Re: FW: History shows paths to market crashes, but lessons seem forgotten
In a message dated 1/5/03 6:56:36 PM, [EMAIL PROTECTED] writes: << Take the crash of 1929. In Devil Take the Hindmost, Edward Chancellor records how Wall Street's elite convinced themselves that the rules of economics had been rewritten and that the market could support ever-higher share prices. >> In all fairness, while it's possible the market would have crashed eventually anyway--that's certainly true of the bankers who ran the Fed at the time--the Fed caused the stock market crash, and did so deliberately by tripling the rediscount rate the day before the crash. David Levenstam
Re: FW: History shows paths to market crashes, but lessons seem forgotten
I find it interesting that there are so many more articles about bubbles than about the underlying reality of the equity premium puzzle. This is a nice case where a little knowledge is a dangerous thing. The average investor would be far better off if they did think that enormous returns could continue forever because, in a deep though less dramatic way, they DO. I suspect that a lot of people have been turned off to stock ownership for decades in spite of the fact that they are the smart long-term bet. -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] Mr. Banks: Will you be good enough to explain all this?! Mary Poppins: First of all I would like to make one thing perfectly clear. Banks: Yes? Poppins: I never explain *anything*. *Mary Poppins*
Re: FW: History shows paths to market crashes, but lessons seem forgotten
In a message dated 1/7/03 12:53:47 AM, [EMAIL PROTECTED] writes: << I find it interesting that there are so many more articles about bubbles than about the underlying reality of the equity premium puzzle. This is a nice case where a little knowledge is a dangerous thing. The average investor would be far better off if they did think that enormous returns could continue forever because, in a deep though less dramatic way, they DO. I suspect that a lot of people have been turned off to stock ownership for decades in spite of the fact that they are the smart long-term bet. -- Prof. Bryan Caplan Department of Economics George Mason University >> If one had a cynical bent one might suggest that the predominance of stories about the small bubbles in the huge cake batter of the miracle of modern economic growth stems from a prevalence of statists in the news media. David Levenstam
Re: FW: History shows paths to market crashes, but lessons seem forgotten
> If one had a cynical bent one might suggest that the predominance of > stories about the small bubbles in the huge cake batter of the miracle of modern economic growth stems from a prevalence of statists in the news media.< > David Levenstam What about the large bubbles? Fred Foldvary = [EMAIL PROTECTED]
Re: FW: History shows paths to market crashes, but lessons seem forgotten
--- Bryan D Caplan <[EMAIL PROTECTED]> wrote: > I find it interesting that there are so many more articles about bubbles > than about the underlying reality of the equity premium puzzle. This is > a nice case where a little knowledge is a dangerous thing. The average > investor would be far better off if they did think that enormous returns > could continue forever because, in a deep though less dramatic way, they > DO. I suspect that a lot of people have been turned off to stock > ownership for decades in spite of the fact that they are the smart > long-term bet. Two reason for owning bonds in addition to stocks are: 1) the long run for stocks can be a very long run, so short-term bonds are used for funds that need to be available sooner. 2) what counts is returns after tax, and the double-taxation of dividends plus the taxation of nominal rather than real gains reduces the compounding gain. For a 50% marginal tax rate, the real wealth return on the DJIA is only about 2.5%, relative to an untaxed rate of 6.7%. Thus, a high-income person may be better off in tax-free municipal bonds after having maxed out his tax-free retirement accounts. Fred Foldvary = [EMAIL PROTECTED]
Re: FW: History shows paths to market crashes, but lessons seem forgotten
The average > investor would be far better off if they did think that enormous returns > could continue forever because, in a deep though less dramatic way, they > DO. I suspect that a lot of people have been turned off to stock > ownership for decades in spite of the fact that they are the smart > long-term bet. > -- People aren't always alive in the long-term! Lots of baby boomers are approaching retirement when they will begin to draw down their savings. If their savings are being decimated by a bear market at the same time, they may not have enough to last them until they die. For people who have already accumulated a nest egg and may not be young enough to start over, capital preservation is rule number one. So it may be a wise precaution for these people to move their wealth into save havens, mainly bonds. In a few years, this movement of baby boomer money into safe havens should drive down both the price of stocks and the yield on bonds. ~Alypius Skinner
Re: FW: History shows paths to market crashes, but lessons seem forgotten
In a message dated 1/7/03 11:58:51 AM, [EMAIL PROTECTED] writes: << > If one had a cynical bent one might suggest that the predominance of > stories about the small bubbles in the huge cake batter of the miracle of modern economic growth stems from a prevalence of statists in the news media.< > David Levenstam What about the large bubbles? Fred Foldvary >> Compared to the factor of 25 by which real per capita incomes have grown since the Industrial Revolution, there ARE no large bubbles. David Levenstam
