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zman1816
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Name: zman1816
Gender: Male
Interests: GOAL: Do whatever new activities come my way
Expertise: big fan of Richard Feynman. Can talk about his theories over coffee any day of the week.
Occupation: Apps Engineer
Industry: Semi
Message: message meEmail: email me
Yahoo:  zman1816@yahoo.com
Member Since:
7/7/2003
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| When a country stops creating new wealth, it's prosperity is doomed. The US has always been a prosperous country because wealth has always gone up. It's the reason people move from other countries to get a piece of the pie. Old industries have expanded as new industries have sprouted in the US generating new wealth. People bought houses to live in them and found themselves wealthy because of the appreciation. People owned stock through their 401k and saw huge gains over time. The average wealth of people went up for a number of years.
What is that wealth tied to? Is it tied to production? Is it tied to spending? Is it tied to revenue generation? If I rip you off, I become wealthier, but you become poorer...so the overall sum is zero. They say options trading is a zero sum game because one person's loss is another person's win. When houses or stocks appreciate, it's not a zero sum game. Sure one person might get a better deal than the other, but overall wealth increases... at least that's what they say. Over the decades, production and innovation increased in the US generating lots of wealth. That wealth generation was not possible with the high salaries, so to be competitive, production was driven overseas. Production and innovation are the key to wealth generation... and both are intertwined.
You can only innovate on an existing product. Think about, if you lived in the caveman era, you would innovate by making sharper weapons or thinking of traps for animals. you see what works and try to improve on it. Small steps in constantly improving methods and actions result in large changes over time.
The idea is that you innovate continuously, ever so slowly and wealth grows without realizing it. That was typically the case over the many decades. Then you have the internet boom where excess capital was chasing the latest innovations that were literally altering the way we live. The technology was disruptive and sudden rather than gradual, so there was a sudden explosion of wealth followed by decreases in wealth for brick and mortar companies. The net result was that wealth was generated, but too much was generated to justify the meager profits and down came the boom. Just so be clear, the Nasdaq peaked around 5000 in March 2000. In Oct 2007, considered the market peak of the latest boom, the nasdaq peaked at 2800, about 40% below its all-time high.
Innovation in technology easier understand. The old cell phones did not have texting, internet, or cameras... so there's been a lot of innovation in the cell phone arena. The more complex innovations happen along supply chains or with financial instruments. Packaging mortgages into securities and selling them over the open market was an innovation that was partly responsible for the housing boom. The problem was that people bought houses they could not afford. Whose fault is that? The buyer partly because he should had his due diligence. I CANNOT relate because when I got prequalified for a loan, the amount was so small. The standards have always been there, banks just got lax about following them. They relaxed their standards because they had excess capital and they had to loan to someone. They literally started giving loans away. To help people qualify, they charged a low interest rate. An investment can make money in two ways: 1) interest on the asset 2) appreciation. Since excess capital existed in the housing market with low interest, that drove appreciation up on the loans because it was understood that house prices never fall.
House prices went up so much that enough wealth was generated for many years to come. How long will we be we stuck with falling house prices? How can house prices go up after many investors have lost their money? Are they going to invest in US housing again? The wealth generated from the internet boom never caught up even with the housing boom. The housing boom is that much more worst because it affected a greater number of people. To make it worse, wealth isn't tied to production anymore. Nothing is produced in the United States. The labor force has gotten smaller in the last 10 years. There were 200k more jobs in Oct 1999, yet the US population has grown by 37 million. It's a whole new world now. This isn't the same economy that our grandparents or parents grew up in. In reality, the decline started in 1999. During the Bush years, the median income was falling almost the whole time. The US economy is beyond the economy of scale and is entering the new phase, the slow growth, flattening out phase where new wealth isn't generated at the rate we're used to.
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| The truth is One, but different people call it by Different Names | | |
| Let's take a look at the major stock markets and see where they are today....
The S&P500 closed today at 752... if you had invested in the S&P 500 in Jan 1997, you would have made no money in the last 12 years.
What about world stocks?
The FTSE100 (Britain's index) is around 3900... it's stock market has gone no where since Aug 1996. That's worst than the S&P500.
The DAX (Germany's index) has gone no where since Sept 1997.
What about Asian markets? They must be doing better than European markets right?
Hong Kong's Hang Seng has gone no where since Oct 1996.
Japan's Nikkei has gone no where since it started in 1985. Japan's index is the worst, it's been 19 years since the market peaked at approx 39800 and stocks are today at 7910 (down 80%).
Ok ok, I keep mentioning the mature Asian economies, but what about China and India right?
Yes you got me there.... India and China are the two countries that are doing better in the last 10 years. They are the exceptions.
So when Suze Orman goes on TV and says that stocks always go up and you have to invest in the long-term, I guess at some point we have to define "long-term". If you retire at 65 and start working at 25, you work for approximately 40 years (reasonable). The Great Depression took 25 years to recover. 25 years out of 40 years is more than half your working life. Should that be considered long-term? You could have invested in the stock market your whole life from 1910 and come 1929, the market crashed and you just would not have enough time for the market to recover.... i'm just talking about recovering, still haven't made money yet. Is that reasonable?
