HK Real Estate, GDP, Velocity of Money, M Base [Part 2]...

i have privately discussed these topics with various readers and they should have some familiarity with the blog [Part 1] right before this one.

the first chart here is chart 4 of Part 1, click on the charts for a better view.

HK Real Estate
if you look at chart 4 mentioned in Part 1 of the title, you will read then in 2008 the M base is only 800, now we have 2600 and that is 3 times as much. back in 2008, most apartments are in the range of hkd4500-5000 per sq ft, with a doubling of M base, you will surely have the real estate prices lifted towards a double or not far from it. this assumes a lot of money was channeled in that direction and it surely has since there are no yields to be found at the bank for deposits. but if you look further the M base expanded 3 times as much.

GDP
M base x Velocity of M = GDP, with so much debt and very strict lending standards, there is no way for the market to invest and also the euro crisis is putting a dent to investments, so the velocity of money trends lower thus the fed has to increase the money supply to make sure GDP is not slowing too much, yet a lot of the GDP generated is at the expense of the middle class which constrains spending and thus further investments as there is no revenue growth by volume but by price alone.

velocity of money is how many times the money base cycles through the economy, if people buy more stuff, thus more transactions and corps have more revenue and profits, so they can raise prices, increase salaries/wages and the cycle goes on. now we have the reverse due to deleveraging, people spends less on average, so corps cut back and limit wage increases though they can still maintain profits by cutting back faster than the drop in revenue and also reverse provisions.

HK Real Estate, GDP, Velocity of Money, M Base [Part 1]

the following is an article from a newsletter.

most of you might not be interested in the full article, then read the blog following this one which will give you some insights to the above topics with the subject.


Hoisington Investment Management
Quarterly Review and Outlook
Third Quarter 2012

Growth Recession

Entering the final quarter of the year, domestic and global economic conditions are extremely fragile.  Across the globe, countries are in outright recession, and in some instances where aggregate growth is holding above the zero line, manufacturing sectors are contracting.  The only issue left to determine is the degree of the downturn underway.  International trade is declining, so weaknesses in different parts of the world are reinforcing domestic deteriorations in economies continents away.  With this global slump at hand, a highly relevant question is whether the U.S. can escape a severe recession in light of the following:

a) the U.S. manufacturing sector that paced domestic economic growth over the past three years has lapsed into recession;

b) real income and the personal saving rate have been slumping in the face of an interim upturn in inflation, and

c) aggregate over-indebtedness, which is the dominant negative force in the economy, has continued to move upward in concert with flagging economic activity.

New government initiatives have been announced, particularly by central banks, in an attempt to counteract deteriorating economic conditions.  These latest programs in the U.S. and Europe are similar to previous efforts.  While prices for risk assets have improved, governments have not been able to address underlying debt imbalances.  Thus, nothing suggests that these latest actions do anything to change the extreme over-indebtedness of major global economies. 

To avoid recession in the U.S., the Federal Reserve embarked on open-ended quantitative easing (QE3).  Importantly, the enactment of QE3 is a tacit admission by the Fed that earlier efforts failed, but this action will also fail to bring about stronger economic growth.

Commodity Market Reactions

Commodity markets have risen in reaction to the Federal Reserve’s liquidity injections into the banking sector (Table 1).  From the time the press reported that the Fed was moving toward QE1 & QE2 commodity prices surged.  During QE1 & QE2 wholesale gasoline prices jumped 30% and 37%, respectively, and the Goldman Sachs Commodity Food Index (GSCI-Food) rose 7% and 22%, respectively.  From the time the press reported that the Fed was moving toward QE3, both gasoline and the GSCI Food index jumped by 19%, through the end of the 3rd quarter.

