Sometimes this time really is different

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backpacker
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Sometimes this time really is different

Post by backpacker » Tue Aug 30, 2016 1:14 pm

We investors often assume that the future will be quite a bit like the past, at least if the past includes a long enough period of time. What are your favorite examples of this time really being different? When has the behavior of markets switched and never switched back?

I was thinking about this question after looking at a chart of US inflation. Before 1950, there were wild swings in the value of the dollar with large bouts of deflation. After 1950, the the swings become smaller and deflation essentially disappears.

Image

http://www.multpl.com/inflation/
Last edited by backpacker on Tue Aug 30, 2016 1:18 pm, edited 1 time in total.

letsgobobby
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Re: Sometimes this time really is different

Post by letsgobobby » Tue Aug 30, 2016 1:17 pm

1989 the Nikkei really was outlandishly priced and it was actionable.

1999 really was a stock market bubble and it was actionable.

2006 really was a real estate and credit bubble and it was actionable.

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Re: Sometimes this time really is different

Post by KnowNth » Tue Aug 30, 2016 1:35 pm

I have the same question as well.

The bogleheads motto is always "stay the course", but what if the course is wrong?

For example, the "shrinking value premium" post a few days ago was very interesting. Another example, I would think developed countries aging population issue has to affect market somehow, should we prepare "this time it is really different"?


backpacker wrote:We investors often assume that the future will be quite a bit like the past, at least if the past includes a long enough period of time. What are your favorite examples of this time really being different? When has the behavior of markets switched and never switched back?

I was thinking about this question after looking at a chart of US inflation. Before 1950, there were wild swings in the value of the dollar with large bouts of deflation. After 1950, the the swings become smaller and deflation essentially disappears.

Image

http://www.multpl.com/inflation/

asif408
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Re: Sometimes this time really is different

Post by asif408 » Tue Aug 30, 2016 2:04 pm

I think in one of Bill Bernstein's books he mentioned that at one time you could say that if stock yields were lower than bonds yield that spelled doom for future stock returns and bonds always outperformed stocks in subsequent periods. Now that is no longer the case. I don't remember the exact year or time frame that change occurred, so maybe someone else can fill in the pieces.

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Re: Sometimes this time really is different

Post by evarrr » Tue Aug 30, 2016 2:47 pm

KnowNth wrote: The bogleheads motto is always "stay the course", but what if the course is wrong?
I think about this too. Stock & bond market returns in part depend on prevailing monetary policy (creation of fed, interest rates, QE, etc.) and Washington sentiment (pushing affordable housing, global trade, war, etc.). However, the more I learn about these policies, the more I'm convinced that they're just winging it (with scholarly intentions at least on the fed side). I think every time it pretty much IS different. Our history of markets is pretty short in the grand scheme. I think it's foolish to expect that the past 100 years of market history will repeat.... although it might :wink: (BTW... the book Lords of Finance is very good if you're interested in learning about how the US came to be great economic power.)

I don't think there is a better option except staying the course since we can't predict the future. All we have is evidence from the past to guide us in making prudent decisions.

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Re: Sometimes this time really is different

Post by Tigermoose » Tue Aug 30, 2016 3:04 pm

Although the tools and theories we have at our disposal change over time, human nature has not significantly changed. Fear, greed, and the mass delusions of crowds and society are an ever-present condition of mankind. Fun exercise: what are the mass delusions we currently embrace that will someday be seen as manias?
Institutions matter

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Re: Sometimes this time really is different

Post by am » Tue Aug 30, 2016 3:30 pm

I wonder what the effect of the Internet, ease of investing, index funds and low expenses be when we look back? These are all recent changes. Would the last century look the same if we had these in place? Would we still have so called premiums if everybody had easy access to small value? What if everybody had access to 401ks and used them for retirement like we do now? I wonder if these factors will lead to lower returns?

