100 years of excess returns: No, they are not (statistically) significant.

[Update:  Commenters “dlr” and Kevin Erdmann point out that I erred in assuming the low dividend ratios of modern times were also true in the past.  They were close to 5%. So there is a serious flaw in my post below, although I still believe that the rational view today is that stock returns going forward will be less than in the past.  However the excess returns over the past 100 years are harder to explain away than I assumed.  Also dlr cites data on bond yields that suggests I underestimated the expected return on NASDAQ in my previous post, which means the 2002 lows were probably more “accurate” than the peak of 2000.  I hope they’re right—I’m all in.]

In a previous post I argued that stock indices are not expected to grow faster than NGDP.  After all, the only index I know of that goes back 100 years (the Dow) has risen slower than NGDP over that period.  But that’s not why I made the claim, rather it seemed illogical that a sub-sample of stocks would out-perform NGDP, when the total value of all stocks would be expected to rise with NGDP in the very long run.  Now there are some possible weaknesses in my argument.  NASDAQ has a lower dividend yield, and hence a higher expected gain, but I doubt it dramatically affects my overall claim.

Then the argument got sidetracked on to a discussion of total returns, a different question.  That seemed to be where the real objection lay. Here’s Kevin Erdmann:

I, for one, am tickled by the irony that in the comment section of this excellent post about the pessimistic bias, Scott has been pulled into an argument where he is saying that a 4% equity risk premium that persisted for a century is the result of a lucky break – that a cumulative excess return of some 5000% over that time doesn’t reflect an expected return premium for equities. On average, less than every 20 years, equity portfolios have doubled government bond portfolios.

Sorry, but this is a misuse of statistical significance.  The 100 year time frame does not in any way prove that the returns were expected. Here’s a counterexample.  Take the 3 most successful stocks in the Dow over the past 100 years.  I have no idea what there are, let’s say IBM, GE and Exxon.  Now compute their total returns.  Since the overall market has done well, obviously the three best would have done amazingly well.  But no one would claim that their actual returns tell us anything about their expected returns.  And that’s because you had cherry picked some very impressive investments, ex post.  And that’s despite the fact that you would be working with 100 years of data.

In the case of the US stock market you are not just cherry picking, but double cherry picking.  You are selecting one of the most impressive economies in the world over the past 100 years.  A country that never adopted socialism, was never destroyed by war, revolution or hyperinflation.  Even many major economies like Germany, Japan, Russia and China suffered enormous problems at various stages of the past 100 years.  The commenter “dlr” shows that the US stock market has outperformed all of the other big economies.  And he compares the US to other countries that have done relatively well, leaving out places like Russia, China, Argentina, Venezuela, etc.  So by looking at the US you have cherry picked the most successful big economy in world history, during its golden age.  But that’s not enough to explain the entire equity premium, as dlr notes.  Other countries also have rather large returns.  

This leads to the second form of cherry picking, you are studying what has turned out (ex post) to be the Cadillac of investments—stocks. Today we think of stocks as a perfectly normal investment.  I’ve had all my 401k in stocks for almost my entire working life, and that’s not considered particularly weird.  But 100 years ago stocks did not have the prestige they have today.  Bonds and bank accounts would have been more typical investments.  I would have had railroad bonds in my 401k.  The stock market turned out to be the premier investment of the past century (for many complex and unexpected reasons), but no one knew that in 1914.

I know that people will want to latch on to the 100 years of data—surely that is statistically significant?  I will admit that if stocks consistently earned large returns then you could say that investors should have caught on.  Suppose that the excess returns were always positive, but ranged from 1% to 9%, averaging 5%.  Then yes, 100 years would be enough.  But look at this data for the Dow:

March 11, 1914   Dow = 81.57,  CPI = 9.9  real Dow = 8.24

August 12, 1982,  Dow = 776.92   CPI = 97.7   real Dow = 7.95

In real terms the Dow went nowhere in 68 years.  Yes, the total real returns were positive because of dividends, and indeed probably larger than bonds (which were crushed by unexpected inflation after we left gold.)  But a real yield equal to slightly less than the dividend yield is not all that impressive for 68 1/2 years.  Now look at the next 18 years:

