Post-Golden Age returns? Are we in the Golden Age?

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Josué
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Post-Golden Age returns? Are we in the Golden Age?

Post by Josué »

I just ran into this video: http://www.investopedia.com/video/play/ ... e-returns/

I'm quite new to investing so there's a few things I don't get about this video. Haven we been on a "Golden Age"? Why did that age end/is that age ending? What can be the reasons for greater volatility that the interviewee talks about? Would this Golden Age end affect our prospects of ER?

chenda
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Re: Post-Golden Age returns? Are we in the Golden Age?

Post by chenda »

The golden age is never now.

jacob
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Re: Post-Golden Age returns? Are we in the Golden Age?

Post by jacob »

If you're new to investing, this is probably TMI ...

The Golden Age spanned the post WWII years until about 1973. During that time one could get high yields both in bonds and stocks. This was also the time of generous company pensions because it was believed that exponential growth would last forever. Most of the huge liability issues we face today were created during that time. It ended with the oil shocks and a decade of stagflation with increasing prices and stagnant markets/economies. Since around 1981, taxes have been lowered and interest rates have been gradually lowered down to ZIRP creating a lot of tailwind and the common perception for anyone between roughly the age of 45 and 65 that "stocks always go up in the long run.

Added to this boom was also deregulation, an increase in international trade, and the end of the Cold War. Of new technologies we had computer tech and financialization (subprime, derivatives, ... ). New sources of energy were found in the North Sea and Alaska which brought energy prices down to afforable levels again. Most of this era was known as the Great Moderation. This is where the Greenspan Put became popular (its modern equivalent is QE) when central banks would go in and put(*) a hand under the market by lowering the interest rate, thus moderating the business cycle. Overall, that [overly low rates] lead to whole bunch of dumb malinvestments which triggered around the world. Japan in 1989. The Asian Crisis in 1997/98. The DotCom bubble in the US in 2000. Thus people between age ~35-45 will be somewhat skeptical about "the long run" having seen several storms while also having received little benefit from the "long term trend" of their investment career so far.

(*) Put refers to a put-option that provides downside protection if the security falls under a certain price level.

Ultimately, all this culminated in the global financial crisis in 2008/09. Which we're still dealing with. Solutions have generally been of the mercantilist beggar-thy-neighbor where every large trading block in the world (Japan, EU, China, US) have tried to lower their interest rates and depress their currency. The US has so far been the best as this game, so the USD and markets are high now. Thus the rosy outlook of investors under 30-35 having only experienced the exuberance of QE.

This would result in more volatility because there's most credit (hot money leverage) sloshing around in the system. The QE of various countries have to a large degree decoupled the economy from the market (e.g. these are all financial moves ... why we don't see much effective job creation anymore). Lower returns obtain from everything being hugely overvalued relative to historical values (e.g. the only thing to drive prices up even higher would be "greater fools"). The lack of correlation comes from the observation that investing doesn't really function as much as investing used to do (i.e. as a way to finance business) but act in a more speculative and leveraged sense. What El-Erian is hinting at is that we're entering a trading range where things go side-ways and where asset classes no longer rebalance very well. He's still saying that cash is worthwhile suggesting that he's not considering inflation as a factor (yet?!)---otherwise I think he'd add what ought to be non-traded or rarely traded classes (I don't think gold qualifies anymore ... in 2009 at the bottom, gold was strongly correlated with stocks).

Observe that market trending and rebalancing are EXACTLY what all the popular strategies currently rely on and recommend.

FIRE is still possible, but just following the herd is not going to be as effective as it was during the "rising tide" era.

daylen
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Re: Post-Golden Age returns? Are we in the Golden Age?

Post by daylen »

@jacob I know it all kind of blurs together, but what are some sources on this topic?

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Re: Post-Golden Age returns? Are we in the Golden Age?

Post by jacob »


cmonkey
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Re: Post-Golden Age returns? Are we in the Golden Age?

Post by cmonkey »

That one is not at my library, but this one is. Anyone read it ?

DSKla
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Re: Post-Golden Age returns? Are we in the Golden Age?

Post by DSKla »

What are examples of non-traded or rarely traded asset classes other than gold that one would want as inflation insurance? Is that basically the alpha strategy?

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Re: Post-Golden Age returns? Are we in the Golden Age?

Post by jacob »

Land, commodities, food, non-listed businesses, stuff where the main input is skilled labor (guns, precision tools).

johnbroker
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Re: Post-Golden Age returns? Are we in the Golden Age?

Post by johnbroker »

jacob wrote:Land, commodities, food, non-listed businesses, stuff where the main input is skilled labor (guns, precision tools).
I completely agree with this. The timing is the main problem, i.e. when should we start acting because this is a paradigm change...

Josué
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Re: Post-Golden Age returns? Are we in the Golden Age?