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Re: Sometimes this time really is different

Post by JoMoney » Tue Aug 30, 2016 3:42 pm

asif408 wrote:I think in one of Bill Bernstein's books he mentioned that at one time you could say that if stock yields were lower than bonds yield that spelled doom for future stock returns and bonds always outperformed stocks in subsequent periods. Now that is no longer the case. I don't remember the exact year or time frame that change occurred, so maybe someone else can fill in the pieces.
Jeremy Siegel has a great write up on this in his book "Stocks For the Long Run", the section is titled: An Evil Omen Returns
...In the summer of 1958, an event of great significance took place for those who followed long-standing indicators of stock market value. For the first time in history, the interest rate on long-term government bonds exceeded the dividend yield on common stocks.
Business Week noted this event in an August 1958 article entitled "An Evil Omen Returns," warning investors that when yields on stocks approached those on bonds, a major market decline was in the offing. ...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Sometimes this time really is different

Post by ANC » Tue Aug 30, 2016 4:22 pm

Many economists and economic historians attribute much of the erratic behavior before the mid 30s to the gold standard.

Although there's always talk about returning to the gold standard on the one hand and the emergence of bitcoin, etc., on the other hand, I do not see a change in the currency regime in the offing. Of course, this projection could be wrong.

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Re: Sometimes this time really is different

Post by boglerdude » Tue Aug 30, 2016 7:02 pm

letsgobobby wrote:1999 really was a stock market bubble and it was actionable.
2006 really was a real estate and credit bubble and it was actionable.
Howso. Gut feeling?

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Past performance does not guarantee future returns

Post by bligh » Tue Aug 30, 2016 7:05 pm

[Thread merged into here, see below. --admin LadyGeek]

Hi all,

As I had been reading up on, and migrating to the boglehead philosophy of investing I had a nagging question in the back of my head. I have decided to put it here in a thread and see if someone who has thought about this, can answer it.

In general, it feels the boglehead philosophy discourages "performance chasing" and investing in sectors, or markets that have had a huge run up (eg. Healthcare, REITs, Emerging markets, Small caps, etc.) . If you are overweighting a sector, you do it because you think it will perform great in the long run over a period of decades. Makes sense.

However, in previous posts I have seen that where people have expressed "jitters" about PE ratios and current valuations, past performance of the US market is brought up to assuage any fears. Long term time horizons are mentioned. This all makes sense if you have an optimistic view of the US and World economies? What if you hold a pessimistic long term view? To be clear, when I say long term, I mean decades.. I am not worried about this current bull market and I am not trying to market time it. I am fine with losing half the value when the market crashes, if I believe that a bull market will follow it.

Between stagnant productivity, huge debt piles, enormous income inequality, demographic shifts (declines?) and the advent of negative interest rates .. could it not be a possibility that this huge run up in the stock market in the last century was a one time thing? Could Japan not be the pattern that the US and the rest of the world follows over the next few decades? Even if longterm sustainable bull markets do return, they could start 50 years from now when it is far too late for me to benefit from it.

Is the consensus then, you are either optimistic about the US / World economies and look forward to higher returns via the stock market.. or pessimistic and hold a much higher percentage in bonds and deal with the much lower returns. But with bond yields the way they are.. what would a SWR look like? 1%?

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Re: Sometimes this time really is different

Post by Phineas J. Whoopee » Tue Aug 30, 2016 7:08 pm

ANC wrote:Many economists and economic historians attribute much of the erratic behavior before the mid 30s to the gold standard.

Although there's always talk about returning to the gold standard on the one hand and the emergence of bitcoin, etc., on the other hand, I do not see a change in the currency regime in the offing. Of course, this projection could be wrong.
By my count, of the 60 years during which the US was unambiguously on the gold standard, 1873 - 1933 (documentation is in the linked post), at least 22 of them saw serious financial instability.
PJW

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Re: Sometimes this time really is different

Post by letsgobobby » Tue Aug 30, 2016 7:18 pm

boglerdude wrote:
letsgobobby wrote:1999 really was a stock market bubble and it was actionable.
2006 really was a real estate and credit bubble and it was actionable.
Howso. Gut feeling?
1999 - CAPE was 45 on the S&P500, about double its previous record and nearly triple its average. Action: I was less than 10% stocks.

2006 - evidence overwhelming that most home purchases were based on speculation and hoped for appreciation; many coastal markets predominantly subprime, 0% down, neg am, and/or > 100% LTV. Sometimes all of the above. Action: I was less than 25% stocks and moved out of a very expensive state to a much less expensive state.

1989 - land under the Imperial Palace in Tokyo valued at more than all of California. Action: A relative bought puts on the Nikkei within months of the top. JPX says it started offering put options on the N225 on June 12, 1989. The market peaked on December 29 of that year. There's something ironic about that. Maybe it was the decision to offer options that spurred my relative to buy puts?