Two theoretical considerations account for the rise in commodity prices during QE3.  The first is the expectations effect.  When the Fed says they want higher inflation, the initial reaction of the markets is to “go with”, rather than fight the Fed.  The second linkage, which is the expanded availability of funds used for collateral (margin), was identified and subsequently confirmed by Newedge economist, Dr. Rod McKnew, who stated, “In a world of advanced derivatives, high cash balances are not required to take speculative positions.  All that is required is that margin requirements be satisfied.”  Thus, when the Fed massively expanded reserve balances in QE1 and QE2, margin risk was minimized for those market participants who wished to take positions consistent with the Fed’s goal of higher inflation, and who had either direct or indirect access to the Fed’s hugely inflated reserve balances.  The Apr il 22, 2011 issue of Grant’s Interest Rate Observer documented support for McKnew’s insight.  They asked Darrell Duffie, the Dean Witter Distinguished Professor of Finance at the Graduate School of Business at Stanford University, whether excess reserves could serve as collateral for futures and derivatives transactions.  Dr. Duffie’s answer was “acceptable collateral is a matter of private contract, but reserve deposits are virtually always acceptable.”

Devastation for Households

The unintended consequence of these Federal Reserve actions, however, is to actually slow economic activity.  The CPI rose significantly in QE1 and QE2 (Chart 1).  These price increases had a devastating effect on worker's incomes (Chart 2).  Wages did not immediately respond to commodity price changes; therefore, there was an approximate 3% decline in real average hourly earnings in both instances.  It is true that stock prices also rose along with commodity prices (S&P plus 36% and 24%, respectively, in QE1 and QE2).  However, median households hold a small portion of equities, and thus received minimal wealth benefit.

Wealth Effect

Despite the miserable economic results in QE1 and QE2, we now have QE3.  Fed Chair Ben Bernanke and other Fed advocates believe the “wealth effect” of QE3 will bring life to the economy.  The economics profession has explored this issue in detail.  Sydney Ludvigson and Charles Steindel in How Important is the Stock Market Effect on Consumption in the FRBNY Economic Policy Review, July 1999 write: “We find, as expected, a positive connection between aggregate wealth changes and aggregate spending.  Spending growth in recent years has surely been augmented by market gains, but the effect is found to be rather unstable and hard to pin down.  The contemporaneous response of consumption growth to an unexpected change in wealth is uncertain, and the response appears very short-lived.”  More recently, David Backus, economic professor at New York University found that the wealth effect is not observable, at least for changes in home or equity wealth.

A 2011 study in Applied Economic Letters entitled, Financial Wealth Effect: Evidence from Threshold Estimation by Sherif Khalifa, Ousmane Seck and Elwin Tobing found “a threshold income level of almost $130,000, below which the financial wealth effect is insignificant, and above which the effect is 0.004.” This means a $1 rise in wealth would, in time, boost consumption by less than one-half penny.

These three studies show that the impact of wealth on spending is miniscule—indeed, “nearly not observable.” How the Fed expects the U.S. to gain any economic traction from higher stock prices when rising commodity prices are curtailing real income and spending is puzzling.  This is particularly relevant when econometricians have estimated that for every dollar of gained real income, consumption will rise by about 70 cents.  Conversely, the Fed actions are causing real incomes to decline, which has a 70-cent negative impact on spending for every dollar loss.  Compare that with the 0.004 positive impact on spending for every one-dollar increase in wealth.  Former Fed Chairman, Paul Volcker, summarized the new Fed initiative as sufficiently and succinctly as anyone when he stated that another round of QE3 “is understandable, but it will fail to fix the problem.”

An International Corollary

The unintended consequences of QE3 could also serve to worsen and undermine global economic conditions already under considerable duress.  When the Fed actions lead to higher food and fuel prices, the shock wave reverberates around the world, with many foreign economies being hit adversely.  When prices of basic necessities rise, the greatest burden is on those with the lowest incomes since more of their budget is allocated to the basic necessities such as food and fuel.  Thus, a jump in daily essentials has a more profound negative impact on living standards in economies with lower levels of real per capita income.

Can the Fed Create Demand?