April 11, 2000  Dow = 11287   CPI = 171.3    real Dow = 65.9

The real Dow exploded more than 8-fold.  That’s an awesome return, which doesn’t even include dividends.  And then another 14 years of so-so, even given the extraordinary bull market of recent years:

March 11, 2014   Dow = 16351   CPI = 233.9   real Dow = 69.9

Yes, other indices like S&P 500 would probably have been different.  The early period would probably look better, weakening my argument.  But the 1982-2000 explosion would look even bigger, and the 2000-2014 slowdown even worse, both strengthening my argument.  The basic picture is that in 1982-2000 the market experienced something analogous to the “inflation” of the early universe, when values just exploded.

My pathetic attempt to explain that growth would involve many factors such as slowing inflation and lower taxes on capital gains.  But one factor might have been a growing awareness among investors that with modern investing techniques and longer lives and lots of people putting money away for 40 or 50 years in 401ks those massive excess returns that did occur were not “justified.” On this point theory is on my side.  The equity premium puzzle. They were not expected to occur, and when they did stocks rose to a level where they are not expected to repeat, from this point forward.  I think this may be why Robert Shiller seems to have never said “BUY,” at least since 1996. Perhaps his model doesn’t factor in the new normal of higher equity values due to a realization the equity premium (ex post) was too big in the past.

Don’t be lulled into thinking that 100 years of data is statistically significant.  Didn’t people in 2006 say “real housing prices in America never go down on a nationwide basis.”  How’d that work out?

PS. I’m not saying you should not own stocks.  I’m still fully invested, and still feel they are a bit better than bonds.  Just don’t count on those massive gains of the previous century, which were heavily concentrated in 18 years.  My claim is that going forward, returns will be (expected to be) similar to the other 82 years—basically the dividend yield in real terms, perhaps a bit more if the dividend yield has trended downward over time.  Somewhere between the US and Japanese performance since 1991.

PPS.  For non-American readers the phrase “Cadillac of investments” means roughly the “Mercedes of investments.”

PPPS.  Fat tails

PPPPS.  Transactions costs


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43 Responses to “100 years of excess returns: No, they are not (statistically) significant.”

  1. Gravatar of Brett Brett
    12. March 2014 at 07:56

    Stocks 100 years ago probably deserved their unsavory reputation, even though investing in them was still a good idea looking back from the present. Some of the stuff financiers did back then would put you in prison today.

  2. Gravatar of Niklas Blanchard Niklas Blanchard
    12. March 2014 at 08:01

    I can’t remember where I read it or the name of the paper, but I do remember reading a paper which showed that the Dow made almost all of its gains (in real terms) on a handful of trading days. If anyone could find it, I would be appreciative.

  3. Gravatar of TravisV TravisV
    12. March 2014 at 08:13

    David Beckworth has a new post with excellent graphs:

    “What is the Fed’s Real Inflation Target?”

    http://macromarketmusings.blogspot.com/2014/03/what-is-feds-real-inflation-target.html

  4. Gravatar of TravisV TravisV
    12. March 2014 at 08:27

    Capacity utilization: http://slate.me/1fTVH3v

  5. Gravatar of Major_Freedom Major_Freedom
    12. March 2014 at 08:59

    I think it has to be emphasized that “Stocks should rise no higher than NGDP in the long run” is a theory.

    That theory is not actually based on historical data, because as I showed in a previous comment:

    https://www.themoneyillusion.com/?p=26332#comment-322957

    It is not stand out clear that stocks indices rise slower than NGDP in the long run. The theory that stock indices rise faster than NGDP is very much consistent with the above chart.

    So if it isn’t historical data that is the foundation, it must instead be theoretical.

