Make No Mistake About It: Wall Street (Not Main Street) Is in Control

Sayonara. Rest in peace. Main Street investors had their brief moment in the sun, 15 minutes of fame. Now it's back to the dust bin of history. The Wall Street juggernaut's in control, and America's 95 million investors are relegated to a footnote in market history, like a museum piece no longer popular, packed away, out of sight, deep in the archive vaults.

But please, this can be a Zen moment, if you become truly aware of your cosmological "nothingness" you will ascend to a highly evolved state of enlightenment and perpetual nirvana. For now, of course, you will whine and grit your teeth as you continue adjusting to the transition between your ego's feelings of power during the 1990s dot-com insanity (when 100% annual returns made financial geniuses of all) and today's stock market (which is still below it's 2000 peak).

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But once past the initial shock, once you grasp the reality that the market may never favor little investors again, then you can accept your fate with true Zen inscrutability, reveling in your new evolved state as a humbled non-entity in the blissful state of nothingness.

Dot-com blip, a mere historical anomaly

The truth is that for most of our market's history, Main Street investors have always been powerless non-entities in a land of nothingness. Since the NYSE was created with the 1792 Buttonwood Agreement, the stock markets were an "Old Boys Club" existing solely for elite insiders who owned seats on the exchange. Period.

In a recent Los Angeles Times opinion piece Kyle Pope explains away the 1995-2000 anomaly: It worked because Wall Street began tapping Main Street for IPO funding, and in turn, Main Street participated in a great speculative rush. A symbiotic relationship when earnings were considered irrelevant, 100% annual returns were common and everyone fantasized an early retirement.

Then came the 2000 crash, a three-year bear market, loss of $8 trillion market cap. Then Enron, Sarbanes-Oxley, Putnam and Spitzer, and Main Street's ego deflated with the dot-com bubble. Investors had their moment of glory. Now the 1995-2000 period is a mere footnote in the 215-year history of the NYSE, a brief moment when the little investor was king, before Wall Street's club of elite insiders regained control.

How Wall Street regained its power

How? Very easy. By avoiding Main Street's low-margin, nickel-and-dime accounts. As the bear market faded in 2003, says Pope, Wall Street first tried to relaunch the IPO machine. But Main Street investors weren't hungry, and the product wasn't there. So Wall Street's did a huge strategic shift: Now most of Wall Street's money comes "from trading in derivatives and other private deals, often for its own accounts or in concert with hedge funds and other private traders."

Since 2003 Wall Street has shifted back to an insiders' game, inventing "new derivatives products or trading in futures involving everything from the weather to gas prices," says Pope. As a result, "Wall Street, in general, and the markets, in particular, have reinvented themselves, morphing into enormously profitable machines that operate almost entirely outside of public view" where it is clear that indexes are a "non-story."

This shift was obvious last year as Wall Street insiders split $20 billion in bonuses while their Main Street clients were left wallowing in a stock market what was still well below its highs of six years earlier.

Wall Street's renewed power is also easy to see in Pope's comparison of our $11.8 trillion GDP to the same period when "trading derivatives amounted to $320 trillion. Throw in other aspects of this new financial world, hedge finds, currency swaps and the like, and the total exceeds $780 trillion, or 67 times our GDP."

Moreover, the new Wall Street operates out of the public eye, with little oversight: "Regulators are out of the loop ... because much of that is in private deals it's not as aggressively tracked by the SEC and it certainly isn't highlighted on CNBC. To say that we, as average investors, are out of the loop would be an understatement."

So Wall Street has recaptured absolute control of the markets. And little investors are where they've been for most of our 215-year history: "It was only in the 1990s, during that absurd window of the dot-com craze, when the rest of us came to believe, mistakenly, that we could understand how the markets worked. Now, most of us don't have a clue."

Main Street creates a new identity

The loss of our brief place as masters of the financial universe parallels our new role in the economy. "We are becoming a postindustrial society that specializes in consumption and leisure," writes Fareed Zakaria, Newsweek's foreign affairs editor, "How Long Will America Lead the World?" The investor's loss of power parallels America's drift into second place behind Asia.

Yes, Zakaria offers much evidence of America the world leader, today. But our patterns of consumption are so insatiable that two-thirds of Americans are now obese or over-weight, while (paradoxically) we're graduating more students with sports-exercise degrees than electrical engineering degrees.

As GE's CEO Jeffrey Immelt puts it, "If we want to be the massage capital of the world, we're well on our way." But that's not how to maintain global leadership, not when China and India churn out a 950,000 engineers a year compared with 70,000 in America. No wonder a Goldman Sachs (GS) study concluded that the China will be the world's leading economy by 2045.

Meanwhile, America has become the land of the insatiable consumer, a zero-saving nation borrowing $750 billion annually to finance our insatiable need to buy the latest iPod, X-Box, dune-buggy or large screen plasma TV, while passively enjoying "American Idol," NASCAR racing, baseball, "reality" programs, and other distractions. Americans are so oblivious, says Zakaria, that we "don't quite realize how fast the rest of the world is catching up." Like all those hard-working Asians Clyde Prestowitz writes about in "Three Billion New Capitalists: The Great Shift of Wealth & Power to the East."

So you want solutions, not just an attack the problems? Well, for the millionth time: The best returns passive investors can get are from a well-diversified portfolio of about 10 no-load, low-cost index funds.

If that's too simple and you're ready to take back command of your destiny, here's a better solution: Reread "The Millionaire Next Door," sell all your stocks, become an entrepreneur, and invest in "You, Inc." Get it? That's how most of America's 8.3 million millionaires got their money, not by gambling at the Wall Street casino.

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