Market crash: are we there yet ?

[hellosailor]

Chris-
"If the nett aftertax return from bonds does not exceed the rate of inflation you lose." Well, you win compared to cash in the mattress earning zero growth. Win and lose are relative positions.

Steve-
You misread me, Steve. "between" these transactions may be the space of a week or a day. It doesn't take a year for a dozen trades to be made. And as for what is happening at a company--how's Enron for a company? Or the ex-CEO of Home Depot, how many millions did he take with his early departure while the company tanked against it's competition? How many stockboys and cashiers does it take to repair a hundred million in executive plundering or back-dated stock options?

Valuations (and actual values) often have little to do with an real measure of worth, let alone what the companies have done to increase it. I'm talking about stock trading, not the growth cycle of a corporation. The values of stocks on the stock market have got nothing to do with the real valuations of the corporations in far too many cases. Not just in the penny stock spam manipulation schemes, but does "high tech bubble" sound familiar? While the institutional players (who are now panicking because they have no idea how may junk mortgages are really in their repackaged products) may do some research into "real" values of corporations, the game of the 20th and 21st century is not to build corporation value--but to plunder it and pull it out. Corporate officers are rarely interested in building hundred-year assets, they'd rather sell them off to show they had a profitable year. Or quarter. Or week. Or even day. then they stuff their pockets with inflated stock income, and bail. Surely, you've read something about this trend in the last 40 years?

[wind_magic]

Originally Posted by hellosailor

Chris-
"If the nett aftertax return from bonds does not exceed the rate of inflation you lose." Well, you win compared to cash in the mattress earning zero growth. Win and lose are relative positions.

The value of the $us is completely relative too, it changes every day. Most people know it changes in relation to other foreign currencies, and some know that it goes "up and down", that is, that gasoline isn't getting more expensive right now, but only more expensive in $us because the $us is declining in value. Quite a few people know that, and of course many don't, they just think it's getting more expensive because of something Bush did, or whatever.

But $us changes every day even without regard to other currencies and commodities. Perfect example is the roaring 20's and the depression of the 30's. In the 20's a $us bought a certain amount of milk, labor, or what have you. By the time the deepest part of the depression was in full effect $us would buy you anything, people were desperate for it. They'd sell their labor for pennies, they'd sell milk and wheat for pennies, sell you their car that they couldn't afford gasoline for anyway, etc, you could buy whole businesses for next to nothing, all the real estate you wanted, whatever. Of course the problem was that by that time nobody had any money to buy with, which is the whole point, that debt eats itself, money gets destroyed and disappears. At that point the exact same $us that you had in 1928 would have bought you 10 times as much stuff in 1933. Why ? One word, deflation.

Sometimes that money in the mattress isn't such a bad idea. It was a great idea in the United States in the late 90's early 2000's too up until a few years ago when the trend reversed itself, when gold was running about 270$us/oz. Say that again so it's clear - if you did nothing but hold $us in your pocket from the early 90's into the mid 2000's, the world was willing to give you more gold, more steel, more cows, and more of just about everything EXCEPT stocks, real estate, and American labor, those got more expensive in $us and you had to pay through the teeth for them.

[SteveSouthwood]

Originally Posted by wind_magic

Say that again so it's clear - if you did nothing but hold $us in your pocket from the early 90's into the mid 2000's, the world was willing to give you more gold, more steel, more cows, and more of just about everything EXCEPT stocks, real estate, and American labor, those got more expensive in $us and you had to pay through the teeth for them.

So what you're saying is that dollars bought more commodities at the end of that period compared to the beginning. In addition, you're also saying that had we held onto stock, property and invested in ourselves through training, we would have had a greater value than holding onto cash. Sounds like you're arguing against yourself.

Anyone who all they did was to place a percentage of their income into something as simple as an index fund throughout the time period you mention would have assets with a much greater value than cash under the pillow.

[chris_gee]