I'm not a market timer but sometimes markets go beyond crazy to absolutely insane. That is because, "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one." Markets are like giant Rorschach tests. Although it's hard to prove, at the extremes, they tell you something about human behavior.

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Re: Past performance does not guarantee future returns

Post by itstoomuch » Tue Aug 30, 2016 7:27 pm

Incorrect thinking.

Age bands influence how one invests or not invest.
We are retired: We are big on deferred GLWB annuities and individual stock. We are relatively low in cash, but currently have abnormal amount of cash for a major purchase. No Bonds.
Our son, 31, is big on Indexes (Vanguard -401k, ETF-Roth) and a few individual stock plus company options in taxables. He is relatively high in cash-emergency funds. No Bonds.
YMMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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Re: Sometimes this time really is different

Post by Tycoon » Tue Aug 30, 2016 7:33 pm

Each time is different, if not investing would be easy.
...I might be just beginning | I might be near the end. Enya | | C'est la vie

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Re: Sometimes this time really is different

Post by Longdog » Tue Aug 30, 2016 7:38 pm

I remember thinking that the financial meltdown in 2008 was different, since banks were failing and major industries and companies were collapsing. And I still believe that period was a different intensity of recession than I've ever witnessed in my lifetime. But even counting that period, now 8 years later it seems the market and American economy has reverted to the mean.
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Re: Sometimes this time really is different

Post by boglerdude » Tue Aug 30, 2016 8:05 pm

Lots of things caused financial and social instability 1873 - 1933. Its not really an argument for why a gold standard would be bad.

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Re: Sometimes this time really is different

Post by bligh » Tue Aug 30, 2016 8:42 pm

I missed this thread and created, essentially a duplicate of it. I am posting the relevant bits of my post in that thread in here :
Between stagnant productivity, huge debt piles, enormous income inequality, demographic shifts (declines?) and the advent of negative interest rates .. could it not be a possibility that this huge run up in the stock market in the last century was a one time thing? Could Japan not be the pattern that the US and the rest of the world follows over the next few decades? Even if longterm sustainable bull markets do return, they could start 50 years from now when it is far too late for me to benefit from it.

Is the consensus then, you are either optimistic about the US / World economies and look forward to higher returns via the stock market.. or pessimistic and hold a much higher percentage in bonds and deal with the much lower returns. But with bond yields the way they are.. what would a SWR look like? 1%?

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Re: Past performance does not guarantee future returns

Post by AlohaJoe » Tue Aug 30, 2016 9:56 pm

bligh wrote:But with bond yields the way they are.. what would a SWR look like? 1%?
"SWR" can never fall below 3.33%.

The SWR is defined as "the spending level that is 'guaranteed' to last 30 years". It makes no statements about lasting 31 years or longer.

You can always buy a 30-year TIPS ladder which, aside from some small technicalities that are unlikely to matter much in practice, means the SWR can never fall below 3.33%.

If, for some reason, you think 30-years isn't long enough then a 40 year retirement means your rate can never go below 2.5%.
Could Japan not be the pattern that the US and the rest of the world follows over the next few decades?
In the past 5 years Japanese investors have seen a 69% return. Is that really so horrible?

But your thinking is incorrect: Even if you think global equities had a once-in-history runup that is not a reason to favor bonds over stocks. You should prefer stocks over bonds if you think the equity risk premium compensates for the volatility of equities. Stocks could have a horrible next 50 years and still have an equity risk premium that justifies owning them.

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Re: Sometimes this time really is different

Post by LadyGeek » Tue Aug 30, 2016 10:06 pm

bligh wrote:I missed this thread and created, essentially a duplicate of it. I am posting the relevant bits of my post in that thread in here :
Between stagnant productivity, huge debt piles, enormous income inequality, demographic shifts (declines?) and the advent of negative interest rates .. could it not be a possibility that this huge run up in the stock market in the last century was a one time thing? Could Japan not be the pattern that the US and the rest of the world follows over the next few decades? Even if longterm sustainable bull markets do return, they could start 50 years from now when it is far too late for me to benefit from it.

