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Old 05-28-2012, 09:47 PM   #41
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An interesting paper on this very topic from the National Bureau of Economic Research.
http://www.imf.org/external/np/semin...2/pdf/crbs.pdf
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Historically, periods of high indebtedness have been associated with a rising incidence of default or restructuring of public and private debts. A subtle type of debt restructuring takes the form of “financial repression.” Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks. In the heavily regulated financial markets of the Bretton Woods system, several restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation. Inflation need not take market participants entirely by surprise and, in effect, it need not be very high (by historic standards). For the advanced economies in our sample, real interest rates were negative roughly ˝ of the time during 1945-1980. For the United States and the United Kingdom our estimates of the annual liquidation of debt via negative real interest rates amounted on average from 3 to 4 percent of GDP a year. For Australia and Italy, which recorded higher inflation rates, the liquidation effect was larger (around 5 percent per annum). We describe some of the regulatory measures and policy actions that characterized the heyday of the financial repression era.
Thanks, that's exactly what I read from some financial blog.

Like they say, "hope for growth" is not a plan...
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Old 05-28-2012, 09:53 PM   #42
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Thanks, that's exactly what I read from some financial blog.

Like they say, "hope for growth" is not a plan...
Exactly. Now we see Francois Hollande newly elected in France touting a "growth" agenda. The Germans say they might agree to some growth measures but do not want to renegotiate the austerity agreements.

We all want growth of our economies but there are many agendas for achieving that state. In the US Presidential race we'll see plenty of growth agenda talk. Pick your poison.
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Old 05-28-2012, 10:24 PM   #43
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Hey guys, I know it's been a while since Dory36 moved on to find greener pastures, but please don't use that axe on his username.
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Old 05-29-2012, 08:57 AM   #44
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I think he's still working on it, although he seems to be experimenting with some simulations.
I'm not expecting a response, but FWIW I sent Wade Pfau an email yesterday asking him about floor income as a plan A (his plan evidently) versus plan B (my plan until I threaten my annuitization hurdle, and I linked the fpanet article as a reference). We'll see...

UPDATE: I did get a response! Annuity as plan A versus plan B...
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Old 05-29-2012, 09:24 AM   #45
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The comments section of his blog post show he is reflecting on some of the observations here

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At some point it is worth discussing further, as I think a lot of confusion arises since it is not always clear when someone is talking about real or nominal returns, and when someone is talking about arithmetic or geometric/compounded returns.

Here I am showing only real returns, but you could see the nominal returns by adding the inflation numbers to the real returns.

I didn't double count inflation, the stock return falls so much in Table 3 because it is tied to the bond return through the equity premium, and I lowered the bond return to reflect current conditions and lowered the equity premium to reflect the international average.

I'm running this a few more times now and I do see that the failure rates are still bouncing around a bit from simulation to simulation. The minimum failure rate for 3% is coming out in the range 12-16%, and 4% has failures in the neighborhood of 35-39%. It was merely a coincidence, but the version of the figure I posted does seem to be leaning toward the high failure rate side. Is that what you are finding? It is always good to have replications.
This is encouraging. Too much of the academic work in this area doesn't seem to apply to our real world experience and he is attempting to make this relevant to us.
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Old 05-29-2012, 10:48 AM   #46
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Interesting observation.

My data for the SP500 with dividends from 1951 to present is CAGR = 10.5%. For this period the inflation rate was 3.6% so roughly the real SP500 + dividends return was CAGR = 6.9%.
fwiw, the number I quoted (6.98 being the worst) was without inflation factored out yet (converted to real SP500 + dividends its CAGR was about 3.38%). So your 6.9% number is approximately 3.5% higher than the absolute market minimum return I was alluding to. The one that ended on the day the market hit something like 6500 (rock bottom).

A 7% real market return for stocks is pretty consistent historically when looking at very long term returns 30+ years... and not purposefully selecting a start or end point at a top or bottom. Realistically... no one is going to sell their entire portfolio on a day like March 9th 2009. As you can see now, it only took 2-3 years for the market to double and bounce back from that. Also, no one is going to invest all of their cash into stocks on the absolute height... the gradual in and out helps to mute these extreme cases and show that in reality you'll absolutely never see a 30 year real equity return anywhere close to as low as 3.6%

