Best reason why the market will always go up?

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HomerJ
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Re: Best reason why the market will always go up?

Post by HomerJ » Tue Mar 01, 2016 11:09 pm

I don't even know if MORE population growth is necessary for us on this board to prosper.

60% of the people on the planet are under 40. There's a billion Indians and Chinese striving right now to join the middle class... I see a lot of growth over the next 30 years.

Human work turns into productivity which turns into growth and profits.

But yes, there are no guarantee of anything. The market may indeed may not continue to "always go up".

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Re: Best reason why the market will always go up?

Post by dunscap » Wed Mar 02, 2016 1:05 am

magicrat wrote:In my view, the investment thesis for global equities is twofold: 1) The population will continue to increase, and 2) Businesses will continue to create new products and services that solve problems that others are willing to pay for.

#1 will happen for the foreseeable future, barring some catastrophe (which could happen), and is not that interesting to debate with friends.

Sorry, that's your thesis (and others)? Actually the fairly uncontroversial consensus among demographers is that world population is likely to peak in this century, and almost certainly in the next. In the earliest scenarios this could happen as soon as the 2040s, which is well within current workers investment horizons. While for the time being world population is increasing in absolute numbers faster than ever, the population growth rate peaked in the 1960s (at >2% annually) and has been steadily decreasing ever since that inflection point (closer to 1% today). The foot came off the gas in the 1960s and the brakes will soon be applied. In coming decades we can expect to see population growth actually slow, and ultimately it will peak. Do you have a theory that works after that point?

This isn't just a hypothetical. 20 countries already have negative or zero population growth: Ukraine, Russia, Belarus, Bulgaria, Latvia, Lithuania, Hungary, Romania, Estonia, Moldova, Croatia, Germany, Czech, Japan, Poland, Slovakia, Austria, Italy, Slovenia, Greece. These are real economies that are dealing with decreasing population, today. Notice, this includes Germany and Japan, the #3 and #4 world economies, #1 and #2 in Europe and Asia.

The situation is actually more dramatic than this, because of net migration from high-growth to low-growth countries (e.g., notably, Syria to Germany in the past year). Half of the world's population already lives in countries with sub-replacement fertility, and the highest fertility nations in the growing half are frontier markets and least developed countries. Even the USA, which still has a healthy population growth rate with immigration, has dropped well below replacement total fertility rate of 2.1 to 1.9.

This is not to make any value judgment (there's an ecological argument that current population is already far beyond sustainable, although technological adaptation makes this a moving target) or opinion regarding the exact timing of peak population or its effects on the economy. This is just to say that it is a fact that peak population is likely a foreseeable reality for the youngest generations now already living, and if we want an a robust economic theory it has to deal not only with the dramatic effects of automation but also with the premise of peak population and the interruption of human population growth that has accompanied the entire history of capitalism.

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in_reality
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Re: Best reason why the market will always go up?

Post by in_reality » Wed Mar 02, 2016 3:06 am

bonn wrote:As a thought experiment, a company could reinvest all available funds so that total expenses equal revenues, yielding a profit of 0


I am not an accountant but I believe that company would be taxed on retained earnings which actually is their profit. Sure there are many ways of generating cash to pay a dividend, but ultimately if the company is not profitable then it will not be able to maintain the dividends.

Enron had a high stock price but no profits. What happened? Collapse. If the opposite were true (high profits - low stock price), it'd be able to pay a dividend just fine. The ability to pay a dividend depends ultimately on profitability.

If people expect Apple to be profitable the price of the stock will rise. This does not mean then that Apple is more able to pay out a dividend. If only that were true...but it isn't. Apple then must actually have real earnings. Sort term they have any number of options to finance a dividend, but long term they need to be profitable.

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Re: Best reason why the market will always go up?

Post by Valuethinker » Wed Mar 02, 2016 3:41 am

TomCat96 wrote:
neomutiny06 wrote:Hi all. In major conversations with friends. What is the best reason you have heard for why the global stock market will always go up?



