Over the last six months, top technology and retail public company executives who are classed as insiders have sold 120 million shares and bought only 38,000 shares, the highest insider selling ratio since records began. In other words, if the stock market were a ship, there are currently 3,177 rats abandoning it for every 1 new rat coming aboard. Does that signal that the ship is taking on water?

The mirror image is provided by retail investors (who are the least sophisticated investor class) of whom 51.2% think the market will be higher in 6 months from now vs the 21.6% who think the market will go lower.

Who is right? It doesn’t matter. The benefit here is not in foretelling what the markets will do next, but in understanding what these anecdotes have to tell us about the overarching imbalances of the real economy.

At the same time as corporate executives are abandoning the “risk” ship at record numbers and expressing a preference for holding cash, thereby signalling their expectation of deflation rather than inflation, the corporate-owned mass media, in true pump-and-dump style, are doing their best to underplay the risks of Japan- style deflation and to push equities onto still-gullible investors, which was in any case their assigned part in the confidence game which was President Obama’s economic recovery plan.

Why are retail investors still gullible about equities? A generation or two of Americans used to think of “housing” or “equities” as proxies for “saving”. To the extent that some of the retail investors’ income was no longer going to foregone consumption or to debt repayments, with housing currently out of favour, and with bank deposits paying very little interest, the rising savings ratio may have been spilling over into the equity markets over the last year. From the consumers perspective, therefore, we have deleveraging, falling consumption and increased “saving” (into equities).

If this assessment of corporate executives and consumer actions is correct, this would be consistent with the ongoing deflation which is forcing the Fed into a second round of pushing on a string – excuse me, of prolonged zero interest rates coupled with more of Quantitative Easing.

For the readers who are interested in speculation. Markets can stay irrational longer than short sellers can stay solvent, however the savings rate might be an indicator for the point where irrational optimism turns to irrational panic once again: any wave of extra “savings” money that played a part in the rise in equities over the last year mathematically must crest and recede somewhat when the savings rate stops rising, and the latter must stop rising at some point if it hasn’t already (note that the S&P 500 index has been range-bound for a while now). If there is no other wave of money to take over when that happens, the rally would be vulnerable and market psychology could flip to the negative state.