Using a number as low as that is incredibly pessimistic (beyond reasonable) compared to historical standards... to be ultra conservative he should maybe try 5% instead, which would show that the golden 4% withdrawal is most certainly is "safe"
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Old 05-29-2012, 12:31 PM   #47
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A 7% real market return for stocks is pretty consistent historically when looking at very long term returns 30+ years...
I take it you are talking about US returns (among the world's most productive economies and one that arguably enjoyed advantages it no longer does) over the last 100 years (the most productive such period in history).
What appears to be a "big sample" to some people may properly be viewed as cherry-picking given other perspectives.
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Old 05-29-2012, 12:59 PM   #48
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I take it you are talking about US returns (among the world's most productive economies and one that arguably enjoyed advantages it no longer does) over the last 100 years (the most productive such period in history).
What appears to be a "big sample" to some people may properly be viewed as cherry-picking given other perspectives.
very similar things were said in 1873, 1896, 1913, 1929, 1954, 1973, 2000

"this time its different..." is nothing new. It's human nature to think what we're experiencing today won't fit the models of yesterday... that somehow we'll never get back to the prosperity we saw before. It's the very thing that by nature makes humans horrible investors.

I challenge you to bookmark this comment and come back to look at it in 20 years (10 years might even be enough to show it). I can all but guarantee you that we'll see 5%+ real market returns (8.5%+ actual) between now and then for the S&P500.

If somehow you are correct that the next 20 years fall outside the rules the last 250+ have followed, then I'll call you a genius... or lucky. Either way you can have a good laugh at my expense.
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Old 05-29-2012, 01:17 PM   #49
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...(snip)...
I can all but guarantee you that we'll see 5%+ real market returns (8.5%+ actual) between now and then for the S&P500.
...
Shame on you for being so positive.
Despite your hopeless optimism, I applaud the sentiment.
My portfolio is nodding in agreement too.
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Old 05-29-2012, 01:28 PM   #50
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Shame on you for being so positive.
Despite your hopeless optimism, I applaud the sentiment.
My portfolio is nodding in agreement too.
I've always had an extreme interest in following statistics, investing, human nature and psychology... I often find myself at odds with the notion of "common sense":

In 1998 (late fall) ... as a term project I argued that a recession was statistically a certainty, coming soon. "Recession: All but guaranteed" (lol, I used those exact words as the title of my paper) ... my teacher gave me an B+ overall with a C for message content dragging it down. He thought I was so off-base with the 'prediction.' I don't think he bothered to look at any of the supporting evidence I provided. I wrote him a couple years later and he said he didn't remember my paper or the grade he had given me...

In 2005, I purchased my first house and had a lot of engaging discussions with my realtor trying to understand how it was housing could constantly beat inflation ("the fact that it has risen so much recently... means won't it most likely have horrible return for the next 30 years?" I asked)... she gave me a blank stare almost as if to say, "did you seriously just ask me that? Look at how hot housing is right now!"

In February 2009... I took all the cash I had on hand, as well as a fairly large inheritance, and invested it into stocks/equities. I advised everyone I knew that this was a once in a generation (possibly lifetime) situation to invest in the stock market when it would bring huge returns within 4 years (the market never takes longer than that to recovery from an extreme drop like what we saw at the time)


Looking back... all of those seem reasonable and not all that incredible to predict. I can tell you that at the time of each I was viewed as a looney...
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Old 05-29-2012, 01:30 PM   #51
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very similar things were said in 1873, 1896, 1913, 1929, 1954, 1973, 2000

"this time its different..." is nothing new. It's human nature to think what we're experiencing today won't fit the models of yesterday... that somehow we'll never get back to the prosperity we saw before. It's the very thing that by nature makes humans horrible investors.

I challenge you to bookmark this comment and come back to look at it in 20 years (10 years might even be enough to show it). I can all but guarantee you that we'll see 5%+ real market returns (8.5%+ actual) between now and then for the S&P500.

If somehow you are correct that the next 20 years fall outside the rules the last 250+ have followed, then I'll call you a genius... or lucky. Either way you can have a good laugh at my expense.
Bookmarked!

All true enough and I hope you're right! I hope for average or better real returns and it's certainly possible, but I'm prepared for lower real returns and have contingency plans just in case.
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Old 05-29-2012, 01:34 PM   #52
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I hope for average or better real returns and it's certainly possible, but I'm prepared for lower real returns and have contingency plans just in case.
Like I try not to expect or depend on very high returns. Then if they happen, it's a nice surprise.

If an SWR of around 2% takes me to age 100 (another 36-37 years), I'll won't be in the least bit disappointed. If the market thrives, it'll be Christmas every day at my house.
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Old 05-29-2012, 01:46 PM   #53
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Like I try not to expect or depend on very high returns. Then if they happen, it's a nice surprise.

If an SWR of around 2% takes me to age 100 (another 36-37 years), I'll won't be in the least bit disappointed. If the market thrives, it'll be Christmas every day at my house.
That is the best mindset IMO...