    So what are those theoretical assumptions underlying the theory that “stock indices rise no higher than NGDP in the long run”? We can consider the following possibilities:

    1. Inflation of the money supply affects all prices and spending equally over the long run. Inflation of the money supply does not have persistent heterogeneous effects on prices or spending in the relative sense.

    2. We are capable of experiencing ONLY the long run effects of inflation. This is required because if we are going to connect present conditions with the distant past cause from X, then there cannot be any further changes to X. For if there were, then we would experience the short run effects. And if inflation is more or less persistent, which it has, then we would always be experiencing the short run effects.

    3. If NGDP index rises by a factor of 20 over a period of 50 years say, or whatever reasonable time perios we define as “long run”, then the indices of other aggregates like the PPI, or stocks, should also rise by around 20. Not more than 20. NGDP constrains all spending to itself. NGDP is supposed to represent all spending. It would be theoretically absurd for any component of the total to forever rise faster than the total.

    Here is my thought:

    What if stocks do not rise faster than NGDP but only in the infinite long run? What if stocks can rise faster than NGDP for many years, then a significant, near vertical decline, with once again another faster than NGDP growth, with yet another significant near vertical decline, over and over?

    If inflation of the money supply is persistent, which it is, then why can’t we always be “in” the “short run” effects of inflation? And given the future is reached through a successive path of short run steps, why can’t money have long run consequences? Maybe what we are right now experiencing with police state government is the long run effects of government printing its own money.

  6. Gravatar of Doug M Doug M
    12. March 2014 at 09:19

    You can pin the rise of equities as the Cadilac of investments squarely on the shoulders of Charlie Merrill. Merrill left banking to build Safeway Stores through the 1930s. In 1940 Merrill returned to banking with the intention of bringing the principles of the supermaket to the world of finance. Prior to 1940, the stock market was for speculators and the rich. Really we should be talking about the rise of equites as the Chysler of investing. Not product for the elite, but a product for the masses.

  7. Gravatar of J Mann J Mann
    12. March 2014 at 09:21

    A few years back, Arnold Kling blew my mind by observing that the value of the stock market can’t exceed economic growth forever, because even if there were no other constraints at a certain point, stock owners would own all value in the country. (I can’t find the post, or I’d link to it).

    It was suprising enough that I actually spent 5 minutes with an excel spreadsheet checking what now seems obvious.

  8. Gravatar of Niklas Blanchard Niklas Blanchard
    12. March 2014 at 09:41

    J Mann, was it this?

    http://www.ideasinactiontv.com/tcs_daily/2004/01/privatization-the-ultimate-lockbox-for-social-security.html

  9. Gravatar of ed ed
    12. March 2014 at 10:01

    I absolutely agree with this post.

    To me, though, the strongest argument is to look at valuations. Stock valuations (in terms of P/E ratios or other measures) are higher than they were in the past.

    http://www.multpl.com/shiller-pe/

    This means expected returns in the future must be lower than in the past, for two reasons: (1) it costs more now to buy a stream of earnings (or cash flows or payouts) than it did before, and (2) the capital gains resulting from the increased valuations are a one time gain that will not be repeated.

    And if you agree with Shiller (I don’t) that valuations will revert to historical averages, then future returns will be even that much lower.

  10. Gravatar of TravisV TravisV
    12. March 2014 at 10:03

    Ryan Avent: “A few points on slack”

    http://www.economist.com/blogs/freeexchange/2014/03/monetary-policy-0

  11. Gravatar of dlr dlr
    12. March 2014 at 10:03

    Scott, bluntly but hopefully politely, I think you are saying some very reasonable things here masked by some things that are not at all reasonable.

    First, I want to repeat that ten year inflation protected government bonds yielded over 4.5% when the Nasdaq hit its peak. There is no reasonable argument that a rational investor in the Nasdaq would require less than that same return, which means 7.0% nominally. And that is only if you apply zero risk premium to the Nasdaq over USTs, which of course is too low. Given this, I don’t see why you can’t just retract your claim that *based on the current level of the Nasdaq only* the 2002 price looks less rational than the 2000 peak. It doesn’t. A rational buyer would not own the Nasdaq at a real return below 4.5% (or 5.5%!) in 2000 when they could have bought risk free inflation protected bonds for 4.5%.