Actually I was talking about the USA. There are various measures of inflation - one leaves out food and energy. There are also what I believe they call hedonic adjustments. Steak gets too dear so you buy mince, or the computer you buy now is bigger better and faster so you save on what you would have paid for it 5 years ago, as if you would have bought it then or could have.
Last year the US CPI I believe hit 4%. While this fell in a couple of quarters it is expected to rise on a yoy basis in coming quarters as the low quarters fall out.
http://www.shadowstats.com/cgi-bin/sgs/data provides alternate figures based on the old models of calculating inflation. These show 10%. I suspect most Americans would estimate somewhere between 2-10.
The nett return from the markets long term after official inflation on the SP500 from 1950 2006 assuming dividends are reinvested is 7.8% without taxes or fees, but from 2000 -2006 is - 1.5% (a period in which the dollar has fallen around 30%).
My figure of 1-2% real nett return from the market was based from memory of Schiller's book I think. Although the real return can be calculated over 15 year periods as averaging 6.3% without tax and fees there is considerable variation. Apart from what the real measure of inflation is, and tax and fees the problem with this methodology is that it uses say the Dow or SP500, which change from time to time, so that weaker companies are dropped and stronger ones take their place. This ignores the fact that in the market as a whole some companies drop out as worth nothing, so the method of calculation becomes if I count my winners but not my losses didn't I do well.
Also returns can be boosted up by rising valuations and PEs - particularly when say since 2000 interest rates are held artificially low. Those gains can be illusory when interest rates rise to reflect both inflation and risk, and at the same time compress profitability.
Steve is correct that you don't build real wealth by storing your money under the mattress. However financial speculation is now many times world GDP. Financial shenanigans are the concern now.

[wind_magic]

Originally Posted by SteveSouthwood

So what you're saying is that dollars bought more commodities at the end of that period compared to the beginning. In addition, you're also saying that had we held onto stock, property and invested in ourselves through training, we would have had a greater value than holding onto cash. Sounds like you're arguing against yourself.

Anyone who all they did was to place a percentage of their income into something as simple as an index fund throughout the time period you mention would have assets with a much greater value than cash under the pillow.

No you're putting words into my mouth. I didn't say holding stocks or anything else wasn't a better investment over the same time period. I was simply refuting the notion that holding $us was always a bad idea - it isn't. Just about every investment has a "season", and so does cash. Sometimes being short some south Asian currency is the best investment, sometimes it's being long oil, sometimes it's writing calls on banking stocks, sometimes it's spending money on your kids education, ... and sometimes it's having a mattress full of cash.

[SteveSouthwood]

Originally Posted by hellosailor

You misread me, Steve. "between" these transactions may be the space of a week or a day. It doesn't take a year for a dozen trades to be made. And as for what is happening at a company--how's Enron for a company? Or the ex-CEO of Home Depot, how many millions did he take with his early departure while the company tanked against it's competition? How many stockboys and cashiers does it take to repair a hundred million in executive plundering or back-dated stock options?

I clearly do misread you as I still don't follow your reasoning. We've all heard of Enron and there are not going to be many who approve of what happened there. I feel for the families who bet their jobs and their pensions on the company even though I think it's insane to put all your eggs in one basket.

Yes - there has been a nasty trend in corporate America. But you know what - there's a ton of decent companies out their that are the backbone of this countries economy that have more going for them than corporate greed. They are competing in an aggressive economy that doesn't favour the weak. They are being forced to innovate, be more productive or die. Individual companies die off - others rise. The net effect has been an inexorable rise in value across the combined economy of this planet.

Pockets of this economy (like Enron) will continue to do unconscionable things. But they remain the exception, not the rule.

S

[SteveSouthwood]

Originally Posted by chris_gee

Last year the US CPI I believe hit 4%. While this fell in a couple of quarters it is expected to rise on a yoy basis in coming quarters as the low quarters fall out.

I agree it's been close to 4% a couple of times recently but I don't agree with your reasoning leading you to conclude it's heading back there. For a good part of the last 15 years it's been much less. I wanted to paste a link to some data but it seems I need to post 10 messages before I can do this.

Originally Posted by chris_gee

XXX provides alternate figures based on the old models of calculating inflation. These show 10%. I suspect most Americans would estimate somewhere between 2-10.

The shadowstats numbers imply prices have doubled in the last 8 years. That doesn't pass the sniff test. I can't think of many things (my kids perhaps) that cost half as much 8 years ago.

Originally Posted by chris_gee

The nett return from the markets long term after official inflation on the SP500 from 1950 2006 assuming dividends are reinvested is 7.8% without taxes or fees, but from 2000 -2006 is - 1.5% (a period in which the dollar has fallen around 30%).

After inflation, 7.8% is a grand number. I'm planning my retirement around 6%, before inflation - anything above will be a bonus - perhaps a night or two ashore every now and then (I had to find a way to relate this to sailing ;-)).