Is the consensus then, you are either optimistic about the US / World economies and look forward to higher returns via the stock market.. or pessimistic and hold a much higher percentage in bonds and deal with the much lower returns. But with bond yields the way they are.. what would a SWR look like? 1%?
I merged your thread into the one you missed (here).
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Re: Sometimes this time really is different

Post by LadyGeek » Tue Aug 30, 2016 10:09 pm

I also removed an off-topic post. As a reminder, politics and economic policy are off-topic. See: Non-actionable (Trolling) Topics
If readers can't do anything with the content of a topic other than argue about it, it does not belong here. Examples include:
  • US or world economic, political, tax, health care and climate policies
  • conspiracy theories of any type
  • discussions of the crimes, shortcomings or stupidity of other people, whether they be political figures, celebrities, CEOs, Fed chairmen, subprime mortgage borrowers, lottery winners, federal "bailout" recipients, poor people, rich people, etc. Of course, you are welcome to talk about the stupid financial things you have done.
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Re: Sometimes this time really is different

Post by pkcrafter » Tue Aug 30, 2016 10:59 pm

bligh, no one knows the answers to the questions you ask, but what you worry about is precisely why investing in stocks is risky. It's also why I never recommend 100% stocks. Stuff happens. No two market crashes are triggered by the same thing. There is always something different and the unknown element makes investors very uneasy.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Sometimes this time really is different

Post by james22 » Wed Aug 31, 2016 12:25 am

Central banks are treading in uncharted waters. Sidney Homer and Richard Sylla, the authors of A History of Interest Rates, found no instance of negative rates in 5,000 years. Now there are $11.7 trillion invested in negative-yield sovereign debt, including $7.9 trillion in Japanese government bonds and over $1 trillion in both French and German sovereign debt.

https://blogs.cfainstitute.org/investor ... end-badly/
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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Re: Sometimes this time really is different

Post by saltycaper » Wed Aug 31, 2016 12:52 am

Every time is different. Once you accept that you might lose it all and that there's nothing you can do to ensure the worst won't happen, you can move on.
Quod vitae sectabor iter?

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Re: Sometimes this time really is different

Post by magneto » Wed Aug 31, 2016 5:38 am

ANC wrote:Many economists and economic historians attribute much of the erratic behavior before the mid 30s to the gold standard.

Although there's always talk about returning to the gold standard on the one hand and the emergence of bitcoin, etc., on the other hand, I do not see a change in the currency regime in the offing. Of course, this projection could be wrong.
Yes gold standard could well be part of the issue.

On a wider front we should remember that after the dreadful 1930s, Gov'ts rejected what had been the laissez faire Austrian School type economics approach; and turned to the new Keynesian doctrine, realising they had to become more directly involved in controlling the economy.
In fact many Gov'ts now try to fit the economic cycle to fit in with the electoral cycle, in the hope of being re-elected during a boom!

Prior to the 1930s, business cycles were as a matter of course quite regularly interspersed with periods of deflation accompanying depression, all part of natural cycles. The chart illustrates this quite nicely.

Keynesian methods have been in and out of fashion ever since.
Witness today's QE!
What would have happened without it?

The 1960/70 period is also interesting.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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Re: Sometimes this time really is different

Post by backpacker » Wed Aug 31, 2016 6:26 am

magneto wrote:Prior to the 1930s, business cycles were as a matter of course quite regularly interspersed with periods of deflation accompanying depression, all part of natural cycles. The chart illustrates this quite nicely.
Right. One of the things about the above chart is that it made me wonder about financial research that uses very old economic data about stocks and bonds to figure out "how stocks and bonds work". It would seem to be comparing apples and oranges. At least in terms of inflation, 1880-1930 is a completely different animal than post 1950. Before 1930, owning longterm nominal bonds would have been terrifying. Stocks wouldn't have been much better with the violent cycle of booms and busts.

The other thing it made me think about is inflation going forward. Could serious inflation in developed countries be a thing of the past? How much should investors worry about it? On the one hand, people now saying that serious inflation is gone for good sound a bit like the silly optimists who not long ago were saying that serious recessions were gone for good, that we had "learned to manage the business cycle" or whatever. On the other hand, serious longterm deflation used to be a real problem, and now it isn't. It went away after about the 1940s. Even Japan, with its famous deflation problems since the 1991 crash, has been trying to fight off 1% or 2% deflation, not 10%+ deflation.