Re: FW: History shows paths to market crashes, but lessons seem forgotten
Alypius Skinner wrote: > People aren't always alive in the long-term! Lots of baby boomers are > approaching retirement when they will begin to draw down their savings. If > their savings are being decimated by a bear market at the same time, they > may not have enough to last them until they die. People retiring today can expect to live another 20 years or so. So even there it's not clear that heavy equity investment isn't the smart choice. As far as I understand the literature on the equity premium puzzle, this explanation doesn't really work. And is % of assets in equity really tightly linked to age anyway? I suspect that people who avoid equity when old also avoided when young, and vice versa, but maybe I'm wrong. For people who have > already accumulated a nest egg and may not be young enough to start over, > capital preservation is rule number one. So it may be a wise precaution for > these people to move their wealth into save havens, mainly bonds. In a few > years, this movement of baby boomer money into safe havens should drive down > both the price of stocks and the yield on bonds. > > ~Alypius Skinner -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] Mr. Banks: Will you be good enough to explain all this?! Mary Poppins: First of all I would like to make one thing perfectly clear. Banks: Yes? Poppins: I never explain *anything*. *Mary Poppins*
Re: FW: History shows paths to market crashes, but lessons seem forgotten
> > Compared to the factor of 25 by which real per capita incomes have grown > since the Industrial Revolution, there ARE no large bubbles. > > David Levenstam True, but people don't live 300 years! People who make their fortunes in a bull market and then get decimated in a bear market may not recover in their lifetimes. It has happened before. ~Alypius Skinner
Re: FW: History shows paths to market crashes, but lessons seem forgotten
> People retiring today can expect to live another 20 years or so. So > even there it's not clear that heavy equity investment isn't the smart > choice. As far as I understand the literature on the equity premium > puzzle, this explanation doesn't really work. Yes, it does. If you're drawing down your savings in retirement at a constant rate while your stocks are losing their value, a ten year bear market may leave you with nothing when the next bull gets underway. The 7% long-term inflation-adjusted return on equity investments (composed of dividends plus capital gains) is only true for people who enter the market at very low P/E's and benefit from dramatic P/E "inflation." ~Alypius Skinner
Re: FW: History shows paths to market crashes, but lessons seem forgotten
In a message dated 1/8/03 7:10:56 AM, [EMAIL PROTECTED] writes: << True, but people don't live 300 years! People who make their fortunes in a bull market and then get decimated in a bear market may not recover in their lifetimes. It has happened before. ~Alypius Skinner >> yes, and that may in part account for focus on the busts, but the same people who cover the busts with such glee either do not cover the booms, or cover then grudgingly and with contempt. Bryan Caplan started this thread (or responded to an article someone had sent starting the threat) by asking why the bubbles get so much attention and the underlying growth gets so little. I submit that one cause may be that people rarely appreciate what they have, but surely lament what they lose. Another may be that the vast majority of the people who report the news hate liberty and prosperty (for anyone except themselves and their cohorts, of course) and love--one might say are addicted too--government control. It may well be that most of the people who report the news don't have a clue as to the 25-fold increase in real incomes over the past 300 years, but I'm sure that if they did they'd mostly either not report it at all, or focus on all the "flaws" they can find or imagine in that truly miraculous news. David Levenstam
Re: FW: History shows paths to market crashes, but lessons seem forgotten
Alypius Skinner wrote: > The 7% long-term inflation-adjusted return on equity investments (composed > of dividends plus capital gains) is only true for people who enter the > market at very low P/E's and benefit from dramatic P/E "inflation." How can that be? That 7% is an average over all owners of stock, not a conditional return for people who bought at the right time. (Incidentally, 7% sounds low relative to other averages I've heard. Burton Malkiel cites a figure of 10% real pre-tax if I recall correctly). I don't think you suggested otherwise, but it's worth pointing out that focusing on inflation-adjusted returns just makes the equity premium more striking. Question: Do you think that the flight from equity has really been more substantial among older investors? I've seen no data, but I'd be skeptical. > ~Alypius Skinner -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] Mr. Banks: Will you be good enough to explain all this?! Mary Poppins: First of all I would like to make one thing perfectly clear. Banks: Yes? Poppins: I never explain *anything*. *Mary Poppins*
Re: FW: History shows paths to market crashes, but lessons seem forgotten
> In a few years, this movement of baby boomer money into safe havens should drive down both the price of stocks and the yield on bonds. > ~Alypius Skinner No, for two reasons: 1) Many who retire will not sell all their stocks. If they get an annuity, the stocks are just transferred to the insurance company. The reality of p=r/i will in the long run prevail. 2) Stock markets are increasingly global, and if there is good value in US stocks, Asians and Europeans will buy them. Fred Foldvary = [EMAIL PROTECTED]
