The idea of stock investments doubling in value every seven years or so is based on an estimated historic average annual total returns of 9% to 10%. If Jack Bogle, founder of the Vanguard Group, is right future returns are much more likely to be in the vicinity of 1% to 2%:
“People ought to be very conscious of the mathematics of investing,” Bogle, who now runs Vanguard’s Bogle Financial Markets Research Center, said in a recent interview. “But they so often ignore it.”
He acknowledges that his 1 percent to 2 percent return calculation isn’t a hard rule, because it’s based on many of the variables affecting market performance. But it’s instructive for understanding why an investor’s net returns pale in comparison to market returns.
Here’s how he figures it. Assume a nominal rate of return for the foreseeable of future of around 7%. Inflation eats two points, taxes, another point, and management fees another two points. That leaves 2%. The “Rule of 72” tells us that at that rate it would take roughly 36 years to double your money, a far cry from 7.
What if he’s right? For me that raises a couple of questions. First, does that put a premium on good management or put downwards pressure on management fees? Probably both. In this regard it’s interesting to note that the SEC appears to have come around to the view that if your fund’s performance is significantly better than others’, you’re probably cheating.
I also suspect that professional money managers will receive significantly more scrutiny under a regime of very low returns than they would under one of high returns. Nobody much cares as long as their capital is increasing rapidly. If it’s increasing slowly, not increasing at all, or even decreasing, won’t they be inclined to put everything under a microscope?
Additrionally, wouldn’t expected performance like that put a bit of a damper on the various plans to privatize Social Security? Social Security’s “rate of return” is in about that range. If you assume that the rate of returns for a fully privatized system are normal and have an average of 2% with a standard deviation of one point my back of the envelope calculation tells me that about three-quarters of the population would see returns below 4% and a quarter would see capital losses.
You’ve probably seen snippets of this in several different versions in Chrysler commercials but the complete performance of Eminem’s “Lose Yourself” by Detroit’s Selected of God choir is well worth watching and listening to in full. I find it very affecting.
Blessedly aside from a bit of discrete product placement it’s without commercial interruption.
I have a few quibbles with the pragmatic truth of the lyric not to mention its theology but that is, perhaps, a post for another time. That may be a class issue. The higher one’s position in the class structure the less true it may be that “you only have one shot”.
I find the developments in gospel choirs over the years fascinating from jubilee to jazz to rhythm and blues and, now, to hip-hop (something I predicted decades ago).
The full length song can be purchased at iTunes. All publishing proceeds will go to benefit a number of Detroit based charities.
California and Illinois have many things in common:
Harsh business environments
High tax rates
Both states are among the most pro-union states
Both states lack right-to-work laws
That California and Illinois suffer from business flight and high unemployment should not be surprising.
Take away much of California’s benign climate, the mountains, ocean, and the desert and the similarities would be even more striking. Fortunately, here in Illinois we do have government corruption at a level that Californians can only aspire to.
California, at least in part due to the features mentioned above, has one thing going for it that Illinois does not: a belief that nowhere else is worth living. In Southern California that’s encapsulated in the wisecrack “there is no life east of Sepulveda”. I don’t see Illinois having that sort of hold on its citizens.
Ilinois’s recent decision to offer inducements, mentioned by Mish in his post, to Sears, the financial exchanges located here, Motorola, Caterpillar, and others to prevent them from leaving after the state’s ill-advised tax increases is an exercise in self-destruction. Established companies may be important to the state’s economic future but the facts are clear: new businesses are the engine for job creation. Subsidizing established businesses at the inevitable expense of new businesses is just another way of eating the seed corn.
History may not be on the side of those calling for recession currently. According to recent data from Deutsche Bank the current expansion is still on the shorter end of the historical average length.
Since 1854 the average expansion has lasted 40 months. Since the great depression the average expansion has lasted 58 months. The last 7 expansion, however, have lasted almost 70 months on average. At month 27 the current expansion would be short by historical standards. Of course, if you’re following my balance sheet recession theory this is a relatively moot point, but if we’re going to following the standard NBER data points on recessions then this casts doubt on the odds of a technical recession occurring in the coming 12 months.
According to the NBER the present recovery has been going on for about 27 months, the shortest post-war recovery has been 12 months, the average length of post-war recoveries has been 59 months, and, by my reckoning, the median length of a recovery is 45 months. Deutsche Bank, noting that by the standards of other post-war recoveries the present recovery has been short says so what?
