Finding the New Normal in Investment Returns

In the last couple of months I have taken to reading John Mauldin's weekly commentary via Barry Ritholtz' website. A few years ago, not knowing anything about him, I picked on some comments from Mauldin which was shortsighted on my part. But you learn, and I have come to be quite fond of his letter.

He seems to do a good job of weeding through things and then rendering an opinion that is very easy to follow. Agreeing with him, or anyone for that matter, is not the point so much as learning about a particular point of view. He articulates his point very well, whether you agree or not.

This week he knocks it out of the park with a couple of great one-liners and does a good job, with spreadsheet work from Mike Shedlock, of painting a pretty good picture of what the next decade in the US could look like economically and the influence certain political action could have over that period of time.

Mauldin takes Shedlock's spreadsheet of his expectation and creates a rosy outlook, a gloomy outlook and a middle of the road outlook. Based on the number of jobs needed to tread water, about 125,000 per month (1.5 million per year), there is no scenario where the unemployment rate goes back to where it was two years ago between now out to 2020 (there are numbers to back up the opinion so, as mentioned above, you can agree or disagree with the conclusion). The good scenario has the unemployment rate above 10% through 2013, the middle scenario has it up there through 2015 and the gloomy scenario stays at double digits through 2017 and above 8% through 2020.

Mauldin's gut leads him to conclude we will have a double dip recession starting in 2011. Part of his logic as follows:

I have serious doubts that we can have what amounts to the largest tax increase of all time in what will be a very weak (albeit growing) economy, without putting us back into recession. And Speaker Pelosi thinks it is a smart thing to add another 5.4% surtax on what will already be a rising capital gains and dividend tax.

I do not know Mauldin's politics but the things that the current leadership appears to believe in do not seem to be conducive to actually fixing things with an eye beyond the next election cycle. Not that the Republicans can take any high ground here as we'll be digging out from under the complete mismangement of almost everything under the Bush administration for a long time, even if the seeds were planted during the Clinton years.

Here is a grim little nugget:

Sadly, the private sector has shed over 300,000 jobs since 1999. Think about that. We have had a decade where there have been no new jobs added by the private sector. Real incomes are roughly where they were, and the stock market is down. Talk about a lost decade.

A year or so ago I talked about the idea of a lost decade. The the economy and the stock market were starting to roll over people were asking whether we could have a lost decade like Japan. I contended that with no stock market progress we had already lost a decade even before we start thinking about jobs and stagnant (adjusted for inflation) wages.

Ten years, or more, is a long time for things to be this lousy, but even after the ten years we've had it isn't all that bad. People like Peter Schiff and a few others paint a picture of society crumbling under the weight of these problems. If this were a realistic threat I think it would have started by now. Japan has been on a similar ride for 20 years and their society has not crumbled. The problems here and there are significant but ruinous on a societal level? No.

It reminds me of a story from Western Civ 101. I do not remember where this was or who it was from, but some sect was calling for the end of the world at 9:15 am on October 15 of whatever the year was. After 9:15 on October 15 came and went without the end of the world the sect then proclaimed the world had indeed ended but that no one realized it.

Japan has been a lousy investment destination and the US appears to have gone in that same direction but the world has not ended. If things are this bad then the solution must be to figure out where "normal" returns can be had and then invest in those places.

Comments

[Alex_G:]

I really think that the US is heading for a European style economy, which includes higher taxes, higher base unemployment and most of the gains in employment coming from the Govt sector.

Very little of the stimulus is "investment", just keeping people afloat.

Nov 16 01:26 PM

[Dave Wrixon:]

You should not be talking about Returns in isolation. You need to consider Risk and Return together. Nowhere is more risky than US Assets and the Dollar. Just because the Fed says interest rates are zero, it does not mean you should be giving those suckers your cash for a low rate of interest. The Risks are simply too high. Do you know, I can actually start to see where the Gold Bugs are coming from?

Nov 16 03:50 PM