Capital Flow Analysis Tutorial: Recurrent Themes: US Securities Market

Recurrent Themes in the US Securities Market Capital Flow Analysis Tutorial

Themes are general reasons that explain certain persistent behavior of capital market players at certain times in history.

Themes serve as useful mnemonics in explaining flow of funds.

Themes are useful mnemonics in explaining capital flows.

Themes are the analyst's subjective interpretation of history, social change, ethics, and other explanations for the behavior of market players.

In explaining the U.S. capital market, its often easier to use a phrase such as 'The Common Stock Legend' than it is to describe at length what we mean when we present our analysis of a capital flows in the U.S. equity market.

You may develop your own themes to describe markets.

Capital Flow Analysis Lesson Plan: Recurrent Themes in the US Securities Market

11: The Common Stock Legend

The Common Stock Legend is that diversified portfolios of common stocks maintained over many years, through market highs and lows, will always lead to an increase in real wealth greater than any investment alternative.

2,700 words. 1 page. 7 to 11 minutes.

12: The Role of Demographics

As the composition of the population changes, so do markets. Orthodox economists assume that behavior is rational. However market players reflect shifts in society.

Patterns of saving, distribution of wealth, changing occupations, population aging, and other demographic shifts must be examined.

12,100 words. 5 pages. 48 minutes to 1 hour 20 minutes.

12a: Demographics: Patterns of Savings

The most striking change in US investor behavior in the last fifty years has been the increased emphasis on pension reserves in the household balance sheet.

Money market funds and mutual funds became popular investment vehicles.

1,500 words. 1 page. 6 to 10 minutes.

12b: Demographics: Rich and Poor

90% of the U.S. population has not made significant material progress in twenty years while the Super-Rich have become even richer.

Deindustrialization and a regressive income tax have contributed to widening the gap between rich and poor.

4,700 words. 1 page. 18 to 31 minutes.

12c: Demographics: Changing Occupations

The formation of engineers in the U.S. reached a peak in 1986 and has declined steadily thereafter.

This decline is consistent with deindustrialization and a slow erosion in technical leadership.

In the last century, self-employment has fallen drastically.

2,200 words. 1 page. 9 to 15 minutes.

12d: Demographics: Old and Young

In the United States, since 1929, the population cohort over 65 more than doubled relative to the rest of the population.

This 'aging' is given as the reason for the expected collapse of the social security system.

1,600 words. 1 page. 6 to 11 minutes.

13: The Asset-Lite Movement

The emphasis given to short-term improvement in ROE by hired corporate executives led to a diminished supply of equities over twenty years.

Together with Worker's Capitalism and the Common Stock Legend, this has been a factor in the Great Bubble of the 1990s.

3,600 words. 2 pages. 14 to 24 minutes.

14: The Baby Boomers

The radical change in the American capital market from 1980 to 2000 was not the result of a business cycle.

The cause was cultural transformation and demographic upheaval. The world-view of the Baby Boomers pushed stock prices to record highs during the 1990s.

2,400 words. 3 pages. 10 to 16 minutes.

15: Buybacks and Options

Between 1980 and 2000, rising stock prices were driven by companies spending more than one trillion dollars to take their stocks off the market.

Buybacks created a shortage of stocks at a time when small investors were putting savings in mutual funds without concern for investment merit.

Lesson 151,500 words. 2 pages. 6 to 10 minutes.

16: Workers' Capitalism

The relative position of entrepreneurs in American society can be seen in the structure of government. Since most voting Americans are employees, the government pays attention to their interests.

The supply of equities depends upon the number of entrepreneurs and their success.

4,200 words. 2 pages. 17 to 28 minutes.

17: Democracy's Snare

American founding fathers never foresaw that the number of government employees could expand to the point that public servants would have more votes than the private sector.

Democracy's Snare is that a permanent governing class of voting civil servants may become the nation's rulers.

4,700 words. 3 pages. 19 to 31 minutes.

18: End of the Great Age

Some see the end of a Great Age – the era that stretches back 300 years and encompasses the Enlightenment, the Industrial Revolution, and lives of economists from Adam Smith, David Ricardo and Karl Marx, to Franco Modigliani.

Lesson 187,500 words. 2 pages. 30 to 50 minutes.

19: The Almighty Dollar

In the United States – the owner of the world currency franchise – a strong dollar reduces competitiveness of American industry.

However, having the dollar as an international reserve currency leads to constantly increasing trade deficits that provide a rich flow of funds for the bond markets.

Lesson 198,800 words. 4 pages. 35 to 60 minutes.

20: The Five Horsemen

It is not so much interest rates that drive the economic machine as the exogenous forces of war, leadership, demographics, and technology.

The extreme uncertainties brought to projected dividend streams by these exogenous factors, argue for a conservative bias in calculations of intrinsic value.


4,800 words. 2 pages. 15 to 30 minutes.

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