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Re: Sometimes this time really is different

Post by Toons » Wed Aug 31, 2016 6:38 am

The More It Changes
The More It Stays The
Same









:mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: Sometimes this time really is different

Post by soboggled » Wed Aug 31, 2016 8:21 am

No one can foretell the future.
It could be very different.
Like in Japan, which the Nikkei hit a high in 1989 and is now 27 years later still barely half of where it was then.
https://www.google.com/search?q=japanes ... fJe3vdM%3A

Or this one from the US - which if you look closely shows a steady increase in the market is a post-WWII phenomenon:
https://www.google.com/search?q=s%26p+1 ... NhcJ0dM%3A

Or you can believe those who say (1) it can't happen here and (2) it can't happen again.

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Re: Sometimes this time really is different

Post by backpacker » Wed Aug 31, 2016 8:32 am

soboggled wrote: Or this one from the US - which if you look closely shows a steady increase in the market is a post-WWII phenomenon:
https://www.google.com/search?q=s%26p+1 ... NhcJ0dM%3A
The linked charts are price return charts, not total return. US companies have over time switched from paying out their profits as dividends to reinvesting them. If you look at a total return chart, like this one from Stocks for the Long Run, you'll see that stock returns have been happening for quite a long time.

But! This old data and old data can be less helpful than one might think without knowing more about the backstory, which I don't.

Image

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Re: Sometimes this time really is different

Post by Dead Man Walking » Wed Aug 31, 2016 4:33 pm

james22 wrote:Central banks are treading in uncharted waters. Sidney Homer and Richard Sylla, the authors of A History of Interest Rates, found no instance of negative rates in 5,000 years. Now there are $11.7 trillion invested in negative-yield sovereign debt, including $7.9 trillion in Japanese government bonds and over $1 trillion in both French and German sovereign debt.

https://blogs.cfainstitute.org/investor ... end-badly/
Thanks for the link.

Apparently, the experts at Vanguard don't think this is relevant since they added international bonds to Target Retirement Funds and Life Strategy Funds.

DMW

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Re: Sometimes this time really is different

Post by boglerdude » Wed Aug 31, 2016 4:44 pm

Are German and Japanese bonds safer? And that's why they can pay you nothing?

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Re: Sometimes this time really is different

Post by MIretired » Wed Aug 31, 2016 5:11 pm

boglerdude wrote:Are German and Japanese bonds safer? And that's why they can pay you nothing?
Nope. The govs. are trying to promote lending in the market other than to the govs.(ie: gov. bonds.)

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Re: Sometimes this time really is different

Post by Johnnie » Wed Aug 31, 2016 6:39 pm

Tigermoose wrote:Although the tools and theories we have at our disposal change over time, human nature has not significantly changed. Fear, greed, and the mass delusions of crowds and society are an ever-present condition of mankind.
That's right. Some of this is ever-changing material conditions, ranging from Model T's to LTD's in the working life of a single individual, and then from Commodore 64 to global cloud live in your pocket in 30 years, and a million other examples. But some is evolutionary and baked-in to that ever-present condition of the Being, Human, Mk. 1, unmodified.

The real question is, how can we know it will turn out alright, and the real answer is we can't. Never could, never will. And as Hayek warned in is Nobel acceptance speech, "The Pretense of Knowledge," we can't even know that the information we do have (market data for the short period of democratized, regulated markets) matters at all for knowing what to expect next. It just happens to be the best information we have.

On that last, something Jim Rogers said in a Marketwatch piece this week stuck in my mind (I know :rolleyes:):
The lessons of history are very, very, very clear. Pick any year in history, whatever we think is true, that year, 1900, 15 years later, it's a whole entirely different world. And we all know in 1900 how the world is, and we should be saying to ourselves, find me a weird guy. Find me a strange guy to tell me how this is going to change. 1950, 15 years later, everything we knew, everything we knew was totally wrong.
In the end, from cradle to grave, this is a "faith based" operation, and I'm not talking about religion. But what Tigermoose said is a big part of why I think we're not totally delusional to "stay the course."
:sharebeer
"I know nothing."

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Re: Past performance does not guarantee future returns

Post by mac808 » Wed Aug 31, 2016 7:12 pm

AlohaJoe wrote:
bligh wrote:But with bond yields the way they are.. what would a SWR look like? 1%?
"SWR" can never fall below 3.33%.

The SWR is defined as "the spending level that is 'guaranteed' to last 30 years". It makes no statements about lasting 31 years or longer.