    Second, you note in this post that the Dow’s nominal return has not exceeded NGDP in this century, and then state that you doubt that dividend yield differences can dramatically affect your claim. Of course they can. The Dow’s average dividend yield in the first half of last century was over 5%! The Nasdaq’s dividend yield at peak in 2000 was 20bps…60bps if you cut it by 2/3s. This is the precise reason why using nominal index growth versus total returns is a big — yes, dramatic — mistake. This is also why your 1914-1982 example of unimpressively returning the real dividend yield is very poorly framed. The dividend yield for all stocks on the NYSE at the end of 1914 (I don’t have the DOW offhand, it was going through strange machinations at the time) was 5.5%. A minute ago you were calling real returns like this too good to be true. Now you are calling them unimpressive!

    Now, it is certainly fair to say that global real stock returns of 5-6% or US returns of 6-7% might be infected with survivorship bias or sample size problems and thus a poor expectation. It’s also fair to say that even if they are real, the world has changed (transaction costs, liquidity, diversification, risk, awareness of historical equity premiums) such that ex ante returns should be lower. If you remember, someone wrote a book a book called Dow 36,000 in 1999 roughly making the latter argument (as saying that stocks were way too cheap). There is no magic to stocks. They are mostly junior claims to real assets. Average real asset returns will be determined by marginal return on investment (including surprises), as affected by the physical world and time and risk preferences, and relative stock returns versus returns from senior claims on those assets like bonds will depend on average leverage, the risk preference curve, and risk of ruin. But that does not mean that Nasdaq 4300 in 2014 makes Nasdaq 5000 in 2000 provisionally more rational than Nasdaq 1100 in 2002. Safe returns were too high for that. A better argument is that productivity disappointed — for one of a number of reasons — but that getting productivity wrong was a rational mistake.

  12. Gravatar of Vaidas Urba Vaidas Urba
    12. March 2014 at 10:08

    Niklas Blanchard:
    “I can’t remember where I read it or the name of the paper, but I do remember reading a paper which showed that the Dow made almost all of its gains (in real terms) on a handful of trading days.”

    This is a decent treatment:
    https://advisors.vanguard.com/iwe/pdf/RPD16.pdf

  13. Gravatar of Doug M Doug M
    12. March 2014 at 10:17

    Is there an equity risk premium?

    Stock markets have a retunr above the risk free rate, because you are being paid to absorb risk. Are you being paid too much or too little? Compared to what?

    The expected return of stocks is very much debatable. There are no fixed cashflows. We can look at historical returns, but historical results do not guarantee future results.

    But since the middle of the 20th century the average return is somewhere north of 10%. The historical volatility (standard deviation of returns) is about 20% per year.

    How does this compare with bonds? You can buy a 5-year treasury bond that yeilds 1.55%. But, after a 1 year holding period, that 5 year bond is now a 4 year bond. The risk declines. So, you roll out of the 4 year bond and into the new 5 year. Since the yield curve is upward sloping, that is a “positive carry”. If rates stay unchanged, a year from now the 5 year bond will have a price gain of 1.2% due to the roll down. Put it together, over a 1 year holding period, you will get 1.55% in coupon income plus 1.5% in price appreciation, for a 2.75% holding period return.

    What is the historical volatitly of 5 year bonds? About 4%.

    Annother alternative is to park all your money in cash and cash equivalents. The return on cash equivalents is effectively the Fed funds rate ~0.25%

    According to Arbitrage pricing theory, you should be able to create a portfolio of stocks and cash, that has a similar risk/return profile as your bond portfolio. Or, if you are a bank you can borrow money cheaply and create a levered bond portfolio with a similar risk return profile as your equities.