Can all the trillions of dollars of reserves being added to the banking system move the economy forward enough to eventually create a higher level of aggregate spending?  Our analysis of the aggregate demand curve and its determinants indicate they cannot.  The question is whether monetary actions can shift this aggregate demand (AD) curve out to the right from AD0 to AD1 (Chart 3).  If this were possible, then indeed the economy would shift to a higher level of prices and real GDP.

The AD curve is equal to planned expenditures for nominal GDP since every point on the curve is equal to the aggregate price level (measured on the vertical axis of the graph), multiplied by real GDP (measured on the horizontal axis of the graph).  We know that GDP is equal to money times its turnover or velocity, which is called the equation of exchange as developed by Irving Fisher (Nominal GDP = M*V). 

Deconstructing this formula, M (or M2) is comprised of the monetary base (currency plus reserves) times the money multiplier (m).  The Federal Reserve has control over the monetary base since its balance sheet is the dominant component of the monetary base.  However, the Fed does not directly control the money supply.  The decisions of the depository institutions and the non-bank public determine the money multiplier (m).  M2 thus equals the monetary base multiplied by the money multiplier.  The monetary base, also referred to as high powered money, has exploded from $800 billion in 2008, to $2.6 trillion currently, but the money multiplier has collapsed from 9.3 to 3.9 (Chart 4).  Therefore, the money supply has risen significantly less than the increase in the Fed’s balance sheet, with the result that neither rapid gains in real GDP nor inflation were achieved.  Indeed, with the exception of transitory episodes, inflation re mains subdued and the gain in GDP in the three years of this expansion was the worst of any recovery period since World War II.

The other element that is required for the Fed to shift the aggregate demand curve outward is the velocity or turnover of money over which they also have no control.  During all of the Fed actions since 2008 the velocity of money has plummeted and now stands at a five decade low (Chart 5).

The consequence of the Fed’s lack of control over the money multiplier and velocity is apparent.  The monetary base has surged 3.3 times in size since QE1.  Nominal GDP, however, has grown only at an annual rate of 3%.  This suggests they have not been able to shift the aggregate demand curve outward.  Nor, with these constraints, will they be any more successful in shifting that curve under the present open-ended QE3.  Increased aggregate demand and thus rising inflation is not on the horizon.

[For a more complete discussion of the complexities of the movement of the aggregate supply and aggregate demand curves please see the APPENDIX.]

Treasury Bonds

As commodity prices rose initially in all the QE programs, long-term Treasury bond yields also increased.  However, those higher yields eventually reversed and generally continued to ratchet downward, reaching near record lows.  The current Fed actions may be politically necessary due to numerous demands for them to act to improve the clearly depressed state of economic conditions.  However, these policies will prove to be unproductive.  Economic fundamentals will not improve until the extreme over-indebtedness of the U.S. economy is addressed, and this is in the realm of fiscal, not monetary policy.  It would be more beneficial for the Fed to sit on the sidelines and try to put pressure on the fiscal authorities to take badly needed actions rather than do additional harm.  Until the excessive debt issues are addressed, the multi-year trend in inflation, and thus the long Treasury bond yields will remain downward.

APPENDIX

One of the most important concepts in macroeconomics is aggregate demand (AD) and aggregate supply (AS) analysis – a highly attractive approach that is neither Keynesian, monetarist, Austrian, nor any other individual school, but can be used to illustrate all of their main propositions.  However, before detailing the broader macroeconomics associated with the movement of the AD and AS curves, it is important to understand microeconomic supply and demand curves.  This can best be illustrated through the recent impact the Fed’s decisions had on commodity prices.  In the commodity market, like individual markets in general, the demand curve is downward sloping, the supply curve is upward sloping, and where they intersect determines the price of the commodity and the quantity supplied/demanded.  The micro-demand curve slopes downward because as the price of an item rises, the quantity demanded falls due to income and substitution effects ( buyers can shift to a substitute product).  The micro-supply curve slopes upward since producers will sell more at higher prices than lower ones. 

