It seems stocks may not have been quite the steady outperformers Jeremy Siegel and others have led us to believe.
This important Wall Street Journal article leads off: ‘As of June 30, U.S. stocks have underperformed long-term Treasury bonds for the past five, 10, 15, 20 and 25 years.’ And the 200-year history on which a lot of our conventional wisdom is based rests on some very iffy data in the early years.
Does this mean people will now begin abandoning stocks for long-term bonds just when they should not? (Just as they abandoned long-term bonds for stocks these past five, 10, 15, 20 and 25 years and may now wish they hadn’t?)
I’m sure not willing to accept a 4.2% taxable return on a 30-year Treasury. What if inflation returns at some point? Interest rates would rise and the resale value of those bonds would fall.
Or are we to draw the opposite conclusion – that stocks are cheap here? Facing all the challenges we do, I don’t buy that either.
I think ‘Dow 36,000’ is a long way off, just as it was when that iconic article appeared in The Atlantic a decade ago. (‘Has the long-running bull market been a contemporary version of tulipmania? In explaining their new theory of stock valuation, the authors argue that in fact stock prices are much too low and are destined to rise dramatically in the coming years.’)
‘Oh, please,’ I wrote in this space at the time. ‘The only thing more preposterous than this – you have doubtless seen some discussion of a book by this name (by bright people! how could they?!) – is Donald Trump for President. I mean, please.’
As an update, I would simply replace ‘Donald Trump’ with ‘Sarah Palin.’
(Whatever role Kevin Bacon may play in this, the one degree of separation here is that John McCain chose Sarah Palin to be his running mate – and chose the co-author of Dow 36,000 to be chief economic advisor to his 2000 Presidential campaign. Say what you will about the good Senator, but he knows how to swing for the fences.)
The Dow was 11,000 when Dow 36,000 appeared ten years ago; is 8,200 or so today. I wouldn’t be surprised if it were 8,200 ten years from now – though one can certainly see 5,200 or 20,000, as well. Ten years is a very long time. Where the Dow will be, adjusted for inflation (or deflation), is yet another – and more meaningful – question.
Some stocks are likely to do well, certainly. But the market as a whole? I don’t see it being a bargain here.
So are we headed back toward an earlier era where investors – perceiving stocks as risky, and focusing more on that than on their growth potential – demand higher cash pay-outs from stocks than from bonds? That’s how it used to work for many years: stocks had to pay higher dividends than bonds paid interest, because the interest was considered more reliable. And, yes, sure, profits and dividends could grow – but in a failure, the shareholders would get wiped out, where the bondholders might not.
Ten years ago, the notion of stocks having to pay higher cash yields than bonds seemed quaint at best. Today? Well, today, I think some people may at least pause to ponder whether there could be some sense to this.
Done pondering? My own answer is: I sure hope not.
At least not with regard to the companies on which our future rests. Perhaps Starbucks should pay a high dividend, as the species’ survival does not depend on reinvestment in proliferating coffee shops. But our high tech companies? The ones investing in the miracles of nanotech and biotech? And nano-biotech? (That’s where Dennis Quaid is miniaturized and enters your bloodstream – as actually happened, although it was Martin Short’s bloodstream, not yours.) I’m not keen on such companies paying out profits in dividends that they could reinvest for growth. I’d like to see people investing at hefty valuations to finance those dreams.
Or is the answer that, on average, at least for a while, investors should just come to expect lower returns across all asset classes? That’s way too big a question for my summertime brain, although I expect it would have something to do with the supply and demand for capital. If the world is awash in savings with little opportunity for productive investment, returns would be low. If savings are scarce relative to spectacularly productive projects just screaming to be financed, returns would be high.
It would also have something to do with Moore’s Law. (Hang on, I will get to him.)
