Is the Crystal Ball Clearing? | 148 comments (147 topical, 1 editorial, 0 hidden)

Re: A shift in expectations (none / 0)

For the last 200 years, the US stock market has produced a 7-8% real annual return, ie a doubling every 10 years. Same is true for the Swedish stock market for the last 100 years,

The interesting thing however, is that there were actually quite few years when you got these 7-8%. Having a 20% increase or a 10% fall was more par the course, and there were periods (such as after the 1929 crash) when it took 25 years or more for the stock market to recover.

What's the lesson here? Well, there are some really basic lessons a lot of people keep forgetting. Like, a share is not something abstract: it is a share in a company. And if said company is a reasonably stable and solid business, it will pay you dividends. The (reinvested) dividends are in general half of the the total returns from the stock market in the last 100 years. So don't ignore those sustainable dividend payers.

With solid dividends you can get a reasonable cash stream from your savings even when the economy falls into the dreaded liquidity trap, and while you wait out that 20 year lull in the stock market. And don't worry: if you die while waiting, your kids can always inherit your shares.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Mon Mar 12th, 2012 at 09:03:28 PM EST
[ Parent ]

Re: A shift in expectations (4.00 / 4)

But that's so boring! You can't live like a rock star investing like that, and neither can your broker.

by rifek on Tue Mar 13th, 2012 at 01:45:53 AM EST
[ Parent ]

Re: A shift in expectations (4.00 / 2)

For the last 200 years, the US stock market has produced a 7-8% real annual return, ie a doubling every 10 years. Same is true for the Swedish stock market for the last 100 years

That can only hold if the stock market represents a small fraction of GDP. I doubt everyone's pension could grow at 7-8%

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Tue Mar 13th, 2012 at 04:28:32 AM EST
[ Parent ]

Re: A shift in expectations (none / 0)

Until the '80s the entire financial secto WAS a small fraction of GDP - certainly far smaller than recently.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Mar 13th, 2012 at 09:33:58 AM EST
[ Parent ]

Re: A shift in expectations (4.00 / 2)

And that growth of the sector at the expense of the body as a whole allows larger returns and reinvestmet as long as it keeps growing. But there are of course limits to growth even for cancer.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Tue Mar 13th, 2012 at 10:47:53 AM EST
[ Parent ]

Re: A shift in expectations (none / 0)

Agent Smith: I'd like to share a revelation that I've had during my time here. It came to me when I tried to classify your species and I realized that you're not actually mammals. Every mammal on this planet instinctively develops a natural equilibrium with the surrounding environment but you humans do not. You move to an area and you multiply and multiply until every natural resource is consumed and the only way you can survive is to spread to another area. There is another organism on this planet that follows the same pattern. Do you know what it is? A virus. Human beings are a disease, a cancer of this planet. You're a plague and we are the cure.

by rifek on Tue Mar 13th, 2012 at 02:50:04 PM EST
[ Parent ]

Re: A shift in expectations (4.00 / 2)

Except of course if Mr Smith were a biologist, he would know that moose, foxes and other mammals behave that way as well. What make us different is that we have devised ways to increase the carrying capacity of the land, through the use of cleverness and fossil fuels.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Mar 13th, 2012 at 04:33:56 PM EST
[ Parent ]

Re: A shift in expectations (none / 0)

Hence, "Extend and pretend."

by rifek on Wed Mar 14th, 2012 at 02:46:02 PM EST
[ Parent ]

Re: A shift in expectations (none / 0)

It can work as long as not all of the proceeds are reinvested. A consol paying 7 % can be perfectly sustainable. Expecting to be able to take the payout from the consol and use it to buy another 7 % consol, and so on most certainly is not.

Compounding interest is usually unsustainable, which is why a prudent lender should insist that interest be paid as it accrues.

This, incidentally, breaks money neutrality. Hard.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 10:24:53 AM EST
[ Parent ]

Re: A shift in expectations (none / 0)

The assumption the proceeds can be reinvested is central to the very concept of internal rate of return and the associated concept of reinvestment risk.

So investment theory is bollocks. Oh, well...

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Tue Mar 13th, 2012 at 10:28:44 AM EST
[ Parent ]

Re: A shift in expectations (4.00 / 2)

Well, yeah, the usual interpretation of discount rates is garbage. This surprises you why?

