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Megan McArdle: The Great Stock Market Myth

103 points by cwan 16y ago

joezydeco 16y ago
Remember back during the Bush II era when we all thought we could put all that Social Security money into the stock market? Didn't we all have fun back then?
- jacquesm 16y ago
  Institutional buyers have always bought stocks though, it's just that they used to have a much more conservative risk profile. Typically they'd be anti-cyclic, in this case they bought right along with the herd.
- adolph 16y ago
  I don't know the specifics of the Bush II era plan. However, the operational idea of moving the government pension plan from a defined benefit model to a defined contribution model makes sense to me. Where to stash the contributions will always be a problem. The current imaginary Social Security lock-box seems to me as dishonest as the Bernard Madoff fund management approach. I acknowledge that there are some other concepts involved. For example, Social Security has limited transferability--one's spouse and children may see some benefit but they can't inherit the face value of your contributions from you. This is a bug and a feature. If enough people die early enough, the unused and un-transferred amount can be used to pay for people who live longer and so withdraw more than their contributions. Without means-testing, there seems to be little social-justice in that.
  - brazzy 16y ago
    The whole concept of "stashed contributions" is wrong. Money is a fiction. It's really about resource allocation. In capitalism, whoever has money gets a say in how resources should be allocated, but that does not change the amount of resources available (if there is only 1 productive worker for every 2 retirees, it does not matter how much money those have "stashed"), nor does it make much sense to construct complex rule systems solely to reconcile the allocation of resources to retirees with the money fiction.
    - adolph 16y ago
      Sure, maybe "stashed contributions" is simplistic to the point of being wrong. It isn't that I'd like a better mattress to stuff paper under. In my mind, money is an acceptable enough fiction that I can convince someone to allocate me a hamburger for lunch today. The fictional aspect of it is very handy in performing the time-travel of paying my future self part of my wages of today. Times change and in the future a hamburger may require more or less money as it did today. My bet is that in the long run, that hamburger will be mostly the same or a functional equivalent will cost less because human ingenuity is an unlimited resource.
- orangecat 16y ago
  Actually it was Clinton's idea to have the government invest SS funds in the stock market directly: http://people-press.org/report/70/support-for-clinton-but-not-for-social-security-funds-in-market http://people-press.org/report/70/support-for-clinton-but-no... . That would have been a terrible idea for many reasons. Bush's plan to allow younger workers the option to invest a small portion of their SS taxes would would not have been significantly affected by a fall in the market over the course of a few years.
  - joezydeco 16y ago
    I was referring more to the boom in 2000 when we thought the stock market could do no wrong, and we were all stupid for putting our savings into things like money market accounts when the Dow was outperforming everything in sight.
    - kscaldef 16y ago
      Both the Dow and the S&P 500 posted negative returns in 2000. (And, FWIW, Bush didn't take office until 2001.)
- yummyfajitas 16y ago
  The specific savings mechanism isn't the problem - stocks, bonds, govt pyramid schemes, whatever. All this article says is that stocks aren't a magic solution like some people thought they were - the premium they had over bonds has decreased (though they are still better than SS [1]). The fundamental problem is that any mechanism of retirement savings is a claim on the productive output of workers. When the retiree/worker ratio gets too high (which will happen), pain ensues. [1] If SS were eliminated, stock/bond performance would become worse as SS money chases returns on stocks/bonds. It would still be better than SS today, but would be worse than stock/bond performance today.
- lrm242 16y ago
  Yes. I feel much better right now knowing that Social Security is bankrupt and its obligations will only ever be met through the federal government's printing presses. Aren't we all having fun now?
  - willfully_lost 16y ago
    That's not at all true. Social Security's issues are massively exaggerated by certain groups. The real problems with regards to our "entitlements" is in Medicare. Unless the price of healthcare can be kept under wraps its going to be a nightmare. But there's too many people out there with a lot of money that don't want to see that problem dealt with.
    - lrm242 16y ago
      Suggest you google "Is Social Security Bankrupt" and review the governments own projections. SS receipts are at parity or below obligations. It is, therefore, bankrupt and only maintained by the federal governments ability to run infinite* deficits. (*) Infinite, that is, until the Chinese and other foreign nations stop purchasing our debt.
      - msabalau 16y ago