We think that the three ‘super-cycles’ between 1982-2007 were the exception rather than the norm and existed largely because of a near 30 year secular global decline in inflation that transcended the business cycle. This was perhaps caused by Globalisation and the reduction in cost pressures that it facilitated. We think that the Western authorities ‘maxed out’ on the benefits of this inflationary decline by pumping monetary and fiscal stimulus into their economies whenever they had an economic problem. Given the lack of inflationary pressures they had a rare ability to do this without the normal subsequent price rises
That was then and this is now. Note that since the American Civil War the average length of a recovery was 38 months and the median 30 months. If you think that since World War II everything has changed, that would incline you to believe that the recovery will last for several more years.
However, if you believe that the last several recoveries have been the exception rather than the norm a reversion to the prior trend might incline you to believe that the recovery is already over.
Our Christmas decorations reflect the different facets, the different times of our lives. There are ornaments that hung on our parents’ trees as long as 75 years ago. There are tiny musical instruments. A pewter rocking horse bunny. Another angelic bunny using a carrot as a herald’s trumpet. Samoyeds in various poses.
Pictures and mementos of friends, family, pets, some no longer with us, some still alive. Handprints. Wooden beads.
A snowman, Santa, and a rocking horse hand-carved by my mother-in-law.
A Lionel train set bought used for me some of the components of which are at least 70 years old and which has been reconditioned (a Christmas present from my wife decades ago) so it still runs.
The base of our tree is wrapped in handmade quilts that were rags a half century ago and which were used by an antique dealer (the grandson of the man who guided Francis Parkman on the Oregon Trail) to pad the furniture my mom bought. Who knows how old they are? Or who made them?
Things we’ve bought for each other. Things we’ve bought together.
Inspired by some remarks by Arnold Kling and bolstered by my experience that human beings are better at perceiving a change in speed than they are speed I began noodling around and produced the graph above which illustrates the changes in the real GDP growth rate as measured from a fixed trend. Essentially, my guess was that people aren’t particularly good at perceiving the level of economic activity but they’re probably better at perceiving the change in economic activity over time.
Here’s the method I used for producing it. First, I downloaded the real GDP figures from 1948 to present from the St. Louis Federal Reserve’s FRED database. Then I calculated the year on year change as a percentage. Then I calculated the difference between that percentage and an arbitrarily selected trend. The trend I picked was the average GDP growth rate for the period (3.25%). If I had picked a different “trend” for calculating my differences, it would have made on difference in the general shape of the graph, only in the height of the peaks and depth of the troughs. Then I graphed the result.
The graph illustrates a clear trend: down. Obviously, that’s not good news.
You can see why those who spoke and wrote of a “Great Moderation” starting in the 1980s and continuing through the middle of the Aughts thought they were onto something. Maybe they were but the case is a bit weaker than it used to be. Rather than a “Great Moderation” in which, while the peaks are lower, the troughs are shallower, too, we may be seeing a general slowing of the rate of economic growth over a considerable period of time. The slowing has proceeded under Republican presidents and Democratic presidents, with Democratic control of the Congress and Republican control, and various permutations of the foregoing.
The time and persistence suggests, at least to me, that changing the trend will be very difficult, if not impossible to correct. A United States of persistent slow or no growth will be very different than the one I grew up in.
I’ll admit to a prejudice. I am very suspicious of the announcement of any revolutionary discovery in science but particularly in archaeology. This is either the greatest archaeological discovery of the last half century or ill-infomed charlatanry. I don’t see much of a middle ground:
In 1999 archaeologist Mark Williams of the University of Georgia and Director of the LAMAR Institute, led an archaeological survey of the Kenimer Mound, which is on the southeast side of Brasstown Bald in the Nacoochee Valley. Residents in the nearby village of Sautee generally assume that the massive five-sided pyramidal mound is a large wooded hill. Williams found that the mound had been partially sculpted out of an existing hill then sculpted into a final form with clay. He estimated the construction date to be no later than 900 AD. Williams was unable to determine who built the mound.
Williams is a highly respected specialist in Southeastern archaeology so there was a Maya connection that he did not know about. The earliest maps show the name Itsate, for both a native village at Sautee and another five miles away at the location of the popular resort of Helen, GA. Itsate is what the Itza Mayas called themselves. Also, among all indigenous peoples of the Americas, only the Itza Mayas and the ancestors of the Creek Indians in Georgia built five-side earthen pyramids as their principal mounds. It was commonplace for the Itza Maya to sculpt a hill into a pentagonal mound. There are dozens of such structures in Central America.
