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The Rate of Return on Everything, 1870–2015 (2019)

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Re: The Rate of Return on Everything, 1870–2015 (2019)

#71

Post by JumpCrisscross »

ggm wrote: post #58
sk11001 wrote: post #57

Earlier quoted context omitted.

They don't need to return to baseline. The overall market return can be around 7% - within that you'll have losers, flat lines and huge winners like Apple and Nvidia. That's how you get to the 7% average - by having some companies gain much more than that.

It's very hard for that to sustain over decades without causing market distortions. I'd be interested in what is the longest run of above-market returns by any company since the 1870s. In effect, if they accrue enough value, then they alter the average rate of return. And, since that sucks capital out of the rest of the economy, we're kind of fucked overall because companies making tinned peaches and medicine actuall…

> since that sucks capital out of the rest of the economy, we're kind of fucked overall because companies making tinned peaches and medicine actually need capita

What's constraining the latter is rates. There is zero evidence tech companies are causing the inflation that is pushing up rates. (If anything, it's broadly deflating.)

(And to my knowledge, getting financing for tinning peaches or medicines is plentiful. It's called middle market finance, and while it doesn't make the headlines, it's huge.)

Re: The Rate of Return on Everything, 1870–2015 (2019)

#72

Post by JumpCrisscross »

spiantino wrote: post #13
pineaux wrote: post #2

So basically, housing is the best investment vehicle based on all the numbers.

Especially when you consider all the tax affordances related to owning real estate vs. equities.

> all the tax affordances related to owning real estate vs. equities

The only ones I can think of are depreciation (analogous to capital loss harvesting), 1031 exchanges (loosely analogous to step-up basis; this is the biggest difference) and opportunity zones (analogous to QSBS).

If you borrow against your equities, you can deduct the interest paid on that. That mortgage-interest deductions are bigger is a function of the lending being federally guaranteed more than tax law.

Re: The Rate of Return on Everything, 1870–2015 (2019)

#73

Post by smarm52 »

> In fact, the long decline observed in the past few decades is reminiscent of the secular decline that took place from 1870 to World War I.

> The fact that returns to wealth have remained fairly high and stable while aggregate wealth increased rapidly since the 1970s suggests that capital accumulation may have contributed to the decline in the labor share of income over the recent decades (Karabarbounis and Neiman 2014).

Predicted here:

Piketty, T. (2014). Capital in the twenty-first century. Harvard University Press.

> In terms of total returns, residential real estate and equities have shown very similar and high real total gains, on average about 7% a year.

> Housing, equity, bonds, and bills make up over half of all investable assets in the advanced economies today, and nearly two-thirds if deposits are included.

Interesting, Housing is marked as "risky", and yet heavily invested. Investors are over leveraged in risky investments. They probably do it because controlling housing nets them power above and beyond normal returns. I wonder if this part of the reason for the "boom and bust" of market economies in the West when proper government regulation is removed. The riskiness of much of the investment of most investors may lead to sudden losses and shifts in risk, which may result in them withdrawing capital to "safer" investments, thus triggering a "bust".

And `r ≫ g` shows why the wealthy can wield so much power. Holding capital hostage to regulate economic growth and control it is very powerful, and why they can exercise the kind of control they can.

Re: The Rate of Return on Everything, 1870–2015 (2019)

#74

Post by ggm »

JumpCrisscross wrote: post #71
ggm wrote: post #58

Earlier quoted context omitted.

It's very hard for that to sustain over decades without causing market distortions. I'd be interested in what is the longest run of above-market returns by any company since the 1870s. In effect, if they accrue enough value, then they alter the average rate of return. And, since that sucks capital out of the rest of the economy, we're kind of fucked overall because companies making tinned peaches and medicine actuall…

> since that sucks capital out of the rest of the economy, we're kind of fucked overall because companies making tinned peaches and medicine actually need capita What's constraining the latter is rates. There is zero evidence tech companies are causing the inflation that is pushing up rates. (If anything, it's broadly deflating.) (And to my knowledge, getting financing for tinning peaches or medicines is plentiful. I…

As a non-economist, I ask: do you think their above-grade returns can persist into the future for decades, without becoming a concern, or altering this 7% rate?