Consider. As I used to get paid ridiculous fees to astound personal finance audiences . . . ‘If you had invested just one penny – not a dollar, penny – at just two percent – not ten percent or eight per cent or five percent – just two percent . . . [here I would pause and, as if struck by the thought for the first time, ask, ‘was there ever a time in human history you couldn’t earn two percent? Even the Huns were paying two and a half,’ which was not true, I knew, having spent a good portion of my eighth grade year researching barbarians, but good for a harmless laugh] . . . the day Christ was born [a nervous titter, followed by a long pause to let the time span sink in and the audience conclude this was not an inappropriate use of His name] . . . how much would you have today?‘ I would then recap – ‘one penny at two percent for 2,000 years’ – and, after another long pause, during which in the scores of times I gave this speech no one ever ventured a guess, I would conclude: ‘If you guessed one point five trillion dollars, not pennies [I would rise on my tip-toes to emphasize the relative enormity of the dollar as compared with the penny] . . . you would be low by a factor of a thousand times.’
‘Lesson number one: slow but steady does indeed win the race. Lesson number two: no wonder the Catholic Church has so much money – and more power to it, may I be quick to add.’ Whereupon I would launch into the virtues of the Individual Retirement Account.
But think about it. If a penny at 2% grows to $1.5 quadrillion in 2,000 years (vaguely 150 times the value of all the stocks listed on the New York Stock Exchange) – let alone where it would be from Moses’ day – what implications does this have?
The first is that ‘past performance’ truly is ‘no guarantee of future results,’ as all the prospectuses say. The notion that most of us can compound our money at 5% or 10% a year (after taxes and inflation, no less) is truly a stretch.
In the retirement section of Managing Your Money, the old software program I used to flog, I put up a warning message whenever someone entered an assumed rate of growth that exceeded their assumed rate of inflation by more than 3%: ‘It’s no cinch to outpace inflation by even 3% over the long run. You have chosen yields that outpace your inflation assumption by more than [5%]. We hope you’re successful, but if you wish to change your entries, press ESC and do so now.’
The second implication: people are not saving enough to fund the comfortable 35-year retirements they envision. (So the basic advice – fund that IRA, which these days should be ‘that Roth IRA’ – was not bad then and still holds.) For both our own future financial security and for the sake of the planet, we need to live beneath our means, building up savings each year, not further credit card debt; and we need to live lighter on the land, eating chicken instead of beef most of the time; pasta and locally grown veggies instead of chicken much of the time; water from the tap, not from the plastic bottle. (An enormous sense of guilt compels me to admit that I provided guests with, among other things, four cases of mini Poland Spring Water this July Fourth – my fault exclusively, not Charles’s – and I still feel bad about it. Never again. And in future, we will try harder than ever to recycle the plastic cups we used for the beer and wine. A quick rinse, dry in the sun, and they are as good as new. As Cyberspace is my witness, I vow to do better. We have to.)
The third implication: the compounding of our wealth may come in nonphysical things. Nothing physical can compound at 2% forever on a finite planet, let alone faster. (Have you seen HOME, the movie?.)
That said, Moore’s Law, named after Intel co-founder Gordon Moore, held that computing capacity would double every two years. That’s a 41% compounded rate of growth. (A penny grows to $1 billion in 74 years at that rate.) And lately, the law has been broken in a counter-intuitive way: the doubling seems to have speeded up, to every 18 months or so (a 58% annual rate).
So while the amount of physical material we consume (and discard) each year may need to shrink for at least a few decades while we work out the problem of cheap, clean inexhaustible energy . . . we are living at this astonishing moment – see Ray Kurzweil, also – when, by some measures at least, the growth rate of our individual wealth . . . and perhaps the stock market . . . can handily exceed 2%. As in, for example, my iPhone. Its monetary value is minor; but what would a king, sultan or maharaja have paid to own one (assuming he could have supplied them, also, to his minions and concubines)? So long as productivity can grow rapidly, so can investment returns.
I’m not sure where the market is headed. I am sure this is a time everybody needs to really start thinking outside the box – or we will so foul our box that we miss the chance for a spectacular future . . . and leave the world to the cockroaches, who watched us evolve, learned not to enter the Motels we built for them, and may watch us filibuster our way into decline and extinction.
I got an email from a wealthy friend the other day – an investment banker, no less – politely declining an invitation with the explanation, ‘I am politically apathetic.’ How anyone can be apathetic as our species makes it or breaks it over the next few decades leaves me baffled and worried. Have I mentioned Earth 2100? Have I mentioned Home?
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