Quote of the Day
“No one has ever become rich by being a long-term bear on the fortunes of the United States, and I doubt that anyone will do so in the future. This is still the most flexible and innovative economy in the world.”
~Burton Malkiel
CARPE DIEM
Professor Mark J. Perry's Blog for Economics and Finance
Tuesday, April 24, 2012
About Me
- Name: Mark J. Perry
- Location: Washington, D.C., United States
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
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21 Comments:
All of us living here are long the U.S.
I hope his prediction proves true, but I don't like the current trajectory.
“No one has ever become rich by being a long-term bear on the fortunes of the United States"
______________
No dispute there.
But those who completely shun short-selling as an investment tool are missing out on numerous opportunities.
"No one has ever..." sayings are made to be broken, as most everything fails one day. The bear case for the US is that the country has become rich and self-satisfied, a silly people easily hoodwinked by the nonsensical promises of Obamacare- the govt mandates that you will receive insurance even if you have a pre-existing condition? How is that even insurance anymore? Oh wait, I forgot, it hasn't been insurance in decades, it's a medical prepayment plan that everyone incorrectly calls "insurance"- or prone to wasteful speculative bubbles like the recent dot.com and housing bubbles. The bull case is that as the strongest and most market-oriented economy in the world, there might be excesses but they are always cleaned out by the natural processes of the market, which is why most new tech is still first developed or sold here and companies still do go bankrupt, unlike Japan and their lost decades of keeping bankrupt companies alive as zombies. Obviously it depends on what timeframe we're talking about, but if we go out a century, I see India superceding the US by 2100, though the US economy will still be the richest, per capita, for a majority of the coming decades. All things come to an end and the remarkable run of the US will soon also.
well, it's been pretty tough being a long term bull lately too.
the S+P is at the same level as 13 years ago.
adjust that for CPI and you've lost half your money in real terms and made nothing in real terms since the early 90's.
personally, i've made a lot of money being bullish about specific companies, but the US equity markets as a whole have, in real terms, gone pretty much nowhere for nearly 2 decades.
i guess we can argue about the definition of "long term", but this 18 year flat spot is a very unusual occurrence for us historically and i think it needs to be taken into account.
personally, i think there was almost no real economic growth in the US since 2000 and under-reporting inflation led to over-reported gdp. i'm not interested in setting off that methodology debate again as it just gets repetitive, but it's worth considering that if there really was so much growth, it sure didn't show up in the stock market.
You make some very good points, Morganovich.
About half of my money is invested in emerging markets (I heavily favor Russia, Poland, Mexico, and SE Asia). The other half is in mostly reliable US companies, but I took some risks on start ups. The nice thing is I have the time to be patient :)
"“No one has ever become rich by being a long-term bear on the fortunes of the United States.""
I suppose that if one wanted to invest in the U.S., then a total U.S. market index might be one way to go.
A particular total U.S. market fund has almost a 50% cumulative return since its inception ten years ago. This fund has 3295 U.S. companies in it's portfolio.
buddy-
a 50% cumulative return over 10 years does not amount to much after inflation.
at 3% inflation, you get 35% cumulative over a decade.
if inflation was more like 4%, then you lost out in real terms.
you also likely paid some taxes on that as the fund traded.
all in all, that's not much return.
in real terms, i suspect it's barely positive (or quite possibly negative) after taxes, fees, etc.
This comment has been removed by the author.
morganovich and Buddy. The total return of that fund, meaning dividends reinvested, is closer to 100%. I think that's probably a more appropriate comparison.
My comment about total return of 100% is for the time period of approximately 2002-2012.
jc-
that sounds too high.
where are you getting that figure?
etfs do not pay dividends.
further, 2002 was a great start point, virtually what you would choose as an optimum cherry pick.
start in 2000 and it would look really dire. i'd bet that would pretty much wipe out the whole return.
the whole return from that 10 years is driven by starting it at the lows in 2002. look at a 12 year number instead, and returns are all but gone.
morganovich and jccarroll2948, according to the fund's website:
$10,000, invested at the inception in 2002(5-24-02), grew to $16,309 on 3-31-12. I believe this would be in a tax free account. The last decade was lousy, so it might be better the next ten.
Anyway, that fund seems to be the nearest thing to an overall U.S. investment, in one handy ETF.
buddy-
yes, but using a one decade mark is a bit misleading just now as 2002 was after the big crash.
if that index went back to 2000, the 12 year numbers would be a nominal loss.
(lose 40% in 2000-1 and 100 becomes 60. 60 * 1.62 = 97.2)
that number is really just a function of start point. even the s+p shows positive returns from 2002.
that etf has not behaved that differently in % terms than the russell 2000 which was 488 in 2002 and 812 now. (66% gain)
i don't see much to indicate that it's basket is much different from the r2000 in terms of results.
morgan, the fund had lost 20.81% by the end of its inception year(7 months).
I don't own this eft, but it seems to be the best single, long run proxy for the U.S. equities market.