My example of why it is bad is a hypothetical. If it's a stupid hypothetical I accept that, but my underlying belief that you cannot really have identified, "the same" companies continue to return 2-3x market average over 50 years without some concern remains.

Am I wrong? Sure, some companies do better than others. Warren Buffet swears by re-insurance. When the west coast disappears in a tsunami, it won't be as bountiful, right?

Re: The Rate of Return on Everything, 1870–2015 (2019)

#75

Post by JumpCrisscross »

ggm wrote: post #74
JumpCrisscross wrote: post #71

Earlier quoted context omitted.

> since that sucks capital out of the rest of the economy, we're kind of fucked overall because companies making tinned peaches and medicine actually need capita What's constraining the latter is rates. There is zero evidence tech companies are causing the inflation that is pushing up rates. (If anything, it's broadly deflating.) (And to my knowledge, getting financing for tinning peaches or medicines is plentiful. I…

As a non-economist, I ask: do you think their above-grade returns can persist into the future for decades, without becoming a concern, or altering this 7% rate? My example of why it is bad is a hypothetical. If it's a stupid hypothetical I accept that, but my underlying belief that you cannot really have identified, "the same" companies continue to return 2-3x market average over 50 years without some concern remains…

> do you think their above-grade returns can persist into the future for decades

In aggregate, yes, given equities have done just fine persisting over the last century and a half. (Also, the 7% figure appears to be nominal.)

> you cannot really have identified, "the same" companies continue to return 2-3x market average over 50 years without some concern remains

No, I don't believe we have precedent for this.

> When the west coast disappears in a tsunami, it won't be as bountiful, right?

Flooding isn't typically privately insured. As far as reinsurance is concerned, a tsunami taking out a bunch of California would be financially uneventful; on one hand, you're losing a premium stream, on the other hand, you've freed up reserves.

(Not an economist nor an actuary, but have training in both and some licensing in the latter.)

Re: The Rate of Return on Everything, 1870–2015 (2019)

#76

Post by nostrademons »

_yb2s wrote: post #18

I don't understand how housing can increase in cost in a stable steady manner, as a fraction of household income over long periods of time like more than 100 years. It seems to defy logic, so it makes me suspect how it is being calculated when people claim that housing costs have gone up by massive amounts. Since only a small increase would price a large number of people out of the market- it seems logical that housi…

A few ways that housing can continue to increase as a percentage of income:

1.) Go from a single income supporting to a house to multiple incomes supporting a house. This is actually happening, with the shift from single-earner households in the 1950s to dual-income households to groups of unmarried professionals living together as roommates. The preponderance of post-1950s data can also overweight this effect: historically, the norm was far large extended families to live together in one household, and the single-earner U.S. nuclear family was an aberration created by suburbanization.

2.) Have reset points. How can real estate continue to return 7% real returns for 120 years? Well, return 7% for 40 years, at which point your investment is up 15x. Then bomb the house and kill the owner. Then give the land to the guys who helped you kill the owner at a low, low price, help them build a house on it cheap, and start the 7% appreciation calculator over again from a new low baseline. This is also very close to what actually happened over those 120 years, between WW1, WW2, the Russian/Ottoman/Austrian revolutions, the fall of the Warsaw Pact, the Chinese Civil War / Cultural Revolution / Great Famine, and so on.

3.) Have a smaller percentage of people owning houses. The average housing price can absolutely escape the confines of the median income, if the median person does not own a house. The study's use of rent and imputed rent partially controls for this, but the broad answer for "Housing prices can't outstrip incomes forever, can they?" is "Sure they can, if nobody can afford houses."

4.) Have more people. If you're talking the returns to an asset class, and you own all that asset class, and then suddenly there are more people that need that asset, you're going to make money. This, to a large degree, actually happened during those 120 years.

