This is a chart of the S&P 500 index over the last half-century.
A half-century is a very long time long enough for a person of any age to think “This is it. This is how the stock market works. It has always been like this. It will always be like this.”
From the appearance of this chart, it would be reasonable to conclude “Stocks almost always move up and down in a channel. Sure we hit the occasional anomaly here and there, but those are anomalies, and then the market returns to its normal pattern”
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However, let’s, for a moment consider those two anomalies not as two separate events. Let’s consider them together and call that 12-year period “A lost decade.”
There may be some skeptics, so here is a lifetime chart of the Dow Jones industrial average. (It does not require reconstructing any predecessor. May 26, 1896, by financial reporters Charles Dow and Edward Jones.)
Again, we see that “lost decades” are very common in the stock market, (more common than you probably think.) They have never been more than 16 years apart and they typically last 12-16 years. (Why not? Japan’s Nikkei has been through a “lost generation.” It’s been bumpy, but net flat for 35 years.)
If your investment portfolio moves a bumpy sideways for 12 years, and inflation is 2.5% you lose 26% of your portfolio. (That’s bad at any age, but losing 26% of your portfolio when your 45 or 55 etc is life-altering.)
Meanwhile, if, during the same period, you had been invested in commodities you would have broken-even. If you had been invested in bonds paying 1% more than inflation, you would have made 13%.
I am NOT saying panic and sell everything today. I am saying be aware that there will likely be at least 2 and probably 3-4 “lost decades” during your lifetime and that there is a reasonable chance we are entering one or did so recently.
This guy is more shrill (alarmist) than I like to be but his general point is an accurate one.
(I would use a lot of words and say a very similar thing in a calmer more thoughtful tone
To distance myself from his tone I will post his entire tweet.
But it makes a LOT of sense and his point often goes unnoticed.
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Regarding interest rates:
2% vs 5% vs 7% matters, but what matters even more (in most applications) is the direction they are heading and how quickly.
If you live in an era of falling interest rates, like we have had for 40 years, odds are your experience will be different than if live in an era of rising interest rates.
“This time is different” is a phrase that people generally use tongue-in-cheek, but this time it really might be different no one knows.
Increasing the money supply leads to inflation. The lags varies. the multiplier varies but that is the case and no economist left, right, ultra left etc disagrees with that. NOTE: The further to the right an economist is, the more likely he is to believe that increasing the money supply is the only thing that causes inflation.
The Fed knows they overdid it. They are reducing the money supply as quickly as they think they can. . . ever concerned that if they move too quickly or for to long they will cause a recession
They don’t use this exact chart but it illustrates the concept.
The US has never held more than 60% of GDI as cash on the sidelines.
There is no reason to think it will start now.
As long as the current number is so far outside the range the risk of inflation is significant. The Fed knows this and is working to reduce the money supply as rapidly as it can without causing a recession.
