Bush Era Investment Strategy
Classic investment theory says that investors should pay a premium for safety and command extra compensation for taking risk. But the above chart of the last eight years shows that we have been living in a financial version of Bizarro World where up is down and smart is stupid. Long term Treasuries (ostensibly the safest investment) have generated by far the best returns, while NASDAQ stocks (the riskiest) have paid out the worst returns.
So much for all the Brave Risk Taker rhetoric of the neo-Hooverites. It's time to rethink American Capitalism.
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while NASDAQ stocks (the riskiest) have paid out the worst returns.
I see this sort of chart a lot, and while I'm hardly a Bush fan, it's totally misleading in that it cherry-picks stock market results by starting from the very peak of the internet bubble. And while it scores a cheap political point for the uninformed, it does a disservice to the extent that it discourages anyone from investing long-term savings in the stock market, which on balance is still the best place for them.
(PS: Clinton's second term still had over a year to run as of 12/31/99. Most people doing this sort of exercise at least have the decency to start from 1/20/01 or thereabouts.)
December 22, 2008 1:18 PM | Reply | Permalink
Just out of curiosity --
Why would anyone -- much less ML -- put together a chart of investments covering an odd, arbitrary span of 7 years 11 months?
December 22, 2008 1:23 PM | Reply | Permalink
I got it!
It's a pun on "seven come eleven" at the craps table.
Get it? Craps table? Merrill Lynch saying investing in products it sells is like gambling at craps.
Very witty -- but maybe not so good for its business.
December 22, 2008 1:28 PM | Reply | Permalink
Damn.
It's actually 8 years 11 months. I forgot to count the eleventh post in the one hundred foot fence.
Never mind.
December 22, 2008 1:33 PM | Reply | Permalink
Why would anyone -- much less ML -- put together a chart of investments covering an odd, arbitrary span of 7 years 11 months?
I find it difficult to argue with the end date of 11/30/2008, unless you have some mysterious access to the 12/31/08 data.
I'm not sure why 12/31/99 was picked as the start date, though -- unless it's to capture the entire dot-com bubble-pop, which IIRC occurred in 2000. That said, if we're dealing with Bush, it's clearly the wrong start date -- we'd want 12/31/2000.
December 26, 2008 2:47 AM | Reply | Permalink
It is a pretty arbitrary investment chart. But... 10 years is arbitrary too and it's a standard. The 10 year chart is going to look particularly bad in 2009 since it'll catch just peak of the internet bubble and all the downside.
I do wonder about this "hedge funds" number though. Does that include all hedge fund strategies? Where'd you get it?
December 22, 2008 1:34 PM | Reply | Permalink
My first question was Ellen's but we might easily define the high years as an unrealistic bubble.
What mystifies me is why those funds that have to deliver, that can't say "Past performance is not guarantee of future success" but have to pay out, like pensions and annuities, including Social Security, or have no benefit to an individual, like endowment funds, would take the slightest risk. Who benefits when the GM pension fund is flush? It should not be GM, which might become dependent on reduced contribution rates. It will not be the recipient of the pension.
Endowments are equally pointless customers for speculation. It is a stretch to claim that my orchestra would be better off, in operation or security, having a larger fund. We still would try to meet ticket sales targets, new donations, etc. and not dip into the fund. No fund manager is supposed to benefit from a flush market. But our pension fund suffered badly in the 87 crash, and I asked this very question: "Why the fuck are we gambling with my pension?"
Pensions funds are always trotted out as showing how workers are participating in, and benefiting from investing in stock and bond funds. But they should not be gambling with people's futures. It is gambling, informed gambling, but still that. And one is never supposed to gamble away the farm.
So regardless of the value of this chart LT Treasuries are the absolute standard. If they are toast, so is the whole shebang. The other investors, even those entities like AIG, should have opted for more security, too. I understand the competitive pressure from stockholders to perform as well as hot hedge funds, so the tax structure is necessary to make it equally appealing for all players to tone it down.
The way to do that is more steep progressive rates. They discount windfall and reinforce long-term income. And this might help reverse the trend away from the real economy of agriculture manufacture to the virtual but unreliable one of derivative values like stocks and futures.
December 22, 2008 8:44 PM | Reply | Permalink
Jon - you may want to re-read your initial post.
Classic investing theory says that there's a premium for RISK taking, not a premium for safety. That is, usually the riskier assets (like stocks) are supposed to generate higher returns over time.
Your post doesn't mention the obvious - that sometimes bonds (including Treasuries) can outperform stocks. There's things called bull and bear markets as well as economic expansions and contractions.
Just because we've gone through 8 or so years of negative returns in the stock market, why is that a reason to re-think American capitalism as you suggest?
You could have also made that claim to re-think American capitalism in 1982. If anyone followed your advice in 1982 they would seriously be regretting it today.
December 22, 2008 11:10 PM | Reply | Permalink
Middle class,
there's a difference between "Capitalism" and that which we've been living under for lo these many years, 'unbridled capitalism'....which really started to get traction under Reagan and which has been a metasthesizing cancer on our society ever since.
What you see today in the financial markets and in the corporate board rooms is the culmination of the Reagan philosophy; government is the problem, deregulation, and its every man for himself.
December 23, 2008 9:43 AM | Reply | Permalink
(In other words, if I cannot foresee a good chance of higher returns, I should—and do—stay away from opportunities for which I foresee more risks.)
December 23, 2008 6:23 PM | Reply | Permalink
JW and CT - I don't disagree with you guys about the unbridled part. I was trying to make the point that just because the last 8 (or 10?) years have produced negative stock market returns does not mean we need to rethink capitalism.
The original post here had nothing to say about regulation; it just said that the stock market has stunk since Bush took office and therefore we need to rethink capitalism. I didn't think it was a very intelligent argument
December 23, 2008 6:40 PM | Reply | Permalink