Does gold retain its real value better than other assets/currencies?
I finally got around to reading a report from Scotia Economics that came out last month and compared stock pricing metrics for the S&P 500 to their historical averages. Like many others, the authors have concluded that stocks are cheaper than they have been over the last 20 years, but a 50-100 year history would put them around average value. So do we believe in reasonable growth in the future consistent with long-term valuations or a quick return to higher valuations?
There are three main factors that could have led to higher valuations over the past 20 years and may continue to do so in the future. Regulation is a big one that many individual investors may not take into account. While we never know the exact impact, the deregulation starting in the 80s could have fueled increasing corporate growth as well as more leverage (which raises values). The growing size of financial businesses contributed to the growth in the stock market as well as they went public. While this overall trend still has some momentum, we may be shifting towards more regulations in the future. Any change would take years to have an effect but this may lower future valuations.
Demographics are another popular theme. While there are many good arguments on every side, the last 20 years may have been the best time for baby boomers to invest, and they may start to gradually reverse that soon. On the other hand more open markets (due to less regulations) allow global investors to buy up assets. A few people retire expecting to live 5 years and leave no inheritance so many people may stick with an allocation that lets them plan for a longer time period.
Investor psychology is the third component. Following the financial cowboys of the 80s and the tech speculation of the 90s we may be seeing an increased focus on the stock market from ordinary investors which could last much longer and keep prices higher. As the Scotiabank report says, “40 years olds in the 1980s held far less debt in
inflation adjusted terms and had far lower equity ownership rates than 40 year olds in the lead up to the crisis”.
There was a time when stock dividend yields were normally above bond yields. In the 60s they crossed over and anyone who was waiting for a “return to normal” would be holding their breath for 40-50 years. It may be that investors back then decided the long-term returns of a stock including growing dividends and price appreciation were worth more than a bond with a similar annual cash yield. And maybe investors perspectives have changed again to focus more on price appreciation, although this is self-defeating and true long-term investors can’t buy into it fully.
So was the last 20 years just a time when there was more demand for assets than actual assets, driving up the prices temporarily? Or have fundamental factors changed in a way that will last for another 40 years? There are no good measures. The closest ones typically move at the same time as equity prices. Just like the prices they tell us little about the future since they are high until they aren’t. In a way this doesn’t matter much. I believe in stock market investments and I fear overvaluation, so as long as we stay near or below reasonable prices I’m happy to invest more. But this does show that it’s not quite time to borrow everything you can and put it into stocks. A balanced approach will minimize the future risks.
A recent FP article highlights a trend towards young single people buying houses or condos instead of waiting until they’re married. While it’s to be expected that builders and lenders are moving to make this easier it is a bit more surprising to see that financial planners are recommending this and government regulations still support prices on the high side.
The article reports that a lot of this is driven by people scared of being priced out of the housing market, so it’s just another side of pre-emptive spending. In this case it sometimes requires people to buy a house with a friend, which is sure to have some interesting results. I guess there just aren’t enough TV shows that glorify saving and investing to make it exciting enough for young people today. For a few people this might make sense, but the majority who haven’t exactly decided where they’ll be in 5 years would benefit more from $100,000 in savings than being anchored to a condo tower.
We can’t expect the people doing this to figure out the consequences it will have any time soon, and we can’t expect regulations to further prevent them from pushing the market in the wrong direction. So the only question left is how can we profit from this?
Other than good personal planning there’s probably not much we can do. My recent investment in a special situations lender based in BC might be getting some support from this but unless you’re a builder it’s probably too risky to do anything but watch the show.
The quote that ends the article says that a home is a great asset. While that’s not exactly wrong, I prefer the assets I acquired instead by waiting as long as possible to get our first home, finding an under-priced area of the market, and now figuring out ways to make it last longer (and shorten the mortgage). Maybe when all these first-time buyers figure out that a home doesn’t pay your bills there will be a rush to buy stocks, and I can sell my portfolio and retire 🙂 Of course they would probably have to refinance their mortgage to do that, if they haven’t already done so to buy a boat.
It looks like Citigroup is now facing legal action for selling securities to customers and then shorting them, just like Goldman Sachs last year. Never mind that the act of selling something is the same as shorting something you already have and no one objects to a regular trade, or the surprising fact that Citigroup did something which didn’t end up getting nationalized. It looks like a lot of people are over-reacting to this. And the funniest part is that people are now up in arms about how evil corporations caused poor defenseless hedge funds to lose money.
It could be a fraudulent transaction if they promised it was one thing and it turned out not to be that. But anything short of that is not a crime and maybe not even that unusual. How much do they have to promise anyways? Are they only allowed to sell securities that will never default? In some ways this sounds similar to blaming banks for issuing mortgages to people who couldn’t afford them without asking who applied for the mortgage.
Investors need to learn that nobody sells you something out of the goodness of their heart. Anyone who buys any type of securities, from individual investors buying stocks to institutional investors trading derivatives, needs to understand that (1) they are buying it from someone else and (2) that person no longer wants it for some reason. Anyone who expects otherwise shouldn’t be spared from their mistakes. A good market exists when one person wants to acquire something and another person wants to get rid of it. If you only think one side of that is valid, you don’t have a market and everyone loses.
