Bill Gross, head of bond giant PIMCO, makes an interesting observation:
If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year. If an economy’s GDP could only provide 3.5% more goods and services per year, then how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)? The commonsensical “illogic” of such an arrangement when carried forward another century to 2112 seems obvious as well. If stocks continue to appreciate at a 3% higher rate than the economy itself, then stockholders will command not only a disproportionate share of wealth but nearly all of the money in the world! Owners of “shares” using the rather simple “rule of 72” would double their advantage every 24 years and in another century’s time would have 16 times as much as the skeptics who decided to skip class and play hooky from the stock market.
Conditions are just about as favorable for corporate profits right now as they can get. Taxes’ share is at an historic low. Labor’s share is at an historic low. How far are taxes and labor expected to fall? Zero? Doesn’t sound like a realistic expectation to me.
If it’s not a realistic expectation and conditions are as favorable as they’re likely to get, how realistic is the idea of a stock market that rises at 6.6% per year?
Tying this to something I’ve written about from time to time, public employee pension funds typically assume a return of 7% or even 8% per year to remain solvent. Bonds are practically guaranteed to earn less than stocks. If stocks earn less than 6.6% and bonds earn less than that, exactly how are they going to earn 8%?