        The Social Security trust fund has begun selling off it's very large supply of government bonds. This is exactly why the trust fund accumulated these assets. If a person or private pension fund accumulated a large supply of bonds in order to meet their obligations, it would be very odd to describe them as "bankrupt". Indeed, if I had enough bonds and income to meet my obligations for decades to come, I might well describe myself as being in possession of "fuck you money" Going forward, in general, the Federal Government will not be able to rely on the Social Security Trust fund purchasing the bonds it issues. It can cut spending, raise taxes, or find other buyers who want to purchase bonds. There is no particular reason to be concerned about the ability of the Social Security system, for years to come, to support it's obligations to the workers who have paid into the system. Unless, of course, you fear that wealthy elites will manufacture a bogus social security "crisis" to dispossess the savings of workers and continue to enjoy (federal spending/tax cuts) that can not otherwise be sustained.
- gamble 16y ago
  It was a terrible idea, but not because the stock market crashed. It was a bad idea because private retirement savings plans have been a disaster. Those people who didn't lose their money playing markets they don't understand in a fit of irrational exuberance get to watch the mutual fund industry nibble away at their capital year-by-year as they charge ridiculous fees for lousy management. The existence of the multi-billion (trillion?) dollar mutual fund industry should be a scandal, when almost no knowledgeable expert would recommend putting your money into one. It's extremely difficult to invest your money wisely when the country's largest industry is constantly trying to persuade you to do unwise things with it. What worries me the most about privatization is the likelihood that the dumb money moving into the markets would induce a Wall Street feeding frenzy, followed by another bubble and subsequent crash. Tens of millions of destitute seniors would demand that the gov't make good on their losses, which would be shouldered by the rest of us.
aspiringsensei 16y ago
There's a bright side in this: seriously. If we don't live our lives with the expectation that we will finally begin enjoying them when we retire, we might begin living our lives to our more short-term satisfaction. Not that saving for retirement is stupid - it isn't - but working at a job you hate because it will provide retirement benefits is. Take vacations now, go skiing now, spend time with your kids now...those are the takeaways. I hope the "countdown to retirement" mentality ends as a casualty of future uncertainty.
- roc 16y ago
  I don't know anyone who's slaving away with the expectation of retiring to a permanent vacation. If that was a pervasive mentality, it must have been a regional, industry, or generational thing, because I've never even encountered it. In fact, when my peers/friends/colleagues do talk about retirement, that conversation usually begins and ends with a quip along the lines of "what retirement?". There's 1. almost no expectation that any of us will be able to stop working until we're physically sidelined, short of making 'fuck you' money. And 2. almost no desire to stop building things, even if we get 'fuck you' money. After all, it's not like we're retiring from the factory floor. We might not be mountain biking on the weekends during retirement, but it'd take teams of orderlies to keep us from writing software. I sometimes wonder about the first wave of digerati that hit 'retirement'. Things like a World of Warcraft for the fixed income set seem guaranteed. But what about the code they write? Will the elderly coders follow tradition and dismiss new technology and just support "old school" projects to the end? Will they keep on the edge but churn out solutions more geared to their current situation (less motor control, less faculty to waste on cryptic commands, etc)? Or will their code and goals not be notably different than the new generation at all?
  - arethuza 16y ago
    "I don't know anyone who's slaving away with the expectation of retiring to a permanent vacation." I know quite a few people like that. However, they are all in "traditional" professions (law, medicine, accounting) or executives/fund-manager types working for huge organizations. It's not something that appeals to me.
mbateman 16y ago
> But regulation hasn’t stopped the [pension] plans from being underfunded, in part because the regulators, who worried that companies would use pensions as a slush fund to smooth their earnings, kept them from overcontributing in flusher times. Why would this sort of smoothing need to be regulated away?
- brazzy 16y ago
  My guess: because it could be used to evade taxes.
chrismealy 16y ago
Assuming McArdle isn't secretly worried about Marx's declining rate of profit in capitalism, then maybe returns to capital are falling because returns to labor are increasing. That should be good news for people who work for a living -- unless the only workers capturing those gains are in the boardroom. Uh oh. BTW, average (geometric) returns for the US have been around 6% after inflation. The global average is about 5%. No country has averaged as high as 8%. http://chrismealy.blogspot.com/2009/08/real-return-on-stocks.html http://chrismealy.blogspot.com/2009/08/real-return-on-stocks... In the old days (before the 1970s), with expensive brokers, expensive commissions, no index funds, and taxes incurred from rebalancing, just getting the average market return easily could have eaten up 2% of your return. It shouldn't surprise people that stock returns would fall as costs fell. The after-expenses return was never as high as those historical charts suggested.
- brazzy 16y ago
  maybe returns to capital are falling because returns to labor are increasing. From everything I see, the opposite is the case, at least in the USA and Europe. Maybe it's the Chinese labor that's getting a bigger share of the returns. But I suspect that most of the "missing returns" go to those that exploit weaknesses in the financial system and know how to hide their profits, i.e. investment banks, hedge funds etc.
amh 16y ago