You can always buy a 30-year TIPS ladder which, aside from some small technicalities that are unlikely to matter much in practice, means the SWR can never fall below 3.33%.

If, for some reason, you think 30-years isn't long enough then a 40 year retirement means your rate can never go below 2.5%.
Could Japan not be the pattern that the US and the rest of the world follows over the next few decades?
In the past 5 years Japanese investors have seen a 69% return. Is that really so horrible?

But your thinking is incorrect: Even if you think global equities had a once-in-history runup that is not a reason to favor bonds over stocks. You should prefer stocks over bonds if you think the equity risk premium compensates for the volatility of equities. Stocks could have a horrible next 50 years and still have an equity risk premium that justifies owning them.
Semantics but usually when I think about SWR I think about a perpetual withdrawl rate that can be sustained forever...maybe this should be called PWR or something else to differentiate it. Given increasing lifespans and the medical advances on the near horizon I don't think the concept of a 30 year retirement will be relevant much longer.

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Re: Past performance does not guarantee future returns

Post by LadyGeek » Wed Aug 31, 2016 7:33 pm

mac808 wrote:...Semantics but usually when I think about SWR I think about a perpetual withdrawl rate that can be sustained forever...maybe this should be called PWR or something else to differentiate it. Given increasing lifespans and the medical advances on the near horizon I don't think the concept of a 30 year retirement will be relevant much longer.
Here are a few discussions:

- stupid question [Sustainable withdrawal rate]
- Smooth perpetual withdrawal from risky assets [endowment fd]
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Re: Sometimes this time really is different

Post by james22 » Wed Aug 31, 2016 11:30 pm

Johnnie wrote:The real question is, how can we know it will turn out alright, and the real answer is we can't. Never could, never will. And as Hayek warned in is Nobel acceptance speech, "The Pretense of Knowledge," we can't even know that the information we do have (market data for the short period of democratized, regulated markets) matters at all for knowing what to expect next. It just happens to be the best information we have.
Given central banker's pretense of knowledge, we can reasonably expect it will NOT turn out alright.
This whole episode is likely to end so badly that future children will learn about it in school and shake their heads in wonder at the rank stupidity of it all... Hussman

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Re: Sometimes this time really is different

Post by TomCat96 » Thu Sep 01, 2016 5:02 pm

letsgobobby wrote:1989 the Nikkei really was outlandishly priced and it was actionable.

1999 really was a stock market bubble and it was actionable.

2006 really was a real estate and credit bubble and it was actionable.

Count me in as one of those guys who thinks that this time really is different. We have never had coordinate central bank intervention on this level before. The amount of market interference by the central banks is unimaginable. For example, it's been widely reported that the Bank of Japan is now a top 10 holder in 90% of the Nikkei.

What's more the BOJ has stated it intends to increase their balance sheet of securities to 6 Trillion Yen. The Bank of Switzerland has bought up shares of Apple, Google, and Amazon, while a thread here recently cited that China was selling about 800 Billion of US stocks. All of those things have been reported in multiple media outlets.

The funny thing, is after analyzing all of that, I'm not sure if that means staying the course is the wrong thing to do.

Let's talk worst case scenario. Central banks are printing money without abandon. They use the money to prop up markets, quite literally buying assets. The money they printed has not caused hyperinflationary shock yet, but let's suppose that it does.

The price of goods and services rises, but stocks are fundamentally tied to the prices of goods and services. Consider this short article
which discusses the performance of stocks during hyperinflation.

http://www.businessinsider.com/heres-wh ... on-2011-11

If you own bonds you're hosed. If you took out copious amounts of debt prior to hyperinflation hitting, you win. But if you own stocks, you really don't come out that badly. The stock market will certainly become more volatile, but the ownership of companies which dictate the prices of goods and services don't become worthless. If anything, their value will rise with the hyperinflation.

Stocks have always provided growth which exceeds inflation. That's not mysterious. It just makes good sense.

Deutsche Bank apparently did some rough calculations lately where they estimated the amount of "value" caused by recent central bank interference: About 40% of the value of the current stock market. Whether you believe that or not, the thing is that doesn't mean the market is going to drop 40%. As long as central bank resolve holds, and there's no reason to suggest that it wont, the market won't fall.

If we're trying to figure out when the whole system is going to come crashing down from all this interference, in my opinion, the best test subject to look at is Japan. How much money can a central bank print to support asset prices without causing hyperinflation or without causing any kind of unforeseeable chaos?

