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Re: When interest rates rise....
Old 02-03-2004, 07:42 AM   #21
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Re: When interest rates rise....

RTM is just a statistical artifact. You can't really expect it to happen any more than you can expect historical stock prices to affect future prices. Unless you believe the market has some equilibrium-seeking forces *and* that we've been out of equilibrium for a while, RTM has no predictive quality.

Nah, I just think we've exhausted the productivity gains of various technologies, we've got nasty demographic trends, we're going to have increasing global competition, we have prior art for how a small group can have a big impact on our society, and we've got monetary and fiscal policies that will lead to a stock-dampening increase in both inflation and nominal interest rates.

Of course, Ted's dental floss recycling device could turn things around -- you never know.
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Re: When interest rates rise....
Old 02-04-2004, 06:16 AM   #22
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Re: When interest rates rise....

Quote:

1.*Unless you believe the market has some equilibrium-seeking forces *and* that we've been out of equilibrium for a while, RTM has no predictive quality.

2. I just think we've exhausted the productivity gains of various technologies, we've got nasty demographic trends, we're going to have increasing global competition, ..

3. Of course, Ted's dental floss recycling device could turn things around -- you never know.
The main thing that RTM has to say about market returns is that the annual returns of all asset categories tend to fluctuate around a mean. Economics says that that mean is determined by the rate of growth of productivity (per capita real output) of an economy.

Over the past 200 years or so in the U.S., productivity has been driven by a string of technological "breakthroughs" that were implemented by capital investment, and "institutional" advances that were adopted through the political process. Since the U.S. is still investing in capital (with the assistance of foreign investment, as indicated by our "trade deficit") it seems reasonable to believe that there will continue to be a positive return on it. But it is also reasonable to suspect that the return, in percentage terms, won't be as high as in the past. I agree with the various reasons cited by Wabmester, except "international competition." International trade (which involves a mixture of competition and cooperation) promises to be one factor that will benefit U.S. economic growth, along with that of other countries.

I sort of doubt that it will be driven by my idea of recycling dental floss and condoms from sewage. About all that will accomplish will be to remind people to floss their f...ing teeth
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Re: When interest rates rise....
Old 02-04-2004, 08:11 AM   #23
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Re: When interest rates rise....

The demographic trends do indeed seem to favor lower returns over the next 20 years or so. I see no evidence that the pace of technology is slowing significantly, other than the fact that the large group of boomer scientists will retire soon. Politics is kind of hard to predict. It can go either way, but the current political trend is for inflationary policies. If there was a completely level playing field, I would think that foreign trade would be beneficial. However, differing political policies in different nations can have strange unintended consequences that make it less efficient, and even harmful in some cases.
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Re: When interest rates rise....
Old 02-04-2004, 09:02 PM   #24
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Re: When interest rates rise....

Well, this is just a 20-year WAG, of course. *So, it's based on fuzzy logic and anecdotes.

Like Airbus overtaking Boeing, Toyota overtaking Ford, China overtaking all manufacturing and textiles, India overtaking IT outsourcing, etc. * Assuming there's a trend here, I don't see how it benefits the US GDP.

And while the pace of technology is furious, the impact seems relatively soft compared to, say, the internet (1973), the microprocessor (1971), the computer (1942), the jet (1937), the model-T (1908 ), and the radio (1901), to name a few that had a huge productivity impact.

I like to use the fax machine as an example of a technology that was widely known but relatively low impact until it's price point came down. * I can't think of a technology invented in the last 20 years or so that has that kind of profile. * Whatever is going to radically improve productivity in the next 20 years should already be here.
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Re: When interest rates rise....
Old 02-05-2004, 03:37 AM   #25
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Re: When interest rates rise....

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Like Airbus overtaking Boeing, Toyota overtaking Ford, China overtaking all manufacturing and textiles, India overtaking IT outsourcing, etc. * Assuming there's a trend here, I don't see how it benefits the US GDP.
The way that international trade increases the real wealth of all nations that participate in it is an economic concept called "comparative advantage." Briefly, it causes the entire world to become a single market in which each locale produces what it can produce most efficiently in relative terms.

Every reputable economist recognizes this. The problem with international trade (in fact, the problem with any sort of economic progress) is that it causes some people's services to become obsolete, and they thus experience reduced pay or unemployment. In principle, the policy solution is to tax the gains that the majority of people experience, and use them to compensate the "losers," particularly by assisting them to relocate and develop other skills.