Morganovich, the S&P 500 has more than tripled over the last 18 years. Yes, I know, you think inflation is underreported and that all of that gain was inflation, but I don't think the market is a great indicator of all the real progress recently anyway. The markets overshot during the dot.com and housing booms, so the 12-year record just reflects the correction to those periods of "irrational exuberance." :) However, we see a whole host of online activity that is just starting to be monetized, everything from social networking to podcasting to every webapp under the sun, and once they get those revenue models figured out, these online services will no doubt drive the next boom. My point is that the markets are greatly understating how much progress has been made in the last two decades because we're in an intermediate phase, where we already have a bunch of new tech but we just don't know how to properly commercialize it yet. Once that exploratory discovery phase is done, all the tech that we're already using, often for free, will be driving real businesses and the economy soon enough.
sprewell-
the S+P performed well in the 90's. no one is contesting that.
however, it has been performing terribly for an extended period. we have not seen stagnation like this since the great depression.
the S+P today is 1393. it was at that same nominal level in 1999.
if we assume 3% cpi (which i think is much too low) then in real terms, the S+P is 47% below 1999. to get to real break even you'd need to go all the way back to 1996. that's a helluva long time to have no real gains.
if we use 6% inflation instead, then there has been no real gain for 20 years.
your argument about markets greatly underestimating progress sounds very questionable to me. markets are VERY good at figuring that out in the long run. i make a living betting i can beat the market in individual microcaps, but i sure would not want to try it on say, S+P cash contracts.
if you think you are smarter, hey, go get rich, but to make a claim the market does not understand technology and internet sounds pretty risible to me.
the market has not "missed a tech boom". if the tech is so useful, it would have generated revenues, earnings, and driven the market.
these notions promulgated by lots of newsletter pundits etc that productivity is being underestimated and that tech is adding tons of value that is not being accounted for just ring absurdly false to me. the measure of productivity gains and added value is really easy to measure: you look at production and value created. tech that does not do those things is called a toy.
the fact is that in real terms, the S+P has been flat for at least 15-16 years (and quite possibly for 20). such a thing seems utterly implausible if economic growth is really so strong, especially given how loose money has been.
i think the reality is that since the greenspan era of loose money and under-reported inflation, real growth has mostly stopped.
i think that 2001-12 has been a lost decade for the us and that were had no real growth during that period but, rather, mistook inflation for growth.
the equity markets seem to bear that out.
buddy-
"morgan, the fund had lost 20.81% by the end of its inception year(7 months). "
i know.
but imagine what that loss would have been had it existed in 2000 and 2001.
it would have been down huge by the time 2002 began.
2000 and 2001 were bad years.
“No one has ever become rich by being a long-term bear on the fortunes of the United States, and I doubt that anyone will do so in the future. This is still the most flexible and innovative economy in the world.”
That used to be true for those who did not use leverage, need to cash out within a certain amount of time, and ignored the effect of taxes and the fall in purchasing power. But let us note that the opportunities are far fewer today as we see an explosion in the size of government, increases in taxes, and a huge explosion in liquidity that has cased purchasing power to fall considerably.
Making predictions based on conditions that are no longer in place is a good way to go broke. Think of it this way. If I put a gun to your head and forced you to put your money in ONE asset class today would you choose the S&P 500, a ten year treasury, cash, oil, copper, or gold?
See the problem?
morganovich, I think you misunderstand my point. I say that the markets are underestimating very real progress precisely because the measurable portion of that progress has mostly been about squeezing out efficiencies so far, but not about creating whole new markets with sizable revenue, yet. Of course, the big exception is mobile, which Apple has ridden to become the largest company in the world. It's not that "the market does not understand technology and internet," by which you presumably mean that analysts don't know where growth is happening, but that the technologists don't know how to make money yet off online services (If you're talking about investors not knowing where to invest, then yes, they're pretty dumb: look at the returns of VC over the last decade, they couldn't even beat the S&P 500 you're trashing ;) ). The market has "missed a tech boom" of sorts already, because the tech just hasn't generated revenues yet: that's my point. But that's how the market works, it can only count the money: it's not supposed to predict the future or measure stuff like "progress." If you think productivity gains are overrated, to what do you attribute graphs like this? Sure, part of it is just the lower-value stuff being offshored- though even that is partially driven by technology, whether computers driving logistics or better shipping tech- but most of those gains are obviously driven directly by tech.
Manufacturing productivity in the linked graph is not a toy, nor would I call the iPhone a toy. As for the stuff that doesn't make money yet, a blogger who breaks important stories is not "toying around" just because he hasn't found a revenue model yet. Android isn't a toy, just because it makes little money so far. I'm not saying "economic growth is really so strong," only that economic growth is lagging real technical progress right now. It will catch up, but my only point was that the market is not a good indicator of overall progress at the moment. As for why the markets appear to have stalled, I'd say part of it was just the natural drop off after the recent overshoots on the way up and part of it is just the natural gestation period while we figure out this transition to the information economy.
The market has "missed a tech boom" of sorts already, because the tech just hasn't generated revenues yet: that's my point.
But that is the point. Pets.com could not generate any revenues but was given a ridiculous market cap because the Fed flooded the system with so much money it had to go somewhere.
But that's how the market works, it can only count the money: it's not supposed to predict the future or measure stuff like "progress."
Stuff like progress? Was it progress when Clinton/Grennspan/Bush conspired to get poor people with lousy credit histories to buy their own homes? Is it progress to have a derivative market that runs into a quadrillion dollars? Is it a true market when it is distorted and manipulated by central banks?
If you think productivity gains are overrated, to what do you attribute graphs like this?
Get rid of low value added jobs, replace labour with machinery and you get a chart just like that.
Sure, part of it is just the lower-value stuff being offshored- though even that is partially driven by technology, whether computers driving logistics or better shipping tech- but most of those gains are obviously driven directly by tech.
They are driven by reducing the numerator, which is labour. It is driven by the way you count the data. For example, Apple is not a manufacturing company but its products are counted in many of the categories that are being reported. On the whole aggregates may be good for arguing but are not as useful as you may think.
past performance does not guarantee future returns
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