200 year performance of the PP assets (Real Returns)

[ozzy]

Hi all,

  I came accross this chart and thought I'd share it.  Its shows the 200 year performance of the PP assets adjusted for inflation (Real Returns).  To me, the scariest part is the declining dollar.

[MediumTex]

All modern central banks have inflation targets they try to hit, and they are all north of 0%, which means that all modern currencies are in the process of systematic devaluation.

When you see a central bank fail in its efforts at devaluation, such as Japan's, you see how much damage it can do to a system that isn't built to withstand extended periods of 0% or less inflation.

[Pointedstick]

Be wary of taking the tacit implications behind these kinds of charts at face value. Problem #1 is that gold was not a freely tradable commodity during most of those 200 years; it was held fixed by governments and central banks to a certain quantity of dollars. So gold's return before 1972 is meaningless; it has no return. It was basically tracking the dollar, and you'll notice that as soon as this correlation started to seriously break down in the early '70s, the gold standard ended and we moved to the present era of floating currencies and gold being freely tradable as just another investment product.

Problem #2 is that almost nobody just holds substantial amounts of dollars in cash; they keep their money for the most part in interest-bearing bank accounts, CDs, and short-term bonds, which would be represented by "Bills". So people who  realized that average 2.7% return by putting their money in those kinds of instruments (i.e. nearly all of them) were not wiped out with their purchasing power destroyed the way the value of a dollar falling from $1 to five pennies might imply. If this had happened, the USA would be some kind of barren wasteland, an extrapolation of the Great Depression without end, rather than the wealthiest, most prosperous, most powerful, most culturally dominant nation on Earth.

[Pointedstick]

And of course problem #3 is survivorship bias among stocks. Before the invention and proliferation of stock mutual funds (in the 1920s I believe), you would have to own individual stocks. Most of the companies you could buy in the 1920s are gone today. Here's what the Dow Jones looked like in 1925:

American Can Company General Electric Company United States Realty and Construction Company
American Car and Foundry Company General Motors Corporation United States Rubber Company
American Locomotive Company International Harvester Company United States Steel Corporation
American Smelting & Refining Company Kennecott Mines Company  Western Union Company
The American Sugar Refining Company Mack Trucks, Inc. Westinghouse Electric Corporation
American Telephone and Telegraph Company Sears Roebuck & Company F. W. Woolworth Company
American Tobacco Company (B shares)

How many of those companies still exist today? What kind of return do you think you would have realized if you had put your money into stocks of all of those companies?

[MediumTex]

It's like central banks wanted to give currencies mortality, which can't happen when all of the currency is backed by gold.

When you create assumptions regarding the mortality of a currency's value, it creates urgency to use it productively while you can.

It's not unlike the way we approach time management.  The fact that our time is finite is what drives us to use it wisely.

The central bank orderly devaluation game isn't as dumb as it sounds.

[craigr]

I discuss this chart here in terms of gold:

https://web.archive.org/web/20160324133 ... run-chart/

PS also mentions survivorship bias which this chart has in spades. I don't know how many companies fro 1802 are around today, but I suspect not many.

200 years is a long time and a lot of things can go wrong. Most countries on the planet today don't have a government older than about 75 years. The U.S. had some close calls as well, the Civil War being a big one. Investors that extrapolate U.S. stock performance forward without hiccup are just thumbing their nose at history.

[MediumTex]

It's like central banks wanted to give currencies mortality, which can't happen when all of the currency is backed by gold.

When you create assumptions regarding the mortality of a currency's value, it creates urgency to use it productively while you can.

It's not unlike the way we approach time management.  The fact that our time is finite is what drives us to use it wisely.

The central bank orderly devaluation game isn't as dumb as it sounds.

I'm sorry, but I don't see how stealing people's productivity by printing money is helpful to those people whose productivity is being stolen. If they wanted that to happen, they could just set fire to some of what they produce. For some reason, people don't usually do that.

I didn't say it was helpful.  I just said that it's a known risk, and thus one that should be baked into one's investment strategy, as it is with the PP.

[Pointedstick]

I didn't say it was helpful.  I just said that it's a known risk, and thus one that should be baked into one's investment strategy, as it is with the PP.

It's a known risk that's especially frustrating and worrisome during ZIRP, because it eliminates people's ability to easily prevent their money from being devalued in the manner that Libertarians call attention to. My point that historically people have been able to sidestep the devaluation by putting their money in interest-bearing cash-like instruments like bank accounts and short-term CDs is no longer true. If the dollar is going down by 2% a year and your bank account pays out 0%, then you really are losing your purchasing power.

I understand that the Fed is trying to get people to spend, but in the aftermath of a leveraged, debt-ridden bubble, they just aren't going to want to. It's just pushing on a string, with the effect of either destroying purchasing power or pushing people into risky investments they don't like and will bail out of as soon as they decline or interest rates rise. IMHO. A debt jubilee would probably have the biggest pro-spending effect.

[ozzy]

Thanks for the feedback guys.

I'm sure the chart's purpose is to illustrate that in the VERY long run, stocks are the most profitable.  But if you examine the stock graph closely, I see some very long stretches of bear markets, some lasting over 20 years.

So, for stock-heavy investors, returns are dependent on WHEN they starting investing (during a bull or bear market).  Whereas those who own all the assets, and rebalance annually, aren't gambling on catching a bull stock market.

[Kbg]

The other thing folks don't realize is that, assuming a decent legal system, stock returns normally follow GDP over the long haul. It likely will be tough to see past gains in the US stock market. But one never knows what game changer technologies lie ahead that can change everything.

[clacy]

The other thing folks don't realize is that, assuming a decent legal system, stock returns normally follow GDP over the long haul. It likely will be tough to see past gains in the US stock market. But one never knows what game changer technologies lie ahead that can change everything.

I think globalization can be somewhat of a game changer for that.  Consider 1/3rd of all sales from the S&P came from overseas.  GDP will likely be strong in EM's for years to come.  There is still a lot of room for technology in many parts of the world, not even taking into account future tech advancements. The US will likely lead in that area and capitalize on GDP in developing countries for the foreseeable future.

[MachineGhost]

I'm sorry, but I don't see how stealing people's productivity by printing money is helpful to those people whose productivity is being stolen. If they wanted that to happen, they could just set fire to some of what they produce. For some reason, people don't usually do that.

Printing money monetizes people's productivity, otherwise how would you pay them money in exchange for their productivity in the first place???  Think about it.  The stolen bit is nonsense unless you're talking about inflation.  But that's nothing new, as all forms of money throughout history have always inflated away.  It doesn't require a government or central bank; the people can do it themselves.  And which is why you exchange money for investments.  We don't even hold money in the PP so I don't know how much more clearer it can possible get for you.

And as Japan's sore experiences shows, we actually need inflation just for behaviorial bias reasons, otherwise confidence grinds to a halt.  People just aren't hardwired to deal with real values (down) instead of nominal (up).  Even under a gold standard there was much inflation and deflation.  The myth of a stable form of money is just exactly that.