Economics & Finance

Return Assumptions and the Bear

by

A lot of people throw around terms and assumptions without questioning them deeply. One of the most common assumptions is that stocks beat bonds (and beat the heck out of cash) “over the long haul”.

The basis in fact for this assumption is the long term equity records in the USA, the UK and Canada. These markets, over the long haul, have provided returns beyond bonds and cash.

Why only these markets? Because the rest of the markets (Germany, Japan, China, etc…) had some sort of cataclysmic event (World War, hyperinflation, or takeover by non-capitalist regimes) that make comparisons “over the long haul” useless. Even in these markets it is hard to see how wealth could have been preserved; cash (currency) was debased and debts were reneged upon, so all bets were off.

One key element of the “returns beat bonds and cash” is the assumption that you stay the course through horrendous market periods, hold on to equities, and then ride the upward ticks. If you act as many people do and sell when the market gets difficult, you are apt to be out of the market when it shoots upwards. Some of these bear markets are very lengthy and you have to have nerves of steel to ride them out.

Read more

P.J. O’Rourke on the Daily Show

by

Viacom put the entire archive of Daily Show with Jon Stewart online last October. I haven’t seen many bloggers mention this, and no conservative blogger, so at least part of our readers may not heard about this yet. The Daily Show may be a bit too liberal for the taste of most Chicago Boyz contributors and readers, but there is a lot of good stuff there.

For example, there is this clip of P.J. O’Rourke presenting his new book, On the Wealth of Nations. O’Rourke has done something many eminent economists never managed or got around to, he worked his way through Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, or ‘The Wealth of Nations’, as it is more commonly called. And O’Rourke actually managed to get such a good grasp on this difficult subject matter that he was able to write a book of his own that makes it accessible to the general public.

The book is highly recommend, an excerpt from the first chapter can be found here.

(The first link to the Daily Show leads to the index page there, but it directly leads to the clip with P.J. O’Rourke, too, at least when I click on it).

Quote of the Day

by

Technological advances, from the light bulb and telephone, to the car and airplane, to the transistor and internet, are discontinuities from life as previously known. So are penicillin, the C-section, Lipitor and MRI’s. So are innovations like the corporate org chart, capital and expense accounting, the experience curve, and consumer marketing. All these innovations constitute the infrastructure of wealth and longevity.
 
Within the general trend of increased global wealth and longevity are periods of decidedly negative impact as well. The Black Death of 1348 wiped out half of Europe, the 1918 influenza epidemic killed 30 million people, and World War II reduced the earth’s population by 2.5%. Mao and Stalin also killed tens of millions of their people. There have periods of economic death as well. The 75 years of the USSR’s existence comes to mind, and of course the Great Crash, when the Dow Jones Industrials went from 299 to 41, and a quarter of America went unemployed. We would note that few of these negative discontinuities were foreseen (heck, the New York Times may still think that the USSR was a model of economic success!).
 
We really don’t know what is going to happen in the future, in part because the West is fat, dumb and happy, and has been so for a very long time now, at least since World War II. So we do not know what will happen when the West, and other parts of the world, experience the inevitable and severe stresses associated with the massive discontinuities that inevitably happen from time to time. The West has been super lucky in that the post-WWII discontinuities have almost all been on the positive side so far. It would be a mistake to blithely extrapolate that endlessly into the future.

–Dinocrat