I long have thought about this question. I agree that the most of fundamental level, population growth is the driving force of guaranteeing economies will grow. In fact, I would argue that modern economies with shrinking populations will have trouble growing their markets. See Japan.

Fundamentally, population growth as a driver of economic growth is obvious in some ways.


OK a bit of history here.

Until about 1700 population growth did not lead to a permanent improvement in living standards/ economic growth. There was always a scarcity crisis and a collapse in population and/ or living standards. That had been true, everywhere, as long as human history. It's easiest to see in Chinese history but it is also true of the meso-American populations of the New World, and of Europe.

About 1700, in England, the pattern broke. We are still in the upcycle from what became the Scientific and Industrial Revolutions.

HOWEVER it's not sure that we have broken the pattern for forever. All previous civilizations in history have fallen-- by definition. There are a number of natural limits which our technology allows us to push, and apparently surmount, but are still out there:

- resource use - in particular phosphorus. Getting new phosphorus deposits out of seawater, or outer space, say, will be a trick requiring perhaps 100x the energy we currently spend on it. Note c. 70% of world phosphorus supplies come from one source.

- pollution - we may have reached "peak pollution" for the 1 billion of us or so who live in developed countries. That's emphatically not the case for the other 6 billion, who will be at least 8 billion.

- soil exhaustion & habitat destruction - we don't know what say 1 century of the Green Revolution is going to look like in terms of soil depletion-- we are not able to fully replace what we take from the soil. Also the continued loss of species is upsetting the chain of life, and we don't really know what effects that will have. The 6th Great Extinction is upon us, and since we are also the top predator species in that chain, we don't know which lower rungs we can do without (watch fish and marine life, because that's the one which know the least about, and which is proximately threatened by rising standards of living; I've seen estimates that, for example, we've lost 90% of all sharks).

- disease. This is probably the biggest single short term risk. Antibiotics have almost lost their effectiveness, and that means the last 80 years of medical progress is about to be stopped, dead. there are some promising developments in AB tailored to specific diseases (so the general immunity problem does not occur) but we are at a point of maximum danger. And zoonautic viruses are out there-- it's likely the next Spanish flu will come from an animal being intensively farmed in South China. That was 1-2% of the world killed in 1919-20, the number could be bigger. They didn't have international airlines: remember city 2 for SARS after Hong Kong was Toronto. If we look at the paralysis Ebola or Zika has caused, then scale that by 100m or 1 billion cases.

- interconnectedness - consider the late Roman Empire. The collapse of trade meant Britons had worse pottery than they had had *before* the Roman invasion c. 50 AD. Regional specialization of manufacture meant that when trade routes went down, so did the standard of living. Even the US is no longer industrially self sufficient. And in addition we have the Internet-- we are almost to the point where society could not function if a cyberattack (or Electromagnetic Pulse weapons) took down the internet for a significant period of time. By the time we have self-driving cars, we really will be totally dependent on the internet.

Suppose we have ZERO new technological development. How does the economy grow then? One way to add to the value of the assets of your nation is to build more houses. Certainly buildings and homes are useful enough to be considered as part of the GDP. The higher population will then come to demand these houses and your own, and your economy will grow. It makes sense that the housing market can grow based on nothing but population growth alone.


Not quite. Building the houses and the commercial buildings counts as GDP. GDP is a flow, not a stock. So the value of previously built homes doesn't factor into GDP. Westminster Cathedral is only in British GDP via spending by tourists, spending on maintenance etc.

If you look into the big financial crashes, they all feature overbuilding: south west USA pre S&L Crash; New England early 90s; UK early 90s; SE Asia before the 1997 crash; USA residential to 2007; Scandinavia early 2000s; China now.

Americans are almost certainly overhoused in aggregate. Families of 4 don't need 3000+ square feet. Of course on a geographic level that's not true of New York or San Francisco (there is not enough housing to allow all the people who could move there and work more productively, to move there) and it is very unequally spread (20k square foot homes; 5000 square foot McMansions).

There is of course too much retail space in North America: malls are *closing*. Amazon and the like are taking market share.

