The argument goes something like this: $1 invested in the S&P 500 in 1912 turned into more than $500 adjusted for inflation by 2012, but that 6.6% rate of return came with real GDP only running at a 3.5% clip annually. Gross says that âsomehow stockholders must be skimming 3% off the top each and every year, and that those profits must have come at the expense of lenders, laborers and the government.
I am not a financial wizard. I just have a small portfolio manages by a professional which I inherited. This way I have someone else to blame for making investment mistakes. The truth is I prefer concrete investments in things I can see and feel and I imagine I have control over - such as real estate and physical things that appreciate because they have intrinsic value are are useful for being productive (as in making things). Occasionally I'll take a dip into financial journals for sport, which I did this morning. I became interested not by the advice but by the confessions contained there in.
I stumbled up this article in Forbes which lead me to PIMPCO investment outlook. Headline:
Pimco's Bill Gross Says Stocks Were A Ponzi Scheme For The Last Hundred Years
For my father's and my generations
Letting money do the hard work instead of working hard for the money was an historical inevitability it seemed.
but now
Boomers can't take risk. Gen X and Y believe in Facebook but not its stock. Gen Z has no money.
Gross says that long-term history of inflation adjusted returns from stocks shows a persistent but recently fading 6.6% real return (known as the Siegel constant) since 1912. If Generations X and Y had they been alive in 1912 and lived 100 years, they would have turned what on the graph appears to be a $1 investment into more than $500 (inflation adjusted) over the interim. I remember opening my first bank account sometime in grade school 50 years ago and being handed a chart from the account officer showing how much money I'd have when I grew up thanks to the miracle of compounding interest. I didn't hang on to that money. I can't remember what I spent it on and that bank no longer exists.
Gross goes on to say that chain of 6.6% continuing rate of return defies commonsense. I am always wary of that word "commonsense" as it seems to be used when no real explanation can be proffered. It's the default reason like "because I said so." So Gross throws up Chart 1 (I couldn't link it) and points out the
commonsensical "illogic" of such an arrangement when carried forward another century to 2112 . If stocks continue to appreciate at a 3% higher rate than the economy itself, then stockholders will command not only a disproportionate share of wealth but nearly all of the money in the world!
As I said earlier I am not really appreciative of Gross' investment advice. Ultimately he says if you want to maintain that 6.6% you've got to inflate the developed economies over the next few decades but doesn't tell you what happens next. Oh boy inflation. I did that once, not interested. So thinking about these two "confessions"
Economists will confirm that not only the return differentials within capital itself (bonds versus stocks to keep it simple) but the division of GDP between capital, labor and government can significantly advantage one sector versus the other. Chart 2 confirms that real wage gains for labor have been declining as a percentage of GDP since the early 1970s, a 40-year stretch which has yielded the majority of the past century's real return advantage to stocks. Labor gaveth, capital tooketh away in part due to the significant shift to globalization and the utilization of cheaper emerging market labor. In addition, government has conceded a piece of their GDP share via lower taxes over the same time period. Corporate tax rates are now at 30-year lows as a percentage of GDP and it is therefore not too surprising that those 6.6% historical real returns were 3% higher than actual wealth creation for such a long period
and the confession in the intro. They confirm why I have preferred to make things and why I think the future belongs to those who know how to take something of little or no value and using their labor or their minds turn it into something of more value that another person needs or wants. It seems "common sense" to me that the more reliable kind of economy is one built on a local level around real things. They are why I prefer to invest in education, tooling, building and events like Makerfaire. Doing this may not make me a millionaire but it will make a strong community which it something I would rather leave behind. It's not idealism or sicialism, it's, may I say it? Commonsense.
GROSS' complete article http://www.pimco.com/...