If financial Armageddon is coming... planning on soaking up rays at the beach won't be on my mind... or anyone's for that matter. Finding food/shelter will be.

If you can survive (food/basics covered) the extreme worst we've seen in history, you'll be more than ok and pleasantly surprised when you see what actually happens (something close to average)
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Old 05-29-2012, 02:48 PM   #54
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I'm still trying to get my head around how a balanced portfolio behaves in a financial repression scenario. The 1945 to 1980 time period is a bit too long as it included one secular bull and one secular bear scenario. I don't even begin to know how to model what a financial repression period means in the stock or bond markets. Any suggestions?
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Old 05-29-2012, 03:10 PM   #55
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"this time its different..." is nothing new. It's human nature to think what we're experiencing today won't fit the models of yesterday... that somehow we'll never get back to the prosperity we saw before.
I'm just suggesting there's value in stepping back and looking at the bigger picture. From one perspective it is you that is saying "this time it's different"--because you are saying the US will have a different experience than other world-beating economies. "This country is different--it won't get fat and noncompetitive, it won't be overtaken by other economies, its population won't demand redistribution of capital that (whatever other benefits they produce) undeniably move money from places of highest expected return to places of lesser expected return."

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If somehow you are correct that the next 20 years fall outside the rules the last 250+ have followed, then I'll call you a genius... or lucky. Either way you can have a good laugh at my expense.
Hey, if our economy underperforms I certainly won't be laughing. Neither of us will, I'm sure.

In 1900, US equities were 22% of the world market. By 2000, they were 47% of the world market. When we discuss "average" equity returns, should we concentrate on the one nation that so obviously outperformed the rest of the world over this particular time period? Are the same factors in place that allowed US outperformance during that period?

And "250 years?" Nobody thinks we have accurate data on equity returns going back to the 1760s.
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Old 05-29-2012, 03:23 PM   #56
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I'm still trying to get my head around how a balanced portfolio behaves in a financial repression scenario. The 1945 to 1980 time period is a bit too long as it included one secular bull and one secular bear scenario. I don't even begin to know how to model what a financial repression period means in the stock or bond markets. Any suggestions?
The chart below is from a Bill Gross article of August 2003 that I saved. I think you might be able to get the full Outlook article by going to his Pimco site and looking in the archives. The chart shows government short term Treasury real rates and the idea is that the government can totally control the short term rates. Financial repression is then defined (I think) as when those real rates go negative for long periods. Currently the government is even pushing to control longer term rates. The current 3mo Tbill real yield is roughly 0.08% - inflation, or roughly the negative of the inflation rate.

BTW, I'd highly recommend Gross's monthly Outlook articles. Many people (several Bogleheads) kind of hate his guts but he is not referred to as the "bond king" for nothing. He cannot predict the future but IMO he is entertaining and insightful at times. Link to his articles: PIMCO | Insights - Investment Outlook

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Old 05-29-2012, 05:26 PM   #57
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So you bastards are conspiring with Dr. Pfau (image of someone sinister stroking a cat) to ensure I will never be able to retire, eh? Pfooey.
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Old 05-29-2012, 10:31 PM   #58
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very similar things were said in 1873, 1896, 1913, 1929, 1954, 1973, 2000
But our vision is so much clearer now!
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Old 05-30-2012, 12:10 AM   #59
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UPDATE: I did get a response! Annuity as plan A versus plan B...
He's a different type of economist.

He's relatively young and it's too unfair to compare him to those who are older more established in their fields, but he definitely does a better job of communicating with his readers. He has a very clear writing style, he's not afraid to discuss what the meat grinder is doing to the sausage, and he writes to a very wide spectrum of different outlets.

I guess he's much more responsive to and more collaborative with his audience. Compare that to guys like Bernstein who eventually stopped posting at Bogleheads, or guys like Swedroe who got tired of being called out. I know they're not economists, but off the top of my head I can't even think of an economist who posts to discussion boards and has a blog... let alone one who promptly answers reader's e-mails.

I'm enjoying watching a very bright light being shined into some unexplored places.
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Old 05-30-2012, 04:56 AM   #60
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Interesting comment... I have an opposite view. I think our global econonic prospects are darker. Advances and economic progress will only benefit the few, not the masses. And I am very worried about a future nuclear armed Iran.
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Personally I think the future global economic prospects are considerably brighter than current returns on capital indicate. A billion consumers who a decade ago were living on subsistence agriculture in China, India, Brazil etc. now want, need and most important can buy goods and services. While the superior return of US equities of the 20th century may not be repeated, I also don't see repeat of two world wars, or a awful system like communism taking over 1/3 of the world and dragging down international equity returns.
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