"I place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared. To preserve our independence, we must not let our rulers load us with perpetual debt." -Thomas Jefferson
Whose Line Is It?
"The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here. Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better."
Whose line is it? Well, if you guessed Barack H. Obama you are correct. Here is the link to his Congressional testimony 3/16/06, just four years ago.
Now the Presidents economic advisor, Austin Goolsbee, say's that a refusal by the Senate to increase the government's debt ceiling would be "catastrophic" and a sign of "insanity". Well, which is it Mr. President, insanity or a sign of leadership failure?
Rational Expectations:
In my last post "2011-2020 Prognostications" I shared my little excel spreadsheet for calculating future returns in the stock market. At the end of that post I said that investors might expect 2.5%-3.5% real annualized returns from stocks over the next decade. Some thought that this was an excessively bearish forecast, but the fact is that the US stock market has averaged an annualized real return of 1.95% from 1871-2010.
I've been working on getting some year-end performance numbers together and happened to stumble across an excellent web site, Visualizing Economics ( www.visualizingeconomics.com ). They had a series of charts showing the long-run performance of stocks and GDP growth. Excellent stuff if you are as addicted to chart porn as I am.
This is the first of a series of visualizations based on the stock market data used in Irrational Exuberance. Written by Rober Shiller, this book explores the reasons why bubbles form in stock markets and housing markets. You can find his data at IrrationalExuberance.com
Another stock graph similar to Exponential Growth Rate of US Stocks since 1871 except this one is plotted on a semi-log scale to help illustrate the price movement of S&P Composite Index. For example, the percent change in the index’s value during the 1990s “Internet Stock Bubble” (a little over 250%) was similar to the price change during the 10-years preceding the 1929 Stock Market Crash.
Log scale version of yesterday’s Real Growth of US GDP graph. If you look at the Long-term Stock Growth graph, the slope of the trendline looks similar to the US GDP trendline. However, when you calculate their annualized growth rate from 1871-2009 you get:
Annualized Real Stocks Price Growth 1.95%
Annualized Real GDP Growth 3.47%
Annualized Real GDP Growth 3.47%
How could Real GDP grow 1.5% more than Real Stock Prices? The answer may lie in the fact that GDP includes all US businesses (public & private), and many non-public (sometimes smaller) businesses have much faster growth rates than their much larger publicly traded counterparts.
I'll have another post in the near future going over 2010 performance for a variety of assets.
Be careful out there, and keep the lights on,
Chris Wiles, CFA
412-260-7917
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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