If Japan is any lesson, the answer is, a whole heck of a lot. Far, far more percentage-wise than the Fed has ever done. The analogy would be the federal reserve putting on its balance sheet, 90% ownership of the entire S&P 500, and apparently life would still go on.

There's a certain irony to all this. Sure under normal scenarios if the market crashes and you were out of the market, you stand to gain a little if you buy back in.

But if the doomsday scenario happens and hyperinflation occurs, in reality cash is the last place you want to be. You want that cash to be parked in ownership of something that will rise as the value of fiat currency drops. Funny enough that's probably stocks. Stay the course.

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PaFromFL
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Re: Sometimes this time really is different

Post by PaFromFL » Thu Sep 01, 2016 10:02 pm

This time may actually BE different unless you can think of any historical examples of negative interest rates. The usual quasi-linear economic laws are now up against the hard stop of zero interest rates, so things may get nonlinear. The world economy may be slipping into Japanese-style deflation for an extended period. The other difference today is that central banks and governments are manipulating the system to an unprecedented degree with little success and a lot of unintended consequences.

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JoMoney
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Re: Sometimes this time really is different

Post by JoMoney » Thu Sep 01, 2016 10:18 pm

I don't know of any time period with negative interest rates in nominal terms, but there were times the Fed was influenced to keep interest rates "pegged" at what was known to be negative real rates.
http://www.federalreservehistory.org/Ev ... ailView/71
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Re: Sometimes this time really is different

Post by Dale_G » Thu Sep 01, 2016 10:30 pm

TomCat96 wrote:If you own bonds you're hosed. If you took out copious amounts of debt prior to hyperinflation hitting, you win. But if you own stocks, you really don't come out that badly. The stock market will certainly become more volatile, but the ownership of companies which dictate the prices of goods and services don't become worthless. If anything, their value will rise with the hyperinflation.
Hyperinflation? There is always the possibility of "wage and price" controls. Doesn't do much for equity prices or anything else, but what to heck, let's give it another try.

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Re: Sometimes this time really is different

Post by roflwaffle » Fri Sep 02, 2016 8:01 am

TomCat96 wrote:Let's talk worst case scenario. Central banks are printing money without abandon. They use the money to prop up markets, quite literally buying assets. The money they printed has not caused hyperinflationary shock yet, but let's suppose that it does.
I've mulled over this too and come to more or less the same conclusion. I don't think anyone will see hyperinflation without hyper money printing, which hasn't happened so far, but there's a lot more money in the economy.

Using 2000 as an index for the net worth of the US economy (Fed's Financial Accounts of the United States (Z.1)), I'm guesstimating that the current net worth of the US should be ~$67+ trillion in real dollars after adjusting for population growth. The Fed's pegging the value of the US economy at ~$87 trillion, which is a pretty substantial jump. Part of it could be more tangible assets that don't loose a whole lot of value year over year, but I imagine the $4.2 trillion on the Fed's balance sheet and the equivalent of ~$5+ trillion from having interest rates at nada have also added to that figure substantially.

The bulk of the increase is in financial assets, and the largest increases have come in corporate equity, non-corporate equity, mutual funds, and time/savings deposits. Corporate/foreign bonds and Agency/GSE-backed securities have dropped a bit, possibly b/c of access to other sources of capital.

Does is mean anything in the short or long run? Who knows. The biggest difference to me is that the increase in value isn't as singular as it was during the 2000 equities bubble (equities jumped) and 2008 housing bubble (home values jumped). With a P/E10 approaching 30, I imagine that equities will drop in value if, or more likely as, the prime rate approaches 3%. We might see something similar to the 1930s to 1980s. After the great recession, equities had some great P/E10 ratios, and eventually the GS10 caught up to that rate, and both grew in tandem until the early 70s, when the GS10 moved past the P/E10 by a couple percentage points and equities took a good sized hit because it's hard to compete with a guaranteed 7+% return from treasuries.

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Re: Sometimes this time really is different

Post by itstoomuch » Fri Sep 02, 2016 10:16 am

IMO,
It's the money velocity.
Who has the wealth.
Who spends the money.

We are doing everything a retiree can do. Spend more than our income from SS, IRA, Medicare. This in contrast to when we had human capital income where we were investing very hard.
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo

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