Another problem politically -- which is evident from the comments on this forum critical of international trade -- is that the "winners" often don't appreciate the way that they are benefitting, because most of the benefits are in the form of lower prices for the goods they buy. Furthermore, every job lost in a declining industry is essentially replaced in an industry that is expanding due to foreign trade, but the cause of the less productive job lost is obvious while the cause of the more productive job gained is not.

All of this is a reason why I believe that basic economics should be taught in high schools and required in colleges.

Economics is called the "dismal science," largely because of pessimistic predictions by a 19th Century economist named Thomas Malthus that population growth would outrun production, resulting in permanent poverty. Well, the technological advances that have occurred over the past 150 years have appeared to disprove his theory (at least in industrialized countries). But it is extremely naive to believe that technological advances will keep increasing the standard of living indefinitely.

It is especially sobering to realize that much of the increase in productivity was the result of advances in medicine and sanitation (my specialty) that reduced the death rate of younger people who were in their productive years.

Medical advances now are reducing the death rate of older, retired people, thereby adding to the problem of sustaining GDP per capita rather than solving it. As I have said before, the solution to this dilemma is for people to take advantage of their relatively better health and use it to work longer in life, rather than to become completely retired at the "standard" retirement age or (ahem) earlier.
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Re: When interest rates rise....
Old 02-05-2004, 05:20 AM   #26
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Re: When interest rates rise....

My Goodness - even West Wing took a shot at this (SS) last night.

To be politically correct - I'm thinking of changing from ER to 'investment portfolio manager' - my own of course. Then I will be - 'back in the workforce' - Right?
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To be politically Re: When interest rates rise....
Old 02-05-2004, 05:59 AM   #27
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To be politically Re: When interest rates rise....

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Posted by: unclemick Posted on: Today at 9:20am
My Goodness - even West Wing took a shot at this (SS) last night.

To be politically correct - I'm thinking of changing from ER to 'investment portfolio manager' - my own of course. Then I will be - 'back in the workforce' - Right?
That sounds like a great idea, then you can fire yourself and file for unemployment

Doug
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Re: When interest rates rise....
Old 02-05-2004, 06:02 AM   #28
 
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Re: When interest rates rise....

I have 2 confessions this morning. First, I am
actually a closet Luddite (you folks in Rio Linda can check
your dictionary). Secondly, I have read Ted's recent posts
and he may become my new hero, replacing Paul
Terhorst

John Galt
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Re: When interest rates rise....
Old 02-05-2004, 06:32 AM   #29
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Re: When interest rates rise....

Hmm, I may need a remedial economics course after all. I got the benefit to consumers. I even got the potential shift to a new job base (although it looks like we might currently be in an era of underemployment). But what I still don't get after Ted's lucid post is how this trend increases our *GDP*, which I naively assume drives the value of the capital markets.

If our capital intensive industries get replaced by service industries, and our high-value goods are being made elsewhere, shouldn't that drive the GDP and the overall market capitalization down?
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Re: When interest rates rise....
Old 02-05-2004, 08:02 AM   #30
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Re: When interest rates rise....

OK - so my understanding of the period 1960-ish to 1985-ish when the stock market went sideways was a period of rising inflation and therefore interest rates Is this true

Anyway - I'm looking at a plot of the DJIA for that period and am wondering:

1) Are dividends included in this plot?
2) If no to 1) where would a daddyBoy go to find a plot of that?

e.g. Are my stocks gonna yield more dividend if/when the "market" goes sideways for 20 years when the Baby Boomers retire

Anyone have any ideas for me

daddyBoy
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Re: When interest rates rise....
Old 02-05-2004, 10:47 AM   #31
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Re: When interest rates rise....

daddyboy asks:

Are my stocks gonna yield more dividend if/when the "market" goes sideways for 20 years when the Baby Boomers retire...

Mike gives his amateur opinion:

The current dividend yield on the S&P is about 1 1/2 %. This is what you will get for the next 20 years if you buy now and hold. Dividends in the past tended to grow at the rate of inflation, plus a little bit, so your annual income from the S&P may grow to keep up with inflation. However, the growth of dividends in the past was erratic, so there could be many years when dividend income will fall.
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Re: When interest rates rise....most of the benefi
Old 02-05-2004, 11:00 AM   #32
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Re: When interest rates rise....most of the benefi

Ted wrote:

...most of the benefits are in the form of lower prices ...