To arrive at the scary 40% required savings rate, the article assumes an accumulation period (working lifetime) of 30 years. How many people do you know who started working at 30 and retired at 60?
- aero142 16y ago
  Not many, but I do know lots of people that didn't start saving for retirement until 30 or later.
  - amh 16y ago
    People who save nothing until 30 likely have poor money management habits, and are in for a rough ride no matter what the expected return of the stock market is.
    - joezydeco 16y ago
      Right. Because those stagnant wages and exploding health care costs have freed up all that extra money for the middle-class worker.
      - amh 16y ago
        I'm sure it had nothing to do with racking up an average of $10-20k in credit card debt and taking out highly leveraged mortgages with the assumption that ever-increasing real estate values would make up the difference. Saving early is more important than saving a lot. That's the magic of compound interest. Even during the recent recession, inflation has been very much under control. So I'm not sure what "stagnant wages" have to do with anything.
        ahoyhere 16y ago
        I'm sure that racking up $10-20k of credit card debt had nothing to do with the fact that there's no reliable social safety net, no affordable healthcare, cash prices for medical procedures (like a doctor looking at you for 5 minute) are sky-high, the cost of gas and food staples is redonkulous, and, oh yeah, no such thing as affordable public universities any more. The people who got those ridiculous mortgages were snookered in a shell game. If a person can't trust his mortgage broker, who can he trust? But, all that good financial education they got in school should have prepared them for that. Wait, it didn't? NO WAY!
hop 16y ago
You have to take the much longer view when you talk about the merits of investing pensions or SS in stocks. The compounding affects of a broad S&P portfolio will destroy an all bond portfolio in a 20-30 time frame. And now that we are printing all this money and have massive unfunded liabilities, there will be serious inflation in the next 20 years - I have no idea when, but bond yields will drop or become negative at some point while equities will perform much better. And this is Charlie Munger and Warren Buffett's view as well.
- fr0sty 16y ago
  > there will be serious inflation in the next 20 years - I have no idea when, but bond yields will drop or become negative at some point. These two statements are contradictory. Bond yields will skyrocket in the face of inflation. If you meant bond prices (which move inversely to yields) then you would be correct but your assertion, as presented, is false. Also, please pick a 20-30 year timeframe in the last century where investment in bonds (for the entire period) would have underperformed (be destroyed, in your words) the S&P 500 for the same period.
rada 16y ago
I really feel that the article missed the biggest reason why "the stock market may never recover", i.e. accounting fraud. Today's case in point, Cisco (CSCO). First, this early morning post from a respected financial/economic blog: Reading headlines alone, one might wonder if two headlines from today on Cisco were from the same quarter. Bloomberg reports Cisco Misses Estimates on Sluggish Corporate Spending. Meanwhile, the Wall Street Journal reports Cisco Profit Jumps 79%. Sounds like a great opportunity to go long Cisco, right? It's trading down 9% on the missed estimates news while in reality, having your profits up 79% and same-quarter sales up 20% over last year, especially in this economy, is not a bad thing. But wait, here is a later post from another equally respected blog: The book cooking continues. CISCO comes out with "great" earnings but hidden in there is the fact that they're writing their own financing - and holding it off-book. Better hope $21 holds, because if it doesn't it's a LONG way down. Wait a second - so those supposedly realized profits are really just an I-owe-you note from Cisco to itself? Ok then. Here is my point. Almost every company out there is hiding assets and liabilities off balance sheet where nobody can see them. It's fun to talk about complex economic theories but come on, the biggest reason the average investor can't get performance out of the stock market is the book cooking. Had the banking industry not held all that subprime risk off their books, the market would not have seen all that volatility, and we would have seen real Dow growth. As things stand, value investors short of a team of private investigator-style analysts simply cannot afford to trust their own judgement. When the SEC stops focusing on Martha Stuart's insider trading and start going after the real issues, the stock market will recover, democratization or not.
- cynicalkane 16y ago
  There's all kinds of things wrong with what you said, but I'll focus on the off balance sheet asset claim. Sure, almost every company "hides" assets and liabilities off balance sheet because it's standard accounting practice. There's lots of rules about it and it's perfectly reasonable to do in many situations. For instance, securitized risk is held off balance sheet because it effectively isn't an asset, liability or risk to the company that securitized it anymore. (That's the whole point of securitizing risk.) It is in general not true that "nobody can see them", since stuff like this generally has to be declared in financial reports. Yeah, you can't see it... if you're a lazy investor who just reads the quarterly financial statements and thinks that constitutes responsible investing. There are some companies that try to cook the books and game the rules. Surprise. Whenever there are rules people will try to game them. All this tin-foil hat nonsense about "book cooking" as reported in "respected blogs" leading to the ruin of "almost every company" and the entire stock market seems too silly be true.