Post by Josué »

Thanks for the clarification, I'm still processing jacob's detailed reply.
jacob wrote: FIRE is still possible, but just following the herd is not going to be as effective as it was during the "rising tide" era.
Is there a herd behavior here? I feel that every one does his own thing at least here in the forum, did I perceive this wrong?

Personally I am feeling quite tempted to start buying index funds of both stocks and bonds asap. I've saved 20k€ (some 75% SWR hehe) since 4 years ago when I first read the book but now I want to start investing my upcoming savings. However this video startled me a bit because it challenges my assumption that buying and holding index funds will work...

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TheWanderingScholar
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Re: Post-Golden Age returns? Are we in the Golden Age?

Post by TheWanderingScholar »

Josué wrote:Thanks for the clarification, I'm still processing jacob's detailed reply.
jacob wrote: FIRE is still possible, but just following the herd is not going to be as effective as it was during the "rising tide" era.
Is there a herd behavior here? I feel that every one does his own thing at least here in the forum, did I perceive this wrong?

Personally I am feeling quite tempted to start buying index funds of both stocks and bonds asap. I've saved 20k€ (some 75% SWR hehe) since 4 years ago when I first read the book but now I want to start investing my upcoming savings. However this video startled me a bit because it challenges my assumption that buying and holding index funds will work...
I think he meant society as whole and not just the forum.

Josué
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Re: Post-Golden Age returns? Are we in the Golden Age?

Post by Josué »

Right, that would make more sense. But when referring to society's behavior towards FIRE, what exactly does one mean? Most people never reach it so I don't see what the average strategy would be.

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Re: Post-Golden Age returns? Are we in the Golden Age?

Post by jacob »

I meant that the trending performance over the last [...] years (see above) means that almost everybody now believes that index investing, which overperforms managed funds in a trending market but underperforms managed investing in a side-ways market, is the only way to go. We seem to be at a point where very few even stop to consider alternatives.

Kriegsspiel
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Re: Post-Golden Age returns? Are we in the Golden Age?

Post by Kriegsspiel »

cmonkey wrote:That one is not at my library, but this one is. Anyone read it ?
Yes, it's like 900 pages of very interesting economic history and forecasting. It's on Bill Gates' and Tyler Cowen's lists of the best books of the year. Right now, I'm reading Beyond Growth by Herman Daly, and it's a really good followup to TRAFOAG. The applicable quote from Daly being "that the world is moving from an era in which man-made capital was the limiting factor into an era in which remaining natural capital is the limiting factor," which Jacob implied by saying that land and commodities will become better investments as we move further in that direction.

But anyways, you might read TRAFOAG as a description of how man-made capital ceased to be the limiter in Leibig's law. Another quote from Daly: "too many accumulations of money are seeking ways to grow exponentially* in a world in which the physical scale of the economy is already so large relative to the ecosystem that there is not much room left for growth of anything that has a physical dimension." So, physically, things might not have much more room to grow, but things without physical dimensions (digital) can. At first glance, this jives with Bill Gate's criticism of TRAFOAG, namely, that digital and computer-driven progress will have more impact than Gordon believes it will. However, in order to have digital "things," you need materials to make computers, and energy to run them. So that quote could even be expanded to include the non-physical/digital if rare-earth minerals and energy become uneconomical.

* "You cannot permanently pit an absurd human convention (compound interest) against a law of nature (entropic decay)." - Soddy

So maybe those books don't really give you good tactical input about investment returns, but they could give you a better understanding of the global/macro view?

cmonkey
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Re: Post-Golden Age returns? Are we in the Golden Age?

Post by cmonkey »

Thanks for the input. It is now waiting for me at the library.

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Seppia
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Re: Post-Golden Age returns? Are we in the Golden Age?

Post by Seppia »

Sounds like a great book, thanks for sharing.
Here's a nice review from P. Krugman
http://mobile.nytimes.com/2016/01/31/bo ... -were.html

7Wannabe5
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Re: Post-Golden Age returns? Are we in the Golden Age?

Post by 7Wannabe5 »

johnbroker said: I completely agree with this. The timing is the main problem, i.e. when should we start acting because this is a paradigm change...
My mind is still a muddle, but I think that the important concept is "emergy." Like if you saw somebody burning a piano for firewood, you might say "Dang, that's a waste of emergy!" Right now, consumer end gasoline is running around $2/gallon and consumer end white rice is running around $6 for the kilocalorie equivalent. Probably less than 10% of the cost of white rice can be assigned to non-petroleum dependent inputs such as cost of owning/leasing farmland (solar access rights.) So, if gas goes up to $8/gallon, then cost of conventionally grown/distributed white rice will likely go up to $22.20 for kilo-calorie equivalent. Price obtained for local organically grown/bicycle-transported potatoes will therefore close to quadruple while cost to produce might only double, so the value of near-urban farmland (solar access) should rise in accordance. Something like that.

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