    Since stocks have 5x the volatilty as 5 year bonds…

    (expected return of stocks)*0.2 + (fed funds)*0.8 should roughly equal (expected return of bonds)

    So, according to ABT equites should have an expected return is still somewhere north of 10%…

  14. Gravatar of ed ed
    12. March 2014 at 10:25

    J Mann,

    What Kling actually claimed (wrongly) was that *returns* could not exceed GDP growth. I and many other commenters tried to correct him, but he wouldn’t listen, and he continues to make the mistake to this day as far as I can tell. Kling was right about value, but wrong about returns.

    (Sumner didn’t make this mistake, instead it was some of his commenters who kept confusing returns with price. Unlike Kling, Sumner seems to be aware that dividends exist.)

  15. Gravatar of ed ed
    12. March 2014 at 10:31

    Doug says: “historical results do not guarantee future results.”

    Indeed the opposite is the case: historical results guarantee that future results will be worse. Whenever P/E goes up, future returns will be lower, for the two reasons I listed in my previous comment.

  16. Gravatar of Doug M Doug M
    12. March 2014 at 10:32

    dlr
    “I want to repeat that ten year inflation protected government bonds yielded over 4.5% when the Nasdaq hit its peak. There is no reasonable argument that a rational investor in the Nasdaq would require less than that same return, which means 7.0% nominally.”

    A little simpler to compare nominal to nominal. The 10 year treasury was yielding 6.4% on the day NADAQ peaked and an (rational) equity investor would demand something north from there.

  17. Gravatar of Kevin Erdmann Kevin Erdmann
    12. March 2014 at 10:34

    From 1914 to 1980, dividends averaged 5%, so real returns over the worst 66 year period for equities with the lowest risk premium averaged 5%/year, in real terms. You say this is not that impressive, but you admit that it probably beat bonds, which it did, by a lot. So, you managed to find the worst 66 year period for equities, and show us that there was a 4% equity premium over that time. (This is using Shiller’s annual data, comparing real equities to real 1 year Treasuries.)

    And, do I understand this correctly? First, in a thoughtful post about the bias for pessimism, you took the pessimistic position in the comments. And, now, in a thoughtful post about how even if every outcome in a country for a century supports an expectation, it could still be considered cherry picking, and to make your point, you hand pick the worst 66 year period as a data point?

    Your reasons for seeing some unsustainable gains in equities are plausible (although, don’t investors also have better access to bonds, homes, commodities, etc.?) but you have to account for scale. Even if there has been an unsustainable rise in valuation ratios (which is arguable), compared to the cumulative gains we’ve seen in equities, this is like a gnat on an elephant’s tail.

    And we are talking about equities vs. fixed income within the US, so some of the issues having to do with a sort of national survivorship bias would apply to both, so the relative comparison isn’t effected that much by the bias. If an asteroid hit Pennsylvania, bond holders wouldn’t be doing so well either.

  18. Gravatar of ssumner ssumner
    12. March 2014 at 11:06

    OK, Dlr and Kevin, see if my update is acceptable. I’m sort of half throwing in the towel.

  19. Gravatar of bill bill
    12. March 2014 at 11:33

    Maybe TIPS in 2000 were a better “anti-bubble” example than the NASDAQ in 2002? 4.5% real is really nice!
    Right after September 11, 2001, 30 year I-bonds still paid 3.3% real until they were reset in some time in October. I actually bought some (but no where near enough).

  20. Gravatar of Kevin Erdmann Kevin Erdmann
    12. March 2014 at 11:36

    Kudos, Mr. Sumner. We should all aim to maximize the number of posts we have that admit to possible errors. Your ability to follow the data is commendable. And, you have brought up many points worth pondering in these posts. I think we are simply suggesting they don’t explain more than part of the equity premium, which I think is where you are meeting us with the update.

    Although, the scariest thing you can do to finance people is agree with them. As soon as I read your update, in the back of my head, I started wondering if this is going to mark the start of the worst 20 year bear market we’ve ever seen.