The name of Brasstown Bald Mountain is itself, strong evidence of a Maya presence. A Cherokee village near the mountain was named Itsa-ye, when Protestant missionaries arrived in the 1820s. The missionaries mistranslated “Itsaye†to mean “brass.†They added “town†and soon the village was known as Brasstown. Itsa-ye, when translated into English, means “Place of the Itza (Maya).â€
Into this scenario stepped retired engineer, Cary Waldrup, who lives near Track Rock Gap. In 2000 he persuaded the United States Forest Service to hire a professional archaeologist from South Africa, Johannes Loubser, to study the famous Track Rock petroglyphs, and also prepare a map of the stone walls across the creek in site 9UN367. Waldrup and his neighbors felt that the stone structure site deserved more professional attention. They collected contributions from interested citizens in Union County, GA to fund an archaeological survey by Loubser’s firm, Stratum Unlimited, LLC.
Loubser’s work was severely restricted by his available budget, but his discoveries “opened up the door†for future archaeological investigations. His firm dug two test pits under stone structures to obtain soil samples. In conjunction with the highly respected archaeological firm of New South Associates in Stone Mountain, GA he obtained radiocarbon dates for the oldest layer of fill soil in a test pit, going back around 1000 AD. He also found pottery shards from many periods of history. Loubser estimated that some of the shards were made around 760 AD – 850 AD. This is exactly when Maya population began to plummet.
Loubser described the 9UN367 archaeological site as being unique in the United States, and stated that examples of such sites are only found elsewhere in the Maya Highlands and South America. However, he did not present an explanation for who built the stone walls. He was in a conundrum. The Eastern Band of Cherokees had labeled Track Rock Gap as a “Cherokee Heritage Sacred Site.†He had been led to believe that the area had occupied by the Cherokee Indians for many centuries, yet he also knew that the Cherokees never built large scale public works. In fact, the Cherokees established a handful of hamlets in the extreme northeastern tip of Georgia during the 1700s, but the western side of Brasstown Bald Mountain, where Track Rock is located, was not official Cherokee territory until 1793.
The first comment on this article purports to be from the archaeologist cited, Mark Williams, disavowing the claims in the article.
James Pethokoukis produces seven different charts on the economy over the last several years, decade, thirty years, and dating back to 1916, proclaiming them the “most illuminating economic charts of 2011”. The first chart is the infamous chart of projected unemployment deployed by Obama White House economic advisors Jared Bernstein and Christina Romer, updated to the present day, and which may well sink a second Obama term. The best that can be said about it is that they were wrong.
The second illustrates the shockingly rapid decrease in the size of the work force since 2008, without which the U-3 unemployment rate would be above 11%. I don’t believe that the Great Depression of the 1930s was the Great Vacation and I don’t believe that about the late recession and subsequent weak recovery, either.
Others include a chart of median income and consumption since 1980 (a different take on the declining median incomes story), a chart of the percentage of total wealth possessed by the top 1% of income earners since 1916, a comparative chart of recoveries from recessions over the last 30 years, and a projection of the rising level of public debt.
For each of the charts there’s probably another chart that illustrates its opposite or places the blame on somebody else. What I think that most strongly partisan Republican and strongly partisan Democrats miss in the food fight is that the number of Americans affiliated with either party is actually falling and the number of independents is rapidly overtaking the number of registered Republicans. I think they care more about what will be done than about whose fault it was.
What is President Obama going to run on in 2012? That it’s all Bush’s fault and that four more years of Congressional gridlock is just the ticket for healing the country’s ills? It’s more likely he’ll try to emulate Harry Truman and run against the do-nothing Congress which seems like a pretty good strategy considering Congress’s popularity is substantially lower than his. Employing that strategy without undermining the Democrats’ continuing control of the Senate will be extremely delicate.
And then there are the pesky facts. President Obama got very much what he asked for in the first two years of his term. Largest fiscal stimulus in the history of the Republlic? Check. Continuing the bailouts started by the Bush Administration? Check. Healthcare reform? Check. Don’t like the Bush tax cuts? The Obama White House asked that they be extended. Blaming the White House’s asking for the wrong things on Bush or the Republican House may not be that easy a sell.
Scrooge has been called ungenerous. I say that’s a bum rap. What could be more generous than keeping your lamps unlit and your plate unfilled, leaving more fuel for others to burn and more food for others to eat? Who is a more benevolent neighbor than the man who employs no servants, freeing them to wait on someone else?
Oh, it might be slightly more complicated than that. Maybe when Scrooge demands less coal for his fire, less coal ends up being mined. But that’s fine, too. Instead of digging coal for Scrooge, some would-be miner is now free to perform some other service for himself or someone else.