The market will probably fix itself and young people today with jobs are lucky and can ride the wave up. It'll be slow steady growth, show symptoms of a mature economy, and rise slowly. For people retiring in the next 20 years (like the baby boomers), if they had their retirement money in stocks, they are SCREWED.
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| The other day I was talking to my friend about investing in the stock market and he said he's going to increase his 401k contribution and start investing more cash into the market because prices are really depressed right now. There's a saying that the stock market always goes up over the long term. Suze Orman has a show where she talks about it all the time. Ben Stein goes on Yahoo Finance and says the same thing, that the stock market has the best returns over the long term. In recent times (last 15 years), 401k and other retirement accounts have gotten big that bank on the fact that stocks always go up in the long term. 40 years ago, people saved their cash they earned for retirement, but now they stash their money away in a 401k account and it magically grows over time by amounts that would never have been possible by saving alone. There's one major problem here.... the stock market.
Why is Google down over 50% ? They're literally used everyday and are everywhere and highly profitable... but they can't maintain the growth rate of the past quarters. A common barometer for investors is the P/E ratio. A low P/E ratio means the company is undervalued, but it's not true for growth companies because they have high P/E ratios due to their growth. Investors typically look at the PEG ratio or Price to earnings to growth. A PEG ratio of less than 1 means it's a good value vs something greater than 1 means it's expensive. The fact is, Google has been growing about 50%-100% annual growth for the past three years. If you don't believe me, look at their income sheet... I want you to look at their income sheet to prove it to yourself. Companies are expected to grow their profits 20% every year or they're punished. At the end of 2007, the S&P 500 excluding the financial sector was expected to grow their profits by greater than 20% for 2008.
20% Growth example
If you had a $1 in 1900 and it grew at 20% per year (so in 1901, you would have $1.20 and in 1902 $1.44), how much money would you have at the end of 2008? That $1 with 20% growth over 108 years would become greater than $350 million dollars. By 2014, it would be in excess of $1 billion dollars. Over the long term, 20% growth does not seem sustainable, yet companies are expected to post 20% profit growth year after year.
Average household income in 1978 was $38000
Adjusted for inflation, the average income in 1978 today would be equivalent to $120,000. If you don't believe me, here's the inflation calculator http://www.westegg.com/inflation/ . The average income today is about $50k. The fact is, people made more money before. A single engineering salary could afford a house and raise a family. Now you need a dual income to buy a house. I can't support my wife and children on only my income... and I make supposedly good money.
The stock market problem
Back in the days, people saved money for college, saved for buying a house, saved for retirement. Majority of the people were not into the stock market and companies did not have expectations to grow profits 20% every year. Today things are different. It's not efficient to save for retirement because you can't accumulate enough by saving. We have retirement accounts such as 401ks that invest in the market to compound the money saved. Today many people are in the stock market through personal brokerage accounts, but mainly from retirement accounts. As more people got into the market, there were greater expectations for higher returns. Billions of dollars are given to fund managers who go to companies and demand 20% profit growth. While the company is growing, everyone is happy, stocks are going up, more people are buying into the fund, retirement accounts getting bigger, more money to go all around. But there's only so much a company can grow and then it starts slowing down and fund managers sell and the stock goes down. Then to maintain 20% profit growth, instead of growing revenue, they'll start saving by cutting costs, laying off people, outsourcing jobs. Again, how practical is it to grow profit through cost cutting? You outsource jobs one year and you get 20% profit growth, what about the next year? The fact is, what's good for investors is not good for the economy as a whole.
Moral issues of investing
When I was 16 and first started researching the stock market, I was perplexed why a company's stock would go up when layoffs were announced. All I knew was that layoffs were bad. Investors don't care about the economy as a whole. What's good for them isn't good for the average person. You invest a small amount in a fund and get decent returns at the expense of thousands of jobs... and as long as you're getting a good return, we don't care how mutual funds invest our money. What happened to a sustainable business model? Private companies are a lot better run than public companies and are more profitable long run. Check out Chipotle's stock. In the last year, they've opened many restaurants and are highly profitable, but they're same-store sales are down, sales are slowing down, therefore the stock is down almost 100 points.
What happens from here
After WWII, the US emerged as the economic powerhouse. The US gave billions of dollars to Europe to help with their economies. The US had been competitive in manufacturing and was accused by Europe for their cheap wages. What country today is giving billions of dollars to the US? Has low wages and manufacture's about 90% of the world's goods? ... China. They buy billions in US treasury bills, but the recent $586 billion stimulus package showed that now they are going to be investing at home rather than giving it to the US. What happens from here is a lot less clearer than in past recessions.
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| An Obama win deserves a blog entry.... considering that I started this blog in criticizing Bush. After 8 years of terrible decisions, hopefully the next 4 will fix some of the wrongdoings.
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