There is an implicit value to housing services and building services in GDP (greater ability to produce goods and services), but it's not likely to be huge once everyone has a roof over their head that has heating and air conditioning (depending on climate) and running water, light etc.

So your number #1 reason as you asked is population growth.


Children are good for GDP because parents and society spend a lot of money on them until they are at least 18. Retired people are good because society spends so much on medical care for them. However what really matters is your "demographic dividend"-- see Ireland in the last 30 years. The birth rate drops (early 70s) and so the dependency ratio (worker to nonworker) rises sharply. China the same thing.

Only Africa and the Middle East are yet to be in a position of demographic dividend. Even India is experiencing one (Total Fertility Ratio per woman was 6 in 1970, is now c. 3.1).

Other reasons include the fruits of the labor of the existing population. Ideally, the working population produces value. If I build a farm, I will now have additional resources I did not have before. If I own a corporation called farmCORP whose only asset was said farm, then if you could buy the stock of farmCORP, the equity you own from said stock will be greater the longer people till the land. (i.e., the more time has passed)

In a capitalist society, you would hope that people operating in the rational self interest would only till the land if it produced value for them. So too is it with all corporations in the market, not just my hypothetical farmCORP. If people will make individual decisions to generate value for themselves, then over time, they will generate value for the corporations they work for at large.


But make no mistake, there is no guarantee of the above occurring naturally. Alan Greenspan himself said in his memoir that for nations to develop under this economy at least two things are needed: strong property rights and a stable government.


there's a "secret sauce" here we don't have a handle on. Detroit has strong property rights and a stable government. So necessary conditions, but not sufficient conditions.

People cannot make decisions to produce value for themselves if they are dying in the midst of war, killing others (destroying value), or can have the value they procure for themselves readily confiscated because of lack of strong property rights.


You have to worry a lot about externalities. Left to themselves, humans will tend to destroy the environment in which they are placed, which is followed by a collapse of food production and eventually abandonment. On the way there will be war, chaos, political collapse. See the cycles of Chinese history.

You need some quite strong social institutions and norms to stop that. It's not a given that they will occur.

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Re: Best reason why the market will always go up?

Post by Valuethinker » Wed Mar 02, 2016 3:44 am

dunscap wrote:
This is not to make any value judgment (there's an ecological argument that current population is already far beyond sustainable, although technological adaptation makes this a moving target) or opinion regarding the exact timing of peak population or its effects on the economy. This is just to say that it is a fact that peak population is likely a foreseeable reality for the youngest generations now already living, and if we want an a robust economic theory it has to deal not only with the dramatic effects of automation but also with the premise of peak population and the interruption of human population growth that has accompanied the entire history of capitalism.


I entirely agree with you that if we reach "peak humans" it's an interesting challenge. It will come to us in the developed world first.

The main flaw in a lot of arguments in this thread is the presumption that fast growth and technology change benefits corporate profits. It tends not to: technology change erodes barriers to entry and competitive advantage.

Hard to find a greater secular growth story than the airline. From the first commercial flight in an open cockpit in 1929 to now, the airline industry must have grown by something like 7% pa every year, war, oil crisis, depression or not.

Profitability? As Warren Buffett put it "the Wright Brothers should have been strangled in their crib".

Consider the opposite: tobacco. A "dying" industry at least in the First World. But a huge moneyspinner for investors.

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Re: Best reason why the market will always go up?

Post by Valuethinker » Wed Mar 02, 2016 6:42 am

HomerJ wrote:I don't even know if MORE population growth is necessary for us on this board to prosper.

60% of the people on the planet are under 40. There's a billion Indians and Chinese striving right now to join the middle class... I see a lot of growth over the next 30 years.

Human work turns into productivity which turns into growth and profits.

But yes, there are no guarantee of anything. The market may indeed may not continue to "always go up".


The world economy will almost certainly continue to grow, barring major disasters like plague or super war or environmental catastrophe.

There is a "middle income trap" around GDP per capita of $10k pa, where countries then find it difficult to keep growing at abov e say population growth + 2% real.