Both supply and demand schedules are influenced by expectation, fundamental, and liquidity considerations.  When the Fed says that they want faster inflation and that they are going to take steps to achieve this objective, both economic theory and historical experiences indicate that commodity prices will rise, at least transitorily (as seen with the surge in commodity prices after the announcement of QE1, QE2 and QE3).  Information and liquidity available to the buyers is also available to the suppliers, so by saying faster inflation is ahead, suppliers are encouraged to reduce or withhold current production or inventories, moving the supply curve inward.  Thus, in the commodity market, the Fed action spurs an outward shift in the micro-demand curve along with an inward shift of the micro-supply curve, producing higher prices and lower quantities.  These microeconomic developments transmit to the broader economy, which we will now trace through A D and AS curves. 

The AD curve slopes downward and indicates the amount of real GDP that would be purchased at each aggregate price level (Chart 6).  Aggregate demand varies inversely with the price level, so if the price level moves upward from P0 to P1, real GDP declines from Y0 to Y1.  When the price level rises, real wages, real money balances and net exports worsen, thereby reducing real GDP.  The rationale for the downward sloping AD curve is thus quite different from the sloping of the micro-demand curve since substitution effects are not possible when dealing with aggregate prices.  In order to improve real GDP with a rising price level, the AD curve would need to be shifted outward and to the right (from AD0 to AD1).  And as detailed in the letter, the Fed is not capable of shifting the entire AD curve. 

The AS curve slopes upward and indicates the quantity of GDP supplied at various price levels.  The positive correlation between price and output in micro and macroeconomics is the same since the AS curve is the sum of all supply curves across all individual markets.  When Fed policy announcements shock commodity markets, the AS curve shifts inward and to the left (from AS0 to AS1).  This immediately causes a reduction in real GDP (the difference between Y0 and Y1) as the price increases by the difference between P0 and P1 (also Chart 6).  Furthermore, as discussed in the letter, lower GDP as a result of higher prices reduces the demand for labor and widens the output gap, setting in motion a negative spiral. 

For Fed policy to improve real GDP, actions must be taken that either (1) shift the entire demand curve outward (to the right), or (2) do not cause an inward shift of the AS curve that induces an adverse movement along the AD curve.  Accordingly, the Fed is without options to improve the pace of economic activity.

7 traits to avoid

A good article from Financial Post.

Investors are ‘normal,’ not rational,” says Meir Statman, one of the leading thinkers in behavioral finance.

Behavioral finance aims to better understand why people make the financial decisions they do.  And it’s a booming field of study.  Top behavioral finance gurus include Yale’s Robert Shiller and GMO’s James Montier.

It’s also a crucial part of the Chartered Financial Analyst (CFA) curriculum, a course of study for financial advisors and Wall Street’s research analysts.

We compiled a list of the seven most common behavioral biases.  Read through them, and you’ll quickly realize why you make such terrible financial decisions

Your brain thinks it’s great at investing

Spencer Platt / Getty Images

Overconfidence may be the most obvious behavioral finance concept.  This is when you place too much confidence in your ability to predict the outcomes of your investment decisions.

Overconfident investors are often underdiversified and thus more susceptible to volatility.

Source: CFA Institute

Your brain doesn’t know how to handle new information.

Daniel Goodman / Business Insider.com

Anchoring is related to overconfidence.  For example, you make your initial investment decision based on the information available to you at the time.  Later, you get news that materially affects any forecasts you initially made.  But rather than conduct new analysis, you just revise your old analysis.

Because you are anchored, your revised analysis won’t fully reflect the new information.

Source: CFA Institute

Your brain is too focused on the past.

Lewis & Clark & Sacagawea

Wikimedia Commons

A company might announce a string of great quarterly earnings.  As a result, you assume the next earnings announcement will probably be great too. This error falls under a broad  behavioral finance concept called representativeness: you incorrectly think one thing means something else.

Another example of representativeness is assuming a good company is a good stock.

Source: CFA Institute

Your brain doesn’t like to lose.