Mike replies:

I appreciate this very much. I responded to the lower prices on television sets and computers by recently buying a new fast computer and large screen television set. Trade is working very well here. However, the government has a policy of never ever allowing general prices to fall (deflation). If the price of televisions goes down, the government springs into action and furiously tries to raise prices so that the CPI goes up instead of down. This has the effect of raising prices on de jure monopolies like medicine at a rate more than sufficient to offset the fall in the price of imports. The end result is that overall consumer prices never fall (CPI) regardless of how much efficiency trade introduces into the system.

BTW, that was an insightful comment about sanitation and medicine. Sanitation has indeed done more to extend the productive life span of people than virtually all other causes combined. The extended productive lifespan, coupled with machines that magnify the productivity even further, has raised the standard of living appreciably.
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Re: When interest rates rise....
Old 02-05-2004, 11:00 AM   #33
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Re: When interest rates rise....

Quote:

Anyone have any ideas for me

daddyBoy
To get a chart including reinvested dividends, do this:

www.moneycentral.com
stocks
drop down 'find' button
common indices
dow jones industrial average
chart
date range 1/1/1960 to 12/31/1985
on the chart click drop down 'chart'
choose investment growth
voila

Results:

A rise from 1960 until late 1965, then a bouncing ball until about mid 1982 when it started to rise again. An ER killer. Many of the times when you do a firecalc and get 95% or 97%, the 1929 crash and this time period are the causes of the non-100% result.

Be advised that I have regularly found mistakes in either the data or the processes that microsoft uses in their moneycentral tools, so any decision-grade analysis should be done with other tools or the microsoft data and process that is applied to the data should be looked at closely. Specifically I have found stocks and funds that are missing dividend data, or have wrong dividend data, and the way microsoft applies dividends to gains is simply wrong and has been for years.

With regards to what you can do to survive this, either market timing successfully (good luck) each bounce, owning investment products that werent correlated to stocks or bonds, or using TIPS.

TIPS sound like a great idea and the analyses look great. Unfortunately most of the analysis produced was done a little while ago and uses 3-3.7% tips returns, and most of the recent stuff still supposes 2-2.5% rates. Super if you could actually get that, but at this point buying tips gets you less than 2% yield (plus of course inflation), and the cheapest fund (vanguards) is at 1.50%.

With my current withdrawal rate of just a little under 4%, clearly that isnt covering me. Including inflation the current real yield would be 4-5% with 2.5-3% of that being bond appreciation that I would have to pay taxes on each year and not receive until the bonds matured and were sold.

I'll take my chances with beating 4% without them for the time being, but clearly if the yield rose above 2.5% they'd be very, very worth considering.
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Re: When interest rates rise....
Old 02-05-2004, 11:20 AM   #34
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Re: When interest rates rise....

Daddyboy

Use your search engine for: CPCUG InvestCIG and go to long term indexes. Peruse your brains out - I use these to jump start my thinking regularly. Notice that S&P dividends have been in a downtrend since the early eighties - so 'something' is/will be required to reverse the trend.
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Re: When interest rates rise....
Old 02-05-2004, 10:50 PM   #35
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Re: When interest rates rise....

Quote:
Notice that S&P dividends have been in a downtrend since the early eighties - so 'something' is/will be required to reverse the trend.
Just about the same time CEOs of large corps started rewarding themselves bigtime for their "astounding performance".
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Re: When interest rates rise....
Old 02-06-2004, 02:03 AM   #36
 
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Re: When interest rates rise....

Got to weigh in on the CEO pay thing. Let the market take care of it. I believe there is no such thing as too
much compensation (for anyone). If you can get it
legally, then go for it. The marketplace will work all of
this out in time. We attempt to control the free market
at our peril. History is rife with examples. I predict
free enterprise will be destroyed in time, with the chipping away process going on more or less
continuously. A current example? The Martha Stewart
case. A tempest in a tea pot if there ever was once.

John Galt
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Re: When interest rates rise....
Old 02-06-2004, 05:38 AM   #37
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Re: When interest rates rise....

Problem is it is all too often not done legally.
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