China is on the brink of that and with unfavourable demographics. India nowhere near.

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Re: Best reason why the market will always go up?

Post by Danzangdc » Wed Mar 02, 2016 2:52 pm

Stock prices are the result of supply and demand. If more dollars are chasing after the existing number of publicly traded shares, prices go up. The opposite, and prices go down. The history of the U.S. stock market has coincided with a period of pretty consistent economic growth, meaning there have been more dollars to invest and more people able to invest. The stock market also has gained great legitimacy, to the point where every person with disposable income sees buying stocks as the right and prudent thing to do with extra money. But there are lots of reasons why demand for stocks could go down over the long run. Some cataclysmic (plenty of great societies, currencies, etc. have failed or gone into long declines; so has the world as a whole over long periods). Or the markets could come to be seen as illegitimate. Or taxes on stock earnings could increase, devauling stocks. Or transaction taxes could reduce liquidity. Or the balance of capital distribution could tip too far away from the average joe, limiting the ability of people to invest. War. Plague. Famine. Drought. Aliens. Etc. Etc.

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Re: Best reason why the market will always go up?

Post by Clive » Thu Mar 03, 2016 1:07 am

If stocks earn 6% real and someone used cryogenics to sleep for a thousand years then even with a tiny original (accumulation/dividends reinvested) investment they'd awaken to own the world. Inflation, taxation or even outright confiscation are means to break that. The risk premium reflects the risk.

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Re: Best reason why the market will always go up?

Post by trueblueky » Thu Mar 03, 2016 10:37 am

If population growth were the sole cause of world GDP growth, wouldn't GDP per person stay the same?
Arent productivity increases necessary to increase GDP per person?

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Re: Best reason why the market will always go up?

Post by Alex Frakt » Thu Mar 03, 2016 12:00 pm

trueblueky wrote:If population growth were the sole cause of world GDP growth, wouldn't GDP per person stay the same?
Arent productivity increases necessary to increase GDP per person?

Yes. This thread has actually morphed from a question about markets to economies.

The answer to the original question is fairly simple. Unless people are completely irrational, in aggregate and over the long term, people will buy a business (i.e., stock) or make a loan to a business or government (i.e., bond) at a price that allows them to receive a reasonable return, whether through price appreciation or dividend or interest payments. This return will be reflected in market indices, thus markets will always go up. The only thing that will cause this to fail is if something occurs that invalidates the original assumptions of the buyer or lender. Examples include a long term drop in productivity (asteroid strike results in worldwide infrastructure destruction) or consumer demand (everyone decides to join a Franciscan or Buddhist monastery) or uncompensated takeover of market participants (alien invasion).

OTOH, the important issue when discussing economic growth is per capita GDP if you are a classical economist and perhaps the average income of the lowest quintile of earners if you are a humanitarian. By definition, growth in the former (per capita GDP) requires productivity increases. Growth in the latter can be influenced in multiple ways, all of which are off-topic on this site.

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Re: Best reason why the market will always go up?

Post by rgs92 » Thu Mar 03, 2016 12:12 pm

My view is simple. If I need to buy food 20 years from now, a collection of food stocks will track the price of food. This applies to everything I buy.
Of course, it works both ways, say with energy stocks, but the price of gasoline and my heating/electric bill compensate for this, so it's only fair.
This is what investing is for, to buy things in the future.

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Re: Best reason why the market will always go up?

Post by ArmchairArchitect » Thu Mar 03, 2016 12:42 pm

My opinion:

The market will always go up nominally due to inflation. The market going up in real (above inflation) terms is due to the average growth of corporate profits being above the inflation rate. Stock price is based ultimately on profits, so if the profit growth rate exceeds inflation, then so will the stock price (I'm talking about a macro view...there will always be exceptions to the rule).

If you are looking for a deeper answer than that, it is built into the DNA for companies to seek profit growth rather than be satisfied with flatline profits, therefore the motivation to create new products/services will always be there in order to increase those profits.

rgs92
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Re: Best reason why the market will always go up?