Bob Owen via Flickr

Loss aversion, or the reluctance to accept a loss, can be deadly.  For example, one of your investments may be down 20% for good reason.  The best decision may be to just book the loss and move on.  However, you can’t help but think that the stock might comeback.

This latter thinking is dangerous because it often results in you increasing your position in the money losing investment.  This behavior is similar to the gambler who makes a series of larger bets in hopes of breaking even.

Source: CFA Institute

Your brain remembers everything.

How you trade in the future is often affected by the outcomes of your previous trades.  For example, you may have sold a stock at a 20% gain, only to watch the stock continue to rise after your sale.  And you think to yourself, “If only I had waited.”  Or perhaps one of your investments fall in value, and you dwell on the time when you could’ve sold it while in the money.  These all lead to unpleasant feelings of regret.

Regret minimization occurs when you avoid investing altogether or invests conservatively because you don’t want to feel that regret.

Source: CFA Institute

Your brain likes to go with the trends.

RBC Capital Markets

Your ability to tolerate risk should be determined by your personal financial circumstances, your investment time horizon, and the size of an investment in the context of your portfolio.  Frame dependence is a concept that refers to the tendency to change risk tolerance based on the direction of the market.  For example, your willingness to tolerate risk may fall when markets are falling.  Alternatively, your risk tolerance may rise when markets are rising.

This often causes the investor to buy high and sell low.

Source: CFA Institute

Your brain is great at coming up with excuses.

Ed Yourdon/Getty

Sometimes your investments might go sour. Of course, it’s not your fault, right? Defense mechanisms in the form of excuses are related to overconfidence. Here are some common excuses:

• ‘if-only’: If only that one thing hadn’t happened, then I would’ve been right. Unfortunately, you can’t prove the counter-factual.
• ‘almost right’: But sometimes, being close isn’t good enough.
• ‘it hasn’t happened yet’: Unfortunately, “markets can remain irrational longer than you and I can remain solvent.”
• ‘single predictor’: Just because you were wrong about one thing doesn’t mean you’re going to be wrong about everything else, right?
• ‘dog ate my research’**

Source: CFA Institute

DOW, big rally?

click to read the picture more clearly

the dow suggests a strong rally, why? because the dow breaks out of the purple neckline for quite some months already.

since this is a monthly chart, expect quite some bumps ahead, the nearest one is the rising wedge which might pull the dow down significantly so it does not look like a breakout above the neckline, then all of a sudden, it rallies up to caught everyone with big surprises.

how will hsi behave? well, that is for the next update.

Dow reached new high short term, but investors do not agree

the stock market volume shrinks not only in hk, but in the states as well. this has big impact on ipo market

why has this happened? read an article from wsj.


The stock market is reaching toward new highs on the fourth anniversary of the financial crisis, but many people refuse to be lured back.

            Even as stock indexes have doubled in value since the market low in March 2009, investors have yanked a net $138 billion from mutual funds and exchange-traded funds that invest in U.S. stocks, according to the Investment Company Institute, a mutual-fund trade group. Investors over the same period put $1 trillion into bond funds, a traditionally lower yielding but safer investment.

            It marks the first time since 1981 that investors have pulled money from U.S.-stock funds for more than a year at a time.

            Crumbling confidence in stocks reflects a broader loss of trust in the stock market and in the idea that the prudent investor could expect a comfortable retirement and even a measure of wealth.

            The stock market has become the foundation of U.S. retirement savings, with nearly half of American families owning stocks. But wounded investors, worried about another big loss, are triggering a decline in stock ownership.

            Market busts in the 1930s and 1970s soured previous generations of investors. Now, said money manager Steven Leuthold, of the Leuthold Group in Minneapolis, "I think we've lost another generation."

            The signs of disaffection are widespread. The percentage of American families who say they own stocks or stock funds slumped to 46% in 2011 from 53% in 2001, according to the Investment Company Institute. Only a quarter of households with retirement plans were willing to take above-average investment risk in 2011, down from 33% in 1998, an ICI survey found.

