The world will change for the better when people decide they are sick and tired of being sick and tired of the way the world is, and decide to change themselves.

~ Sidney Madwed

I've stayed out of the stock market game for the most part for the past few years. Yet I follow and write about personal finance, investing, and economics every day. I still find it very interesting and I would love to participate again at some point.

Last week I wrote about risk tolerance in Stock Allocation: All or None? Many were supportive of the way I presented my choice even if they disagreed with the choice itself. But it was Larry MacDonald who asked the question that prompted me to write this post. He asked: “I was wondering, though, if you would ever consider more than 0% exposure to stocks and under what conditions?”

Why Have I Stayed Out of the Market?

Most of you are aware of my reasoning. (See 5 Investment Challenges for the Next Decade.) For those who aren't, I'll steal from a comment response I wrote to give a taste of some of the things that keep me away from stock market investing:

  1. Lack of transparency: Average investors are the last to know when real problems arise in the financial system. Witness the subprime crisis, and it’s latest iteration, which is apparently contained – until it’s not.
  2. U.S. debt & deficits are untenable and could cause massive problems in the currency, commodity, equity, and bond markets, especially in light of the fact that the greenback is the global reserve currency.
  3. Derivatives: These things make this a very different marketplace than the one that existed during the time period that comprises “historical stock market returns.”
  4. Computerized trading: In some ways, this has leveled the playing field for small investors. In others, it has further tipped the advantage in the direction of some of the pros. At the very least, it has increased complexity and volatility. At worst, it has lead to a marketplace that doesn’t often reflect the true value of the securities it represents.
  5. Ponzi Policies: I’m not interested in investing in a market that rises 200 points because the economy is so terrible that the central bank needs to create money out of thin air. I understand the mechanics of it, but I don’t think it will work and I’m pretty sure it will make things worse in the end.

What Would Bring Our Money Back to the Market?

I suppose you could just say that if the problems above were fixed, I would be happy to invest in the markets again. In some ways, most of those 5 points come down to the same issue I mention over and over: transparency. You cannot have an efficient free market system without transparency, for without it, there can be no trust.

The debt and deficit issue is not unique to the United States. Many countries in Europe, including the U.K., face similar problems. The fact that the U.S. is the largest economy and holds the global reserve currency, however, makes it a special case, and imparts on the U.S. government rights and responsibilities that other countries do not share.

Rather than just saying “fix it”, or “clean it up”, I thought about each of these 5 points and tried to imagine what would make me run out and buy stocks:

  1. Increased Transparency: If there's a problem, I want to know about it so I can invest accordingly. I'm tired of trying to read between the lines of CEO, Federal Reserve, and Treasury official statements to figure out what they're really saying. I don't want to be told anything is contained only to find out it wasn't. I don't want to find out that there were major balance sheet holes in entire industries after I've lost 50% of my money and the rest has gone to bail out the businesses that lost it for me.
  2. Effective Fiscal Policy: The U.S. needs to signal that it's ready with a concrete plan to tackle its fiscal mess. There are policies that don't involve monetary alchemy that can be used to right the ship in less time than you might think.
  3. Better Regulation: Notice that I didn't say more regulation. The fact that derivatives have been allowed to grow into the market minefield that they are today speaks to the double-edged sword of innovation. Yes, we should try out new products that might improve our financial system. But we can't give carte blanche reign to financial engineers who know more than the regulators about how these things work. Products like these need to be introduced gradually and monitored closely. Derivatives belong on a transparent exchange.
  4. Reduced Size and Complexity: Many aspects of the market system have become so complicated that the Dr. Frankenstein types who designed them don't even know exactly how they'll behave. The financial sector in general is too big and it needs to shrink. Banks need to go back to the basics so that they can contribute to the real economy. No more hiring armies of mathematicians to figure out how to spin gold out of straw with financial products that line their own pockets and fleece the real economy.
  5. Get Real: Our current financial system is a Ponzi scheme that's nearing its end game. We cannot continue extend and pretend policies and expect that all will be well for our children and grandchildren. We need to get real about pension liabilities and how much government and corporate pensions will really be able to pay out in light of market returns and demographic challenges. If we want a free market economy, we can't keep kicking the can down the road. We can't label China a currency manipulator while we pursue policies that muck up the economic gears to a much greater degree than the level of the yuan.

In short, we need to grow up and stop stealing from our children's future. We're supposed to leave them a world that's in better condition than we found it. We're failing. It's time to stop and change directions now. I would be happy to invest in a market based on real business fundamentals rather than financial alchemy. I don't see that anywhere right now.

I hope I've answered the question. If you have any others, feel free to comment here.