api 16y ago
I have never believed in retirement, nor have I ever thought that I would get social security or that any magical financial system would allow me to "retire." I would like, in my later life, to maybe step down into more scholarly pursuits. But I'm sure I'll still be doing something for revenue.
- hyperbovine 16y ago
  Isn't it funny? The idea that you could spend you entire professional career at, say, GM, retire at 65, and live out your years on a comfortable pension + social security, seems so amazingly quaint and outdated. I can hardly believe that that was the universal expectation in this country just a few short decades ago, but my elders insist it was true. Nobody in my peer group (millenials, I think we're called) seriously thinks they are going to see any of the money we are paying into social security. Pension? What's that again? On the other hand, the expectation that we are going to be working forever seems to have made us dwell a lot more on what job fulfillment actually means, which is probably a good thing--not too many people I know are willing to put up with the sort of "deferred happiness" model that prevailed in earlier generations.
  - jerf 16y ago
    Historically speaking, as in, over the past several thousand years, what was your best retirement plan? Loving children. Are we returning to that world? To be honest, though, I think things are not as bleak as we think. We are fantastically, fantastically wealthy, overflowing with technology and the tech keeps coming and growing. We are not poorer than our parents; we are substantially wealthier but we have accumulated a proportionally greater load of parasitic loss and bad commitments, and a proportionally greater idea of what we "should" be able to afford. (It is no win to be twice as wealthy as your parents if you try to spend three times as much.) Defined-benefit plans will have to come to be seen as a peculiarly-20th-century delusion, as will the idea that the government is an unlimited charge card.
    - api 16y ago
      We are fantastically wealthy, but we have a gigantic parasitic entity that sucks most of our surplus wealth away and burns it in endless pointless wars and in building bridges to nowhere and similar things.
maukdaddy 16y ago
I wish this article had spent more time talking about dividends in addition to price appreciation in stocks. If the equity premium is indeed going to be lower for the next few decades, then you should start to see increasing dividends to reward stockholders. We might have to get out of the "holy shit I gained 400% on this stock in 6 months" mentality and instead start learning that an income producing basket of dividend stocks at 6% is the way to save for retirement.
hristov 16y ago
It is a standard operating procedure for republicans after they fuck up to get philosophical and start talking about overall trends in the economy and generally treat the whole economy like some kind of force of nature that ebbs and flows on its own and that we cannot do anything about. While there is an economic cycle its effects can be rather mild if properly managed. The fact of the matter is that the dismal performance of the stock market in the last 10 years just matches the dismal performance of the overall economy in the last 10 years and is simply the result of terrible leadership. Yes, it is mostly the fault of George Bush, and Alan Greenspan and Bernake and the new brand of "conservatism" that got popular in America in the later Clinton years (and that includes a lot of conservative democrats). I put conservatism in quotes because this is a type of conservatism that is foreign to many actual honest conservatives. I do not have the time to list all the fuckups, but let me just list the important ones: rampant financial deregulation while still ensuring that the government will guarantee the banks, incredibly expensive wars all over the world without honestly taking the expense into account, a policy ensuring high oil prices for a country that is the greatest importer of oil in the world, trying to fix the effects of wars and high gas prices with low interest rates, when any economist will tell you that these are not things you can fix with low interest rates, support of outsourcing and all kinds of policies that destroy the earning potential of the middle class, refusal to invest in infrastructure, etc. etc. So the stock market is doing badly because the economic policies we had in the last 10 years failed. That is pretty much it.
stretchwithme 16y ago
Consider the gold versus dow ratio: http://seekingalpha.com/article/141811-the-importance-of-the-dow-gold-ratio
gamble 16y ago
It seems strange to me that the comments on this thread are so dismissive of retirement. Retirement is FU money for the average man. Planning for retirement doesn't have to mean ignoring the present, or wasting away on a beach in Boca when you hit 65. What it does mean is having the ability to do or work on whatever you want. By the time you hit sixty and realize you've only got another ten or so good years left on this earth, that kind of freedom is going to seem like the most precious thing in the world.
predictibility 16y ago
Don't worry! Planned War World III by the elites, who by the way were beneficiaries of this retirement scam, will solve all problems. Now when peasants are no needed, they will rid off most of them. The Iran war drums are beating.
bsandbox 16y ago
Along with 8% return, the other big constant in retirement planning is retirement age of 65. Over time, this is going to be seen much more as a variable than a constant. If markets don't perform, retirement age is going to rise pretty dramatically.