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 10:32:44 AM EST
[ Parent ]

Re: A shift in expectations (none / 0)

A not insignificant fracion of all capital is not in the stock market, but in (generally) far less risky investments like bank accounts, corporate and sovereign bonds, or real estate. As they (usually and in the long run) have a lower return, a higher return on stocks might very well be sustainable even in the long run, as long as economic growth runs at a reasonable clip.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Mar 13th, 2012 at 10:55:12 AM EST
[ Parent ]

Re: A shift in expectations (none / 0)

A not insignificant fraction of all ~~capital~~ assets is not in the stock market, but in (generally) far less risky investments like bank accounts, corporate and sovereign bonds, or real estate. As they (usually and in the long run) have a lower return, a higher return on stocks might very well be sustainable even in the long run, as long as economic growth runs at a reasonable clip.

Only assuming that you do not reinject your gains from the stock market into the stock market. If you do, then the stock market's fraction of all assets in the economy will increase.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Mar 13th, 2012 at 11:07:56 AM EST
[ Parent ]

Re: A shift in expectations (none / 1)

But why build a factory when you can simply invest in one with less risk and better return? Of course sooner or later you run out of bricks and mortar and are left with paper and electrons, but isn't it loverly while it lasts?

by rifek on Tue Mar 13th, 2012 at 02:52:13 PM EST
[ Parent ]

Re: A shift in expectations (none / 0)

Because it might be cheaper to build a new one compared to buying an already existing one, depending on market valuations.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Mar 13th, 2012 at 04:37:02 PM EST
[ Parent ]

Re: A shift in expectations (none / 1)

But that involves lags and risks that buying an existing asset doesn't have.

Also, if you buy the existing asset on credit, the existing asset acts as collateral. If you borrow to build, there's no collateral until the thing is built.

Therefore, the banking sector has a bias against lending for capital formation and for lending towards asset bubbles.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Tue Mar 13th, 2012 at 04:42:56 PM EST
[ Parent ]

Re: A shift in expectations (none / 0)

But that involves lags and risks that buying an existing asset doesn't have.

True. Which is why people talk about risk-adjusted returns, and why choosing the highest risk-adjusted return is what you should, given that the absolute level of risk is something you can stomach.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Mar 13th, 2012 at 06:06:54 PM EST
[ Parent ]

lending for construction (none / 1)

is what project finance is about.
And - again, it works, it's quite safe, but it's also quite a bit of work. Which may be the problem...

(Also - project finance bankers do not get million-dollar bonuses)

Wind power

by Jerome a Paris (etg@eurotrib.com) on Wed Mar 14th, 2012 at 08:48:21 AM EST
[ Parent ]

Re: lending for construction (none / 0)

I have been wondering, how much of banks lending is project financing and how much is based on existing assets?

Ball-park figures is what I am looking for really.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed Mar 14th, 2012 at 09:07:23 AM EST
[ Parent ]

Re: lending for construction (none / 0)

most bank lending is still to corporations, and it is impossible to tell if that money is used for investment (and if so, in what) or for other purposes.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Wed Mar 14th, 2012 at 01:08:52 PM EST
[ Parent ]

Re: A shift in expectations (none / 0)

Still, a a lot of non project-finance new construction projects are done by established actors, not startups, which actually have collateral available to pledge.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Mar 14th, 2012 at 10:44:01 AM EST
[ Parent ]

Re: A shift in expectations (none / 0)

A not insignificant fracion of all capital is not in the stock market, but in (generally) far less risky investments like bank accounts, corporate and sovereign bonds, or real estate.

The extent to which it's less risky is basically a function of credit seniority and recovery/collateral values.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Tue Mar 13th, 2012 at 12:32:45 PM EST
[ Parent ]

Re: A shift in expectations (none / 0)

Creditors always have greater seniority than shareholders, that's why shareholders demand higher returns.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Mar 13th, 2012 at 12:38:25 PM EST
[ Parent ]

Re: A shift in expectations (none / 0)

There are more tiers of seniority than "creditors" and "shareholders" or "debt" and "equity".

Interestingly, in English there's "equity" and "debt" = "fixed income", but in Spanish there's no word for "equity". Rather there's "fixed income" (renta fija) and "variable income" (renta variable).

What makes equity more risky than debt is not the seniority but the discretionality of dividend payments.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Carrie (migeru at eurotrib dot com) on Tue Mar 13th, 2012 at 01:12:55 PM EST
[ Parent ]

Re: A shift in expectations (none / 0)

Well, that too.

But of course, there are differnt kinds of seniority when it comes to bonds as well, and the more junior bonds pay higher interest. That's completely reasonable and not mysterious at all.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Mar 13th, 2012 at 01:27:50 PM EST
[ Parent ]

Is the Crystal Ball Clearing? | 148 comments (147 topical, 1 editorial, 0 hidden)

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