealth around."

But the market debunks his socialist ideals.

The 2008 - 2009 meltdown brought the S&P 500 below its 2002 lows - a level not seen since 1997. That means negative returns for the majority of folks who got burnt in the Internet bubble and waited till 2004 - 2005 to get back into the market. The market puts in a bottom when all who wanted to sell have done so, and there are no more sellers. Since most people have similar pain thresholds, bottoms are reached when the majority throws in the towel and sells in fear and desperation. The March 2009 bottom was no exception.

Whom were they selling to? If people were smart enough to get the hell out of the market, who were the "idiots" buying from them? Or could that actually have been smart money snapping up bargains at unbelievable prices?

Stocks represent ownership in corporate America. Those selling in a panic do so because they fear losing it all. Those buying from them must have deep pockets, able to sustain the loss in the worst case scenario. The 2008 - 2009 bear market was therefore the greatest wealth redistribution in a generation from the many to the few: the rich snapping up choice assets for pennies on the dollar from those who were too unsophisticated to understand how the market really works or so gullible as to believe the "mainstream" media.

Granted, the 2008 - 2009 selloff did not happen on Obama's watch but it certainly was the result of the pro-Obama media stoking fears to help him get elected. Now that the economy is recovering, stock prices are going up. Why? Because the crowd is returning to the market, buying back what they sold two years ago but at much higher prices. Wealth redistribution in reverse.

It follows then that the better the economy does and the more discretionary income the crowd has, the more stocks it will buy, and the wider the wealth will spread. As long as we have a market economy, this cycle won't change. But I am not aware of any instances where massive government programs, higher taxes, and tax credits increased the amount of discretionary income available for saving and investment.

Final note: someone said that if you take all the money in the world and spread it equally among everyone, in a few years it will be back exactly where it was. Human nature never changes, and money will always flow from the hands of the many into the hands of the few. Happens in the market all the time: throngs of get-rich-quick wannabes get sucked in and fleeced by the experienced few. How else can you explain billion dollar compensation packages for top hedge fund managers while thousands of broke traders wash out of the market every year?

This, in a nutshell, is how the stock market re-distributes wealth in a free market economy.