103 points by cwan 16y ago

Remember back during the Bush II era when we all thought we could put all that Social Security money into the stock market? Didn't we all have fun back then?

jacquesm 16y ago
Institutional buyers have always bought stocks though, it's just that they used to have a much more conservative risk profile. Typically they'd be anti-cyclic, in this case they bought right along with the herd.
adolph 16y ago
I don't know the specifics of the Bush II era plan. However, the operational idea of moving the government pension plan from a defined benefit model to a defined contribution model makes sense to me. Where to stash the contributions will always be a problem. The current imaginary Social Security lock-box seems to me as dishonest as the Bernard Madoff fund management approach. I acknowledge that there are some other concepts involved. For example, Social Security has limited transferability--one's spouse and children may see some benefit but they can't inherit the face value of your contributions from you. This is a bug and a feature. If enough people die early enough, the unused and un-transferred amount can be used to pay for people who live longer and so withdraw more than their contributions. Without means-testing, there seems to be little social-justice in that.
- brazzy 16y ago
  The whole concept of "stashed contributions" is wrong. Money is a fiction. It's really about resource allocation. In capitalism, whoever has money gets a say in how resources should be allocated, but that does not change the amount of resources available (if there is only 1 productive worker for every 2 retirees, it does not matter how much money those have "stashed"), nor does it make much sense to construct complex rule systems solely to reconcile the allocation of resources to retirees with the money fiction.
  - adolph 16y ago
    Sure, maybe "stashed contributions" is simplistic to the point of being wrong. It isn't that I'd like a better mattress to stuff paper under. In my mind, money is an acceptable enough fiction that I can convince someone to allocate me a hamburger for lunch today. The fictional aspect of it is very handy in performing the time-travel of paying my future self part of my wages of today. Times change and in the future a hamburger may require more or less money as it did today. My bet is that in the long run, that hamburger will be mostly the same or a functional equivalent will cost less because human ingenuity is an unlimited resource.
orangecat 16y ago
Actually it was Clinton's idea to have the government invest SS funds in the stock market directly: http://people-press.org/report/70/support-for-clinton-but-not-for-social-security-funds-in-market http://people-press.org/report/70/support-for-clinton-but-no... . That would have been a terrible idea for many reasons. Bush's plan to allow younger workers the option to invest a small portion of their SS taxes would would not have been significantly affected by a fall in the market over the course of a few years.
- joezydeco 16y ago
  I was referring more to the boom in 2000 when we thought the stock market could do no wrong, and we were all stupid for putting our savings into things like money market accounts when the Dow was outperforming everything in sight.
  - kscaldef 16y ago
    Both the Dow and the S&P 500 posted negative returns in 2000. (And, FWIW, Bush didn't take office until 2001.)
yummyfajitas 16y ago
The specific savings mechanism isn't the problem - stocks, bonds, govt pyramid schemes, whatever. All this article says is that stocks aren't a magic solution like some people thought they were - the premium they had over bonds has decreased (though they are still better than SS [1]). The fundamental problem is that any mechanism of retirement savings is a claim on the productive output of workers. When the retiree/worker ratio gets too high (which will happen), pain ensues. [1] If SS were eliminated, stock/bond performance would become worse as SS money chases returns on stocks/bonds. It would still be better than SS today, but would be worse than stock/bond performance today.