            Mutual funds, predominantly owned by individuals, widely reflect the investment patterns of ordinary people. Whether they made profits or losses after exiting the funds depends on when they bought. Regardless, it is now a cliché that small investors are less interested in the return on their money than in the return of their money.

            Rosa White, a 27-year-old TV-commercial producer in Brooklyn, sold about half of her stock portfolio this spring and moved the cash to a money-market account. She is still buying stock funds through her 401(k) retirement account, she said, but plans to reduce those contributions. She would like to invest more aggressively but said she was afraid.

            "Every other day on the news there's some crisis," she said. "The whole euro-zone collapse talk keeps going and going. If it's not Greece, it's Spain. Then there's the whole Facebook blowup."

            Although most people don't like to tinker with their retirement accounts, the portion allocated to stocks in 401(k)-type accounts overall fell to 61% in July from 70% in early 2007, based on data from Aon Hewitt, a firm that manages corporate benefit plans.

            The stock allocation would be even lower except that many companies are automatically putting new employees in so-called target date plans, which direct most of their contributions to stock funds, said Patti Bjork, Hewitt's retirement research director.

            "The fear in the mind and heart of the investor is more acute now than it was in the '70s, because the investor class today doesn't know what to do, doesn't see an option," said David Kotok, president of Cumberland Advisors, which manages about $2 billion in Sarasota, Fla.

            Many investors are afraid of the real-estate market and are unhappy with bonds. "People don't want to be in cash at a zero interest rate and have a growing fear of longer-term bonds because the yield is so low and the price risk is now high," Mr. Kotok said.

            Demand for bonds, together with central bank policies aimed at stimulating the economy, has pushed interest rates and bond prices to extremes. Prices and yields will eventually return to more normal territory, and people invested in bond funds could see future declines.

            Still, Mr. Kotok said, clients call him asking to get out of stocks. "The conversation will go something like this: 'The market is up enough, I don't like the way things are, take me out and put me in bonds.' I get that every few months. I rarely get a call telling me to go the other way," Mr. Kotok said.

            Some clients say they no longer trust Wall Street. "I get the reaction, they are a pack of thieves and liars and you can't trust them," he said. "The news flow continues to reinforce it."

            A parade of Wall Street scandals has given small investors the impression they are at a disadvantage, beginning a decade ago with criminal behavior at Enron and WorldCom. More recently, bankers at Barclays PLC admitted to trying to manipulate for years an interest rate widely used as the basis for U.S. mortgage rates; J.P. Morgan Chase & Co. disclosed a trading goof that has cost the bank at least $5.8 billion; and Morgan Stanley and the Nasdaq Stock Market have been criticized for their handling of Facebook's stock offering, which cost investors billions.

            "I've changed my views remarkably on how to invest in the market," said Franklin Riesenburger, 66-year-old lawyer in Cherry Hill, N.J.

            Through the 1990s, Mr. Riesenburger was a dedicated buy-and-hold stock investor, owning no bonds and delighting at the risks of the stock market. He made good profits in small technology and biotech stocks. But after technology stocks collapsed in 2000, he decided the world had changed.

            "On July 18 of that year I started my new wave of investing," he said. "I sold everything."

            Today, Mr. Riesenburger considers the stock market a scary place. Over the past year, he gingerly put money back into such blue-chip stocks as AT&T, Coca-Cola and Exxon Mobil. He sold those stocks as global economic growth slowed this summer.

            In late September, he returned about a third of the money to blue-chip stocks and a gold fund, betting that Federal Reserve stimulus would push those investments higher. Depending on events, he said, he will either increase that bet or pull out his money.

            Most of his savings remains in bonds, real estate and money-market funds. "I do not trust the stock market to put in lasting gains," said Mr. Riesenburger. His main concern now, he said, is avoiding a loss.

            As in the 1930s and 1970s, when stock price collapses and financial scandal mangled savings, it could take years to rebuild confidence, Mr. Leuthold and other money managers said.