Maybe the security you’re buying is being sold by a pension fund that has changing liabilities and needs to shift its assets, or maybe it’s being sold by someone who knows some bad news will come out tomorrow. If you can’t confidently judge its value on your own or get a written guarantee from someone else who specifically warrants that it meets certain criteria and will cover your losses if it doesn’t, don’t bother buying it.
We’re now seeing many examples of people who didn’t have the guarantees they expected. It’s painful but it’s cheaper to learn the lesson than to insure everyone for everything. I hope no one comes after me for buying lots of stocks when other investors were forced (by themselves) to sell at low prices. Or what about selling bonds that were at an all-time low yield and had high probabilities of declining in value, to unsuspecting investors who were tricked (by themselves) into buying? I think I should plan my escape now!
Yesterday I hinted at how the current lack of jobs is hiding an opportunity and a turning point.
The opportunity is removing the large organizations that have acted as middle-men and connecting people directly. In a way I’m a little confused about all the people who don’t know what to do next. If you have one skill and your neighbor has another, you can forget “the economy” and trade directly. If you’re not too deep in an urban area a small group of people could create their own self-sufficient economy. This is also behind the increasing number of online businesses (many fail quickly but a few create something new). As more people do this a new economy will grow to replace the declining old economy.
The turning point is reaching a new level of “work-optional” as a society. In the last century a growing number of people have joined a social class where they don’t need to work 10-12 hours a day just to survive, which is a game-changer. We’re still working through a few of the effects but we understand this concept now. Many people choose to continue working 12 hours a day to get the best that’s available today. Others are content to live like a king 100 years ago, which requires far less work these days.
With another great leap in productivity this could get to a level that would have been unimaginable 30 years ago. Natural resources and physical goods are a limiting factor, but many parts of our lives aren’t tied to these as much as they once were. Knowledge workers have less of an advantage now because even information is a commodity. But this is good for everyone because information grows without the physical limits that food, oil, and lumber have. Increasing productivity means that more will be available. And better information increases physical productivity too because we have less waste.
The only question is what we’ll do with it. Will we have a growing population to support? Will everyone try to get more and more, working hard to stay ahead? Will more people be happy with what they have and choose to work less? Since people don’t actually like “doing nothing” as much as they think, what will they do with work they don’t need to get paid for?
One way or another there are many changes coming. There is a lot of potential for the economy to grow, but there is also potential for people to be less attached to the economy. This is a theme I’ve been working on for years, finding how I can do my best work and make the most of it. I’ve also been building my business on the idea of making people far more productive so less people are needed and they don’t need to work long hours.
Personally I’m motivated to do a lot, not sit in front of a TV. I’m very interested in business so I’m likely to be doing things that make money for a long time. I’m interested in personal finance so I try to arrange my own finances like a fortress even though I could get by without it. But many other options are now available. When people get tired of waiting for someone to tell them what to do, maybe they’ll start taking advantage of those options.
There seems to be a growing sense that young people in their 20s and 30s aren’t getting the opportunities they were promised in life. I’m not old enough to know if this is really different from the past, but it’s clear that many people have hit a dead-end. And now with the after-effects of the recession(s), many more in all age groups have joined them. What’s going on here? One possibility is that a lot of the jobs people expected to have were given away for free.
I don’t just mean they went to low-cost countries. Some of the work is actually being done for free, by the same people who want better jobs. Sound crazy?
A blog post I came across recently highlights how this happens by drawing together three books from highly respected authors. Daniel Pink, Seth Godin, and Clay Shirky highlight how companies in the west are increasingly realizing that instead of hiring more and more people, they need to hire less people who do more. And it’s not just by working employees to death. Investments in technology and training can increase people’s output to the point where less people are needed (maybe the promised productivity gains from technology are finally coming through!)
At the same time, people whose skills aren’t fully used at work go home and spend their free time creating things that you couldn’t buy at any price in earlier ages, and then giving them away. In fact some of the free stuff is a higher level of quality than you can buy today. A large part of the internet is a testament to this. Put these trends together, and people are actually giving away jobs!
Each of the pieces makes sense on its own. But taken together it’s a strange picture. Some people can’t get jobs, others have jobs that limit what they can do instead of pushing them to do more. And yet those same people can be giving away something better than what they get paid for. Why aren’t people getting paid (more) for the highest value they create instead of boring and menial tasks?
There are two sides to this. Some things can only be done for fun and for free. They may be done more often now that the internet can connect people easily but that doesn’t mean they’ll turn into a business. For example there are great guitar lessons available for free but the percentage of guitar players who earn a significant income will never be very large. On the other hand, some things will contribute to the economy over time. Open source software is given away for free by experts but as their work gains popularity it often leads to new jobs and new business.
Hidden behind these changes there’s an opportunity big enough to change the world and a turning point that will change the world. Tomorrow I’ll explain more!