  21. Gravatar of Rajat Rajat
    12. March 2014 at 11:38

    Hasn’t the US profit share increased quite a bit since the late 70s? That would allow stock prices to increase faster than NGDP. The continuing outperformance of stocks would seem to depend on whether the profit share continues to grow at the expense of the wage share.

  22. Gravatar of ant1900 ant1900
    12. March 2014 at 11:41

    Eric Falkenstein has a great book “The Missing Risk Premium” that makes a very reasonable and empircal case the there is no equity premium. You have to correct for survivorship bias (index contain only the companies that have survived and stock markets that have survived (basically cherry picking that Scott notes), inflation, market timing (indexes don’t flinch but real investors sell at bottoms and buy at tops), taxes, commissions, and bid-ask spreads.

  23. Gravatar of ant1900 ant1900
    12. March 2014 at 11:53

    Here’s a PowerPoint summary of the Falkenstein case for an equity premium close to zero: http://www.efalken.com/papers/FalkMRPoutline.pptx

    See slides 61-72 in particular.

  24. Gravatar of TravisV TravisV
    12. March 2014 at 12:12

    Dear commenters:

    Fascinating old post below:

    https://www.themoneyillusion.com/?p=4415

    Could someone please explain why “a fall in the U.S. gold ratio is the expected consequence of an expansionary policy”?

  25. Gravatar of Kevin Erdmann Kevin Erdmann
    12. March 2014 at 12:12

    ant1900,

    If the premium was EASY it wouldn’t exist.

  26. Gravatar of ed ed
    12. March 2014 at 12:19

    Scott, don’t throw in the towel too hard!

    I agree that your original point doesn’t quite hold for the NASDAQ (which really does look crazily overvalued in retrospect), but it would be much closer to true for the S&P 500, and the larger point holds that there seems to be an asymmetry in how people talk about valuations and returns.

    Also, it doesn’t make much sense to just compare dividend yields over time, you should be comparing total payouts including repurchases. Lately repurchases are at around the same level as dividends, so you can take the current dividend yield and almost double it, which makes it much closer to historical yields.

  27. Gravatar of Tom Brown Tom Brown
    12. March 2014 at 12:36

    TravisV: I’m not sure… does it mean how many oz a dollar is worth? As in the oz per dollar goes down? Or perhaps that people fear oz per dollar will go down, so they exchange now before that happens?

  28. Gravatar of dlr dlr
    12. March 2014 at 13:13

    Thank you Scott.

  29. Gravatar of ssumner ssumner
    12. March 2014 at 13:44

    ed, Yes, I should have made my point using the S&P500, it would have been somewhat better, especially if I’d used March 2009 as the low. The 2000 peak in the S&P 500 (1550?) may have been closer to the correct value (based on today) than the 670 level of March 2009.

  30. Gravatar of benjamin cole benjamin cole
    12. March 2014 at 17:10

    Tough question for passive investors: I think we see secular capital gluts. That mean yields get dri en down. Is that the future?

  31. Gravatar of Ricardo Ricardo
    12. March 2014 at 17:41

    I agree with Rajat comment above. So does PIMCO’s Bill Gross, see the “Investment Outlook” from Aug 2012:
    http://www.pimco.com/EN/Insights/Pages/Cult-Figures.aspx

    One of the more relevant sections, says:
    “… 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… 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”

  32. Gravatar of Tommy Dorsett Tommy Dorsett
    12. March 2014 at 18:01

    Scott – Here’s a 90+ year history of the djia as a ratio to the nominal economy. No evidence here whatsoever that easy money (1968-80) caused a bubble in stock prices. The peaks in the graph were all during low inflation, relatively tame ngdp environments.

    http://research.stlouisfed.org/fred2/graph/?g=t1k

  33. Gravatar of Major_Freedom Major_Freedom
    12. March 2014 at 18:10

    Tommy:

    “No evidence here whatsoever that easy money (1968-80) caused a bubble in stock prices.”

    You are assuming that “loose money” is defined by NGDP.