Re: The Rate of Return on Everything, 1870–2015 (2019)

#77

Post by creer »

ggm wrote: post #58
sk11001 wrote: post #57

Earlier quoted context omitted.

They don't need to return to baseline. The overall market return can be around 7% - within that you'll have losers, flat lines and huge winners like Apple and Nvidia. That's how you get to the 7% average - by having some companies gain much more than that.

It's very hard for that to sustain over decades without causing market distortions. I'd be interested in what is the longest run of above-market returns by any company since the 1870s. In effect, if they accrue enough value, then they alter the average rate of return. And, since that sucks capital out of the rest of the economy, we're kind of fucked overall because companies making tinned peaches and medicine actuall…

Are these two example well chosen? Seems to me there has been plenty of entrepreneurship in food. So many new companies started in the past perhaps 20 years, and many now surprisingly large.

And medecine overall (drugs, machines, care, insurance, tests, prevention) has been considered a field with good future prospects for a long time - worthy of investing.

Re: The Rate of Return on Everything, 1870–2015 (2019)

#78

Post by ptero »

ggm wrote: post #74
JumpCrisscross wrote: post #71

Earlier quoted context omitted.

> since that sucks capital out of the rest of the economy, we're kind of fucked overall because companies making tinned peaches and medicine actually need capita What's constraining the latter is rates. There is zero evidence tech companies are causing the inflation that is pushing up rates. (If anything, it's broadly deflating.) (And to my knowledge, getting financing for tinning peaches or medicines is plentiful. I…

As a non-economist, I ask: do you think their above-grade returns can persist into the future for decades, without becoming a concern, or altering this 7% rate? My example of why it is bad is a hypothetical. If it's a stupid hypothetical I accept that, but my underlying belief that you cannot really have identified, "the same" companies continue to return 2-3x market average over 50 years without some concern remains…

It feels like I am always peddling Lyn Alden on macro questions. One of Lyn's recent public articles analyses long term returns and argues that most investments suck, and a few superachievers pull up the averages.

So Apples and Nvidias eventually rotate out of the return engines club and are replaced by next few champions; but not a broad group.

Re: The Rate of Return on Everything, 1870–2015 (2019)

#79

Post by javednissar »

cyberax wrote: post #68
_yb2s wrote: post #18

I don't understand how housing can increase in cost in a stable steady manner, as a fraction of household income over long periods of time like more than 100 years. It seems to defy logic, so it makes me suspect how it is being calculated when people claim that housing costs have gone up by massive amounts. Since only a small increase would price a large number of people out of the market- it seems logical that housi…

> I don't understand how housing can increase in cost in a stable steady manner It's the density death spiral. Dense housing gets more expensive (yes, dense housing IS more expensive!), that in turn drives even more density. The only way to fix it? Promote suburbs and smaller cities. There is literally _no_ other fix.

I don’t understand the logic here, the land itself will be valuable regardless of whether or not there is a house there or an apartment building. The principal component of the cost of buying a house or a condo is the associated land cost. Building more density gives more people access to that land.

If your contention is that more housing is bad because it draws more economic activity which raises land values then that’s fair but this is the same as arguing for less freedom of movement. Essentially any nation that adopts your policy prescription is taking a step towards turning into the Soviet Union.

That may sound like hyperbole but that is the end result of NIMBYism and illiberal land use policy.

Re: The Rate of Return on Everything, 1870–2015 (2019)

#80

Post by twoodfin »

JumpCrisscross wrote: post #69
TacticalCoder wrote: post #63

Earlier quoted context omitted.

> In peacetime, r has always been much greater than g This is an ultra simplistic formula, made by someone who's been born, raised and fed in a highly socialist country where the only word politicians know is "tax".

> is an ultra simplistic formula No shit. What gave it away, the two terms or the inequality? :) Joking aside, it's simplistic because it's elementary. If real returns exceed real growth, ceteris paribus , you have a net flow of principal (so to speak) from labour to capital. That doesn't mean one can conclude the argument with those two variables alone. But it's a valid starting point, and concludes with many soluti…

Why is reducing “r” desirable? Why not try to raise “g” instead?
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