lrm242 16y ago
Yes. I feel much better right now knowing that Social Security is bankrupt and its obligations will only ever be met through the federal government's printing presses. Aren't we all having fun now?
- willfully_lost 16y ago
  That's not at all true. Social Security's issues are massively exaggerated by certain groups. The real problems with regards to our "entitlements" is in Medicare. Unless the price of healthcare can be kept under wraps its going to be a nightmare. But there's too many people out there with a lot of money that don't want to see that problem dealt with.
  - lrm242 16y ago
    Suggest you google "Is Social Security Bankrupt" and review the governments own projections. SS receipts are at parity or below obligations. It is, therefore, bankrupt and only maintained by the federal governments ability to run infinite* deficits. (*) Infinite, that is, until the Chinese and other foreign nations stop purchasing our debt.
    - msabalau 16y ago
      The Social Security trust fund has begun selling off it's very large supply of government bonds. This is exactly why the trust fund accumulated these assets. If a person or private pension fund accumulated a large supply of bonds in order to meet their obligations, it would be very odd to describe them as "bankrupt". Indeed, if I had enough bonds and income to meet my obligations for decades to come, I might well describe myself as being in possession of "fuck you money" Going forward, in general, the Federal Government will not be able to rely on the Social Security Trust fund purchasing the bonds it issues. It can cut spending, raise taxes, or find other buyers who want to purchase bonds. There is no particular reason to be concerned about the ability of the Social Security system, for years to come, to support it's obligations to the workers who have paid into the system. Unless, of course, you fear that wealthy elites will manufacture a bogus social security "crisis" to dispossess the savings of workers and continue to enjoy (federal spending/tax cuts) that can not otherwise be sustained.
gamble 16y ago
It was a terrible idea, but not because the stock market crashed. It was a bad idea because private retirement savings plans have been a disaster. Those people who didn't lose their money playing markets they don't understand in a fit of irrational exuberance get to watch the mutual fund industry nibble away at their capital year-by-year as they charge ridiculous fees for lousy management. The existence of the multi-billion (trillion?) dollar mutual fund industry should be a scandal, when almost no knowledgeable expert would recommend putting your money into one. It's extremely difficult to invest your money wisely when the country's largest industry is constantly trying to persuade you to do unwise things with it. What worries me the most about privatization is the likelihood that the dumb money moving into the markets would induce a Wall Street feeding frenzy, followed by another bubble and subsequent crash. Tens of millions of destitute seniors would demand that the gov't make good on their losses, which would be shouldered by the rest of us.

aspiringsensei 16y ago

There's a bright side in this: seriously. If we don't live our lives with the expectation that we will finally begin enjoying them when we retire, we might begin living our lives to our more short-term satisfaction. Not that saving for retirement is stupid - it isn't - but working at a job you hate because it will provide retirement benefits is. Take vacations now, go skiing now, spend time with your kids now...those are the takeaways. I hope the "countdown to retirement" mentality ends as a casualty of future uncertainty.