    If instead you realized the Fed is most expansionary during deflationary busts, where “expansionary” means increasing OMOs, which significantly affects stocks in the short run before it significantly affects aggregate spending or consumer spending, it makes sense that stock prices relative to NGDP would be highest during times when the Fed is most active as against reversing declines in prices and NGDP!

    Stocks go into a boom not because of NGDP, but because of the Fed engaging in OMOs.

    Think of two things going on at once. On the one hand, NDGP is falling along with prices and employment. On the other hand, the Fed is at that moment increasing reserves to counteract the deflation.

    But Fed inflation has a lagged effect, which is why we don’t see the contemporaneous correlation that you are assuming must take place for the theory that loose money causes stock bubbles to be true.

  34. Gravatar of Kevin Erdmann Kevin Erdmann
    12. March 2014 at 19:13

    Regarding some of the comments here concerning compensation as a declining percentage of GDP, I wonder how much of that is a product of the increased us of stock options as compensation. Does anyone know about any work that has tried to quantify that?

  35. Gravatar of Stephen Kirchner Stephen Kirchner
    12. March 2014 at 19:22

    “I think this may be why Robert Shiller seems to have never said “BUY,” at least since 1996.”

    Since 1981 in fact, a disastrous record of investment advice.

  36. Gravatar of Kevin Erdmann Kevin Erdmann
    12. March 2014 at 19:26

    Here is a post I did a while back on the slow trend of descending returns to capital. I should have posted this earlier:

    http://idiosyncraticwhisk.blogspot.com/2013/11/required-returns-pe-ratios-and-wealth.html

    I suspect some of my analysis is wrong, some is obvious, and some is insightful (I hope). The short version is that there is some decline in expected returns, but not enough to create an imminently obvious decline in this generation’s returns.

  37. Gravatar of Jason Jason
    12. March 2014 at 23:40

    Scott what do you think of this most recent blog post by Krugman
    http://krugman.blogs.nytimes.com/2014/03/12/wages-of-fear-somewhat-wonkish/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body

    Wages are close to NGDP and you DID say once that wage targeting would be ideal, correct?

  38. Gravatar of Nick Nick
    13. March 2014 at 05:01

    Totally off-topic, but a propos to your recurring theme that interest rates do not tell you if monetary policy is loose or tight, here is a perfect graph of just that point:

    http://www.businessinsider.com/gundlach-what-hath-qe-wrought-2014-3?op=1

    Check out slide 30. QE increases rates, and stopping QE lowers rates. QED! (QE indeed?)

  39. Gravatar of Floccina Floccina
    13. March 2014 at 06:20

    My only quibble with “Stocks should rise no higher than NGDP in the long run” is that public companies seem to be squeezing out private companies and so accounting for more of GDP.

  40. Gravatar of ssumner ssumner
    13. March 2014 at 09:14

    Ben, I wouldn’t be surprised.

    Ricardo, Where is the time series for corporate profits as a share of GDP?

    Tommy, Good point.

    Thanks Stephan.

    Jason, I’m still skeptical of the old-fashioned Phillips curve. But it’s possible.

    Thanks Nick, I love the graph on the height of Fed chairmen.

    Floccina, I didn’t know that–do you have data?

  41. Gravatar of Brian Donohue Brian Donohue
    13. March 2014 at 14:36

    Scott,

    Over the next 20 years, the case for investing in stocks, I think, is not that they will repeat the 20th century performance, but that the main alternative, bonds, look unattractive after a 30-year bull market on the back of declining interest rates. Not for nothing did Warren Buffett say in his 2013 shareholder letter that bonds currently offer “return-free risk” and “should come with a warning label right now.” A 6%-7% nominal return on stocks over the next 20 years will destroy what you can hope to get from bonds.

  42. Gravatar of J Mann J Mann
    14. March 2014 at 04:21

    Niklas – it must have been on econlog, because that was the only place I was reading Kling before he left, but I can’t find it. (I found several posts making similar points, though.)

    Ed – thanks, that makes sense.

  43. Gravatar of ssumner ssumner
    14. March 2014 at 05:12

    Brian, I agree.

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