GOING TO THE SUN

In 1961, we set out to put a man on the moon by the end of the decade. It was a supremely cool thing to do – read President Kennedy’s rationale here – and it had lots of indirect benefits, like these. In the decade ahead, we will go to the sun. Not literally, of course – for energy. And if we do it as successfully as we went to the moon, the benefits will be even more tangible. By replacing fossil fuels with solar energy and other inexhaustible, nonpolluting energy sources, we’ll save $700 billion we send abroad each year . . . $7 trillion per decade . . . and set a course for a more nearly sustainable economy.

Plug your car in when you get home, and let the sun’s rays (one way or another) recharge it.

Cool.

GARRISON KEILLOR

Lisa Strong: ‘I’m disappointed. You offered Keillor’s article as a positive thing. 1) How dare Keillor suggest that previously ‘we’ pretended to be Canadians. Maybe he did. But he should speak for himself. I’m offended at the idea. Canada is a fine country. Please Garrison, move there. (Are you sure this is an article you wish to promote?) 2) The Swedes and French are happy?? Why is that a plus? What about these socialist countries makes them superior judges? Their government system? Their economic system? Maybe Keillor sees these as superior, but I do NOT want to use these as our models. (Are you sure this is an article you wish to promote?) 3) But most importantly, Keillor is promoting that Obama immediately abandon his promises. Ok, so which is it: Is Keillor suggesting that Obama should abandon his heartfelt promises to those who faithfully elected him? Or is Keillor praising Obama for winning the game for the Democrats by deceiving the voters about what he can and will do? Or is Keillor suggesting that Obama didn’t understand the current circumstances under which he would be operating? Pick any one. Keillor is so blinded by his politics that he doesn’t even see anything wrong with this. He sees this as a success. Aghhh! My team is my country. Clearly Keillor’s team is his party. My country is in big trouble, and this kind of party politics that is at the root of it. (Are you sure this is an article you wish to promote?)’

☞ Thanks for your perspective, Lisa. I do think having the most of the world cheering for us again is good for the world, good for our national security, and good for our (eventual) continued prosperity. All positive.

I think Obama will be far less partisan than his predecessor, and that we’ll all join you in being pleased by that.

And I think Garrison Keillor is one of our country’s great teammates – but that sometimes teams do screw up, and that his point is that our team, these past eight years, has not been at the top of its game.

MONEY

Alan S.: ‘Getting back to finance for a brief moment: The Dow averaged 5.3% compounded annually for the 20th century, a record Warren Buffet called ‘a wonderful century’ – when he calculated that to achieve that return again, the index would need to reach nearly 2,000,000 by 2100. The way the stock market is presently going, this of course will be impossible. Will stocks ever thrive again, even if only at a 5.3% annual rate of return? (This return seems puny, considering that some 1 year CD’s are paying the same thing.) Am I missing something?’

☞ Do we have to get back to finance? Not a cheerful topic. (Which is to say: if you’ve been using it to hedge your portfolio, don’t sell your RSW.)

For the Dow to compound at 5.3% through the end of the century from its 13,850 high a year ago would be to have it climb to 1.7 million. Give it a full century instead of 93 years and you’re at 2.4 million. Go nuts and compound it at 5.4% and it’s Dow 2.7 million. That’s quite a jump. And we may be alive to see it.

A couple of points on the math.

First, not to quibble, but I think the one-year CD rate is more like 3.45% than 5.3%.

Second, most people use more like 9% than 5.3% for the expected return on stocks. But that’s before adjusting for inflation (is it really 9% if prices have been going up by 3%? no, it nets out to 6%) . . . and before adjusting for dividends (traditionally that 9% came in the form of roughly-vaguely 3% dividends and 6% stock appreciation).

And, yes, despite two world wars and the Great Depression the Twentieth was a good century for American equities, and this Twenty-First century could be equally good. To answer your question (‘will stocks ever thrive again’): it seems to me they are closer to a level from which they can thrive at last night’s 8273 than they were at last year’s 13,850. (Right? The cheaper they are, the more room to thrive.)

If Ray Kurzweil is right, and technological progress over even just the next 50 years is 32 times as fast as it was over the past 50 years, it could be a century of astounding economic progress.

But getting from here to there is going to be painful. We have years of readjustment to get out of this mess. And there’s no guarantee that today’s shareholders are likely to wind up doing well.

Take the example of GM. Even if it’s rescued and goes on to thrive, who’s to say how much of the company today’s common shareholders will own? The taxpayers might get 90% of the equity in return for a bail-out. And/or the employees and pensioners might get 90% of the equity in return for agreeing to deep cuts in pay and benefits. And/or the bondholders may wind up owning 90% – or 100% – of the equity if the company goes through a bankruptcy restructuring that allows it to get out from under unsustainable obligations.

And it’s not just GM. Just as homeowners can see their equity wiped out and ownership transferred to the mortgagee (note that the house itself does not disappear), so common stockholders in lots of companies may see their equity wiped out and ownership transferred to the bondholders.

Or not.

But to a lesser or greater degree we could well see some of this.

During which time investors might get more and more disgusted with stocks and more and more partial to bonds. Bizarre even to contemplate, I know; but in the (very) old days, stock dividends used to be higher than bond interest payments – a stock might pay an 8% dividend while its bonds paid 6% – because investors demanded very high cash returns from stocks, relative to bonds, to compensate for their greater risk.*

If that did happen, it would likely be a great time to buy stocks.

We’re a long way from its happening, if it ever does. But it might.

My point: what the heck do I know?

My subsidiary point: because a number of scenarios are possible, it’s wise to be cautious; to diversify; and to live frugally (but joyfully), saving as much as you can and investing it across several asset classes.

*The more modern argument has been that stocks are more volatile, i.e., risky in the short-term; but that they are a safer way to beat inflation over long-term. So investors were delighted to forego dividends for hoped for (and lightly taxed) growth.

 

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