Looking at 2000-2006 is a limited view. Equity investing can't be reasonably assessed over this time period. But something you should go and do. Go and model what would have happened if you had saved 10% of your salary by buying into the S&P 500 twice a month over this time period. It's still not the right time frame but I'm confident you'll arrive at the realization you would get a return on your savings much better than 1.5%. It is wrong to look at the stock market in terms of lump sum investing and lump sum withdrawal. You buy in in bits and you take out in bits. Through that you are very likely (but not guaranteed) to benefit from the bigger picture. When you actually retire the usual thing to do is to have 5-10 years of required income in low risk assets and only trickle down when things look good in the high risk stuff.

Originally Posted by chris_gee

My figure of 1-2% real nett return from the market was based from memory of Schiller's book I think.

Just go and buy 30 year inflation linked treasuries and you'll get nearly a constant 4% in real terms. Forget 1-2%. If you want more, buy this stuff.

Originally Posted by chris_gee

However financial speculation is now many times world GDP. Financial shenanigans are the concern now.

The average man on the street benefits from the speculators. That's why, in the advanced economies, we have price stability and bread on the shelves. Take away the speculators and you lose all fluidity in the commodity and futures markets - costs will rise as producers and resellers take on all the risk and produce simply won't be there because of the increased numbers of businesses going under as they couldn't lock in a price before they had a bad year.

[SteveSouthwood]

Originally Posted by wind_magic

No you're putting words into my mouth. I didn't say holding stocks or anything else wasn't a better investment over the same time period. I was simply refuting the notion that holding $us was always a bad idea - it isn't. Just about every investment has a "season", and so does cash. Sometimes being short some south Asian currency is the best investment, sometimes it's being long oil, sometimes it's writing calls on banking stocks, sometimes it's spending money on your kids education, ... and sometimes it's having a mattress full of cash.

Not at all. You were the one that said the only thing that you couldn't buy more of was real estate, stocks and labor. The converse of this is to say that stocks, houses and labour outperformed cash over the same period. Do you disagree with my logic?

You are absolutely right that with the benefit of hindsight you can always point out which of all the possible assets (including cash) would have been the best to hold onto over a given time period. But that doesn't help us know what's the right thing to hold onto today. That's why you have to look at your savings in terms of buckets of different mixes of assets and look at each bucket over different time horizons.

[wind_magic]

Originally Posted by SteveSouthwood

Not at all. You were the one that said the only thing that you couldn't buy more of was real estate, stocks and labor. The converse of this is to say that stocks, houses and labour outperformed cash over the same period. Do you disagree with my logic?

Now I have no idea what you are saying - I just told you, I did not say that stocks, houses, and labor were not better investments over that period of time, what more do you want me to say ?

I mean so what, that doesn't have anything to do with the fact that $us was a great investment over that time. Is every investment only a good investment if it outperforms everything else ? If so I have some sad news for you, a lot of things outperformed the U.S. stock market over the same period of time. In fact, buying stocks over the past 2 years has been a terrible choice. Yes, owning stocks outperformed having $us in your pocket over the past 2 years, but I'm sorry to report that you would have had to have earned 30% over that time period to even break even in the big scheme of things. If you didn't make 30% on your money over the past 2 years, you lost money because of a declining $us. Owning silver was a much better investment over the past 2 years than owning the index, and so were a lot of other things. Does that make owning stocks wrong ? No, of course not. And the fact that stocks outperformed $us over a certain period of time doesn't make cash a bad investment, it just wasn't quite as good of an investment over that period of time. But $us cash over the period of the 90's into 2000's was a pretty good investment, that's why so many foreign governments and companies invested so heavily in it.

Originally Posted by SteveSouthwood

You are absolutely right that with the benefit of hindsight you can always point out which of all the possible assets (including cash) would have been the best to hold onto over a given time period. But that doesn't help us know what's the right thing to hold onto today. That's why you have to look at your savings in terms of buckets of different mixes of assets and look at each bucket over different time horizons.

Obviously. As far as "doesn't help us know what's the right thing to hold onto today", well who cares, that wasn't the point I was making with my post, that's the point you are trying to make. My point was refuting your statement that holding cash was always a bad idea, that's what you said earlier when you said "you win compared to cash in the mattress earning zero growth.". Cash is the right thing to have sometimes, bonds are not always better, and cash is never "earning zero growth", it is always gaining and losing value compared to everything else in the Universe. It only has "zero growth" to people who can't think beyond investments that are denominated in $us. Cash has had some great moments compared to real estate and stocks even during this incredible 2 decade long bull market in equities, last week was a great time to own cash, I'm sure there are a lot of mortgage fund managers who wish they had a whole lot more of it.

[cardiacpaul]

thats why my money isn't under my pillow.



Its buried in a chock-full-0-nuts can in the back yard, ain't everybodys?