Post by rgs92 » Sun Mar 06, 2016 5:26 pm

'good one Armchair. That sounds very smart to me.

Clive
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Re: Best reason why the market will always go up?

Post by Clive » Sun Mar 06, 2016 7:21 pm

ArmchairArchitect wrote:My opinion:

The market will always go up nominally due to inflation. The market going up in real (above inflation) terms is due to the average growth of corporate profits being above the inflation rate. Stock price is based ultimately on profits, so if the profit growth rate exceeds inflation, then so will the stock price (I'm talking about a macro view...there will always be exceptions to the rule).

If you are looking for a deeper answer than that, it is built into the DNA for companies to seek profit growth rather than be satisfied with flatline profits, therefore the motivation to create new products/services will always be there in order to increase those profits.

Between 1890 and 1941 the change in S&P Composite index and Gold price were near-as the same. Continue on up to 1981 and again the same. As of Feb 2016 if the price of gold was 20% higher and S&P 20% lower they'd again have been the same.

Generally gold is seen as a volatile inflation hedge and the price of gold has somewhat compared to the price of stocks. If both have exceeded inflation (CPI) then CPI is perhaps a under-stated figure ... and indeed if you compare CPI to house price inflation CPI also lagged. A possible reason why CPI might have lagged each of house price, stock price and gold inflation is due to technology - robots running 24/7 replacing factories full of workers and churning out products/goods for relatively lower prices.

A difference between gold and stocks (or home) is its a non productive asset whereas stocks (home/land) utilise the asset productively - that produces a dividend (or in the case of a home - imputed rent benefit). Gold however can be productive if traded. As its price is very volatile compared to stocks then there are opportunities to add stock/reduce gold when the stock purchase power of gold is strong, add gold/reduce stock when the stock purchase power of gold is strong. Such trading can be achieved as simply as assigning target weightings and periodically rebalancing back to target weightings when sizable deviation have become apparent. A three way split of land (home), stocks, gold with imputed rent/dividends included (total returns) periodically rebalanced longer term yielded a 1% lower annualised than 100% stock. Around a third of that might be attributed to the recent divergence (reduce stock price by 20%, increase gold price by 20% and the difference narrows to 0.6%). If stock dividends endured a 15% tax and as gold pays no dividends and is therefore more tax efficient, and the gap narrows further, potentially to being no difference.

As unworked land might produce just a inflation pacing return (increase in land prices over time), so unworked gold yields no dividend. Worked (traded) gold can yield a dividend, that can compare to stock dividends (and/or imputed rent and/or worked land). Gold's 'dividend' comes via its price volatility/correlation. Some investors focus on stock dividends, others on growth, yet other focus on volatility (Options Traders). Price appreciation, Dividend/income, Volatility can all produce similar broad rewards. If that were not the case then everyone would focus upon the most productive choice alone.

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Re: Best reason why the market will always go up?

Post by Valuethinker » Mon Mar 07, 2016 3:59 am

trueblueky wrote:If population growth were the sole cause of world GDP growth, wouldn't GDP per person stay the same?
Arent productivity increases necessary to increase GDP per person?


Basically, yes. The other factor is increases/ decreases in the participation ratio:

- if a mother goes to work and hires a childminder that increases GDP

- if a person delays retirement and keeps working that increases GDP

finite_difference
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Re: Best reason why the market will always go up?

Post by finite_difference » Mon Mar 07, 2016 4:37 pm

Because GDP is increasing.
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Re: Best reason why the market will always go up?

Post by spartan » Mon Mar 07, 2016 8:10 pm

I would look to the definition of what a stock is. A business can use several ways to raise capital to leverage the production of something that people need and will pay for. Bonds, Preferred Stock, and Common stock. All of these are types of loans to a business that pay the investor congruent with the risk of the investment. A bond pays a coupon and a stock pays an equity risk premium. As long as people have great business idea's and good people want to help them increase the production and are willing to shoulder risk, then the market should go up. The whole boglehead concept is to safely harvest this equity risk premium from the entire market.

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