            After the 1929 crash, the Dow Jones Industrial Average didn't return to its previous high until the 1950s. After the stock market turmoil that began in 1966, the Dow didn't start recording sustained gains until the 1980s.

            Beginning in 1971, investors withdrew money from stock funds for 11 consecutive years as the U.S. struggled with oil crises and stagflation, the pernicious combination of inflation, high unemployment and little growth.

            Mutual-fund firms are seeing another exit today. Demand for U.S.-stock funds peaked in 2000, after technology stocks collapsed and the market began a 2½ year decline.

            Some optimism returned in 2003, but flows into U.S. stock funds never reached 2000 levels.

            People began taking substantial money out of U.S.-stock funds in 2008, the year Lehman Brothers Holdings declared bankruptcy, big banks sought a government rescue and the global economy teetered on a precipice.

            The decade's two financial calamities cost the stock market many long-term, stable investors who helped support the double-digit annual stock gains that created vast wealth in the 1990s.

            Jay Greenblatt, a 75-year-old lawyer, said for years he had no stocks and held most of his money in tax-free municipal bonds. About 20 years ago, he said, he hired an investment adviser, who persuaded him to diversify into stocks.

            Mr. Greenblatt did well, and he kept as much as a quarter of his money there until 2007, when he decided to exit. His investment adviser persuaded him to keep about 10% in stocks.

            "I ski the biggest mountains all over the world. I have ridden my motorcycle all over the country. I love risk, but I still fear the market," Mr. Greenblatt said.

            "There is just no stability in the world on anything," he said. "It is the fact that the entire nation, if not the world, is living on credit. It is the fact that the values of stocks have no real relation in my book to the earnings of corporations but rather in a popular sense are speculative and based upon puffing, PR, a presumed future growth."

            Two weeks ago, worried about the U.S. election's impact on the stock market, Mr. Greenblatt sold his remaining stocks and put the money in bonds.

            The flight from stocks could be worse. Retirement accounts still funnel billions of dollars into U.S.-stock mutual funds each year. In the 1970s and 1930s, 401(k) plans didn't exist, so the stock exit was more stark.

            In addition, figures on exchange-traded funds probably overstate demand for stock funds among rank-and-file investors because they also are used by professional traders for hedging.

            A pullback from stocks leaves trading increasingly in the hands of professionals—hedge funds and high-frequency traders that use hard-to-regulate computerized methods. That makes the market more volatile, helping fuel such events as the "flash crash" on May 6, 2010, when the Dow Jones Industrial Average fell 700 points in eight minutes.

            A decade ago, high-speed trading made up a small share of stock trading. Today, many large companies do little else, holding shares for as little as a second. They now represent more than half of all stock trades, according to Tabb Group, which tracks such transactions.

            The trend away from the stock market has been reinforced by aging baby boomers, the oldest now well into their 60s. People nearing retirement often pull back from stocks to preserve their gains. Others who lost jobs in the downturn sold stocks to pay bills.

            Some people shifted money into international-stock funds, banking on China and other fast-growing economies. But many have sold those mutual funds in recent weeks.

            Mr. Leuthold said he saw the Great Depression's stock market hangover extend into the 1960s. "When I started as a broker in '61, we had a couple old guys in the office who had suffered through the Depression, and two of them, personally, would not own a share of stock," he recalled. "One said, 'I would only invest in real estate.' "

                William Hackney, a partner at Atlanta Capital Management in Atlanta, Ga., recalled when investors abandoned stocks in the 1970s. Eventually, the U.S. economy and the stock market recovered, he said: "My point is, this, too, will pass."

            But first, painful memories will have to fade.

            "People are scared stiff to go through an '08 again," said Mark Pollard, a financial adviser in Princeton, N.J., with Merrill Lynch Wealth Management. "People do talk about that: 'Whatever you do, I don't want to go through an '08 again.' "

            Joe Light contributed

to this article.