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The Long-Term View Is Terrifying

The Long-Term View Is Terrifying by Adam English – Outsider Club

We’re steadily closing in on another record in the market.

Including dividends, the S&P 500 has been up every month of the year. There has never been a full year of monthly gains.

Since the start of 2013, 18 of the past 19 quarters have been positive.

And never before have we seen a run like this pan out in such tranquil fashion.

In 2009, there were 55 separate 2%-plus moves in a day. There were 35 in 2011. Not a single one has happened yet this year.

The annualized volatility of daily returns on stocks since 1928 has been 18.7%. For 2017, that number is 7%.

The bull run since 2009 is gradually closing in on the record, too. We’re now at 102 months in a row, compared to the 113-month run between 1990 and 2000.

A Wall St. analyst, fresh out of college, who was lucky enough to land a job after the market low during the Great Recession is now about to turn 30, if they haven’t already.

They’re all but guaranteed to never see anything like this again.

An Impossible Environment

Taking a long-term view, there are some realities we simply cannot ignore.

The last eight years have been great, but the overwhelming majority of us will have to count on our investments continuing to increase in value for decades to come as we approach or live during retirement.

That rapid rise of living standards and wealth, at least on paper, has been borrowed from the future, and dramatically reduced the odds of that happening.

Savings and credit are simple tools used in absurdly complex ways. Yet they serve basic roles.

Savings takes current capital and production and deploys them in the future. Credit takes future capital and production and uses them now.

Too much of either cripples economies. After all, saving as much as possible means using no capital for growth. Meanwhile, too much credit depends on fantastic growth to outpace the slowing effects of interest on future growth and cash flows.

And therein lies the problem. We’re sitting on obscene levels of total debt and debt issuance and seeing far too little growth for it.

A significant proportion of recent economic growth has relied on borrowed money — today standing at an unprecedented 325% of global gross domestic product. Yet we’re only seeing low single-digit growth across vast swaths of the world, and virtually all of the developed world.

And rather than actual debt reduction, policymakers continue to allow exotic tools — though we’re used to them at the moment — to financially engineer around the problem and compel even further spending at the expense of future growth.

Quantitative easing and ultra-low or negative interest rates have seen diminishing returns even as trillions of dollars are committed to implementing them. And we still have absolutely no idea how they will affect the long term.

The Potential Isn’t There

Add in the guaranteed loss of tax revenue and entitlements, and it all but guarantees generations of poverty.

An economic reality is slowly but surely approaching that guarantees that spending cannot be sustained and debt cannot be outgrown anymore.

The dependency on future generations to fund what current generations have guaranteed for themselves is too great.

The number of retirees per employed worker provides a great, if simple, look at what is to come.

In 1970, in the U.S., there were 5.3 workers for every retired person. By 2010 this fell to 4.5. It’s expected to decline to 2.6 by 2050.

Germany will see a drop from 4.1 in 1970 to 1.6 in 2050. Japan has it the worst with a ratio that will decrease from 8.5 to 1.2 over the same time frame.

Right when the baby boomer generation is going to be in a position where salaries are gone and entitlements like Social Security and Medicare are needed, those entitlements probably won’t survive.

Getting Ahead Of The Curve

If we’re not looking at the last bull run of our lives, we’re certainly looking at far smaller runs, with far less in returns, over the next several decades.

And unless you are already independently rich enough to live your dream retirement now, it’ll be a whole lot harder.

Even without a drop in stock market valuation, which is all but certain to come several times through corrections that are unpredictable in the short term, but guaranteed long term, implied rates of return are looking bad.

Just looking at the cyclically-adjusted price-to-earnings ratio, currently sitting right at 30, we’re well into rare territory.

CAPE through Sep 17

The CAPE was equal to or higher than it is today in only 59 of the 1,640 months going back to 1881, or less than 3.6% of the time.

At this level, we should pause to consider the implications. The cyclically-adjusted earnings yield, known as 1/CAPE, does a pretty good job of this, though we’ll be keeping corporate earnings steady to keep it simple.

1/30 suggests that equities will give us a real return in the long term of about 3.33% above inflation, significantly below the 6.4% historical average. And it isn’t like U.S. Treasuries offer an alternative, with the real rate coming in at just under 1% over inflation.

As investors, these are the realities of our long-term outlook. And for the vast majority of us, even after this crazy bull run we’ve seen over the last eight years, it simply will not do.

Finding ways to boost returns on core investments is absolutely essential for every adult alive today.

Thankfully there are ways to do just that.

Take care,

adam english sig

Adam English

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By Outsider Club

Jimmy is a managing editor for Outsider Club and the Investment Director of the personal finance advisory The Crow's Nest. You may also know him as the architect behind the wildly popular finance and investing website Wealth Wire, where he's brought readers the stories behind the mainstream financial news each and every day. For more on Jimmy, check out his editor's page.