roc 16y ago
I don't know anyone who's slaving away with the expectation of retiring to a permanent vacation. If that was a pervasive mentality, it must have been a regional, industry, or generational thing, because I've never even encountered it. In fact, when my peers/friends/colleagues do talk about retirement, that conversation usually begins and ends with a quip along the lines of "what retirement?". There's 1. almost no expectation that any of us will be able to stop working until we're physically sidelined, short of making 'fuck you' money. And 2. almost no desire to stop building things, even if we get 'fuck you' money. After all, it's not like we're retiring from the factory floor. We might not be mountain biking on the weekends during retirement, but it'd take teams of orderlies to keep us from writing software. I sometimes wonder about the first wave of digerati that hit 'retirement'. Things like a World of Warcraft for the fixed income set seem guaranteed. But what about the code they write? Will the elderly coders follow tradition and dismiss new technology and just support "old school" projects to the end? Will they keep on the edge but churn out solutions more geared to their current situation (less motor control, less faculty to waste on cryptic commands, etc)? Or will their code and goals not be notably different than the new generation at all?
- arethuza 16y ago
  "I don't know anyone who's slaving away with the expectation of retiring to a permanent vacation." I know quite a few people like that. However, they are all in "traditional" professions (law, medicine, accounting) or executives/fund-manager types working for huge organizations. It's not something that appeals to me.

mbateman 16y ago

> But regulation hasn’t stopped the [pension] plans from being underfunded, in part because the regulators, who worried that companies would use pensions as a slush fund to smooth their earnings, kept them from overcontributing in flusher times. Why would this sort of smoothing need to be regulated away?

brazzy 16y ago
My guess: because it could be used to evade taxes.

chrismealy 16y ago

Assuming McArdle isn't secretly worried about Marx's declining rate of profit in capitalism, then maybe returns to capital are falling because returns to labor are increasing. That should be good news for people who work for a living -- unless the only workers capturing those gains are in the boardroom. Uh oh. BTW, average (geometric) returns for the US have been around 6% after inflation. The global average is about 5%. No country has averaged as high as 8%. http://chrismealy.blogspot.com/2009/08/real-return-on-stocks.html http://chrismealy.blogspot.com/2009/08/real-return-on-stocks... In the old days (before the 1970s), with expensive brokers, expensive commissions, no index funds, and taxes incurred from rebalancing, just getting the average market return easily could have eaten up 2% of your return. It shouldn't surprise people that stock returns would fall as costs fell. The after-expenses return was never as high as those historical charts suggested.

brazzy 16y ago
maybe returns to capital are falling because returns to labor are increasing. From everything I see, the opposite is the case, at least in the USA and Europe. Maybe it's the Chinese labor that's getting a bigger share of the returns. But I suspect that most of the "missing returns" go to those that exploit weaknesses in the financial system and know how to hide their profits, i.e. investment banks, hedge funds etc.

amh 16y ago

To arrive at the scary 40% required savings rate, the article assumes an accumulation period (working lifetime) of 30 years. How many people do you know who started working at 30 and retired at 60?

aero142 16y ago
Not many, but I do know lots of people that didn't start saving for retirement until 30 or later.
- amh 16y ago
  People who save nothing until 30 likely have poor money management habits, and are in for a rough ride no matter what the expected return of the stock market is.
  - joezydeco 16y ago
    Right. Because those stagnant wages and exploding health care costs have freed up all that extra money for the middle-class worker.
    - amh 16y ago
      I'm sure it had nothing to do with racking up an average of $10-20k in credit card debt and taking out highly leveraged mortgages with the assumption that ever-increasing real estate values would make up the difference. Saving early is more important than saving a lot. That's the magic of compound interest. Even during the recent recession, inflation has been very much under control. So I'm not sure what "stagnant wages" have to do with anything.
      - ahoyhere 16y ago
        I'm sure that racking up $10-20k of credit card debt had nothing to do with the fact that there's no reliable social safety net, no affordable healthcare, cash prices for medical procedures (like a doctor looking at you for 5 minute) are sky-high, the cost of gas and food staples is redonkulous, and, oh yeah, no such thing as affordable public universities any more. The people who got those ridiculous mortgages were snookered in a shell game. If a person can't trust his mortgage broker, who can he trust? But, all that good financial education they got in school should have prepared them for that. Wait, it didn't? NO WAY!

hop 16y ago

You have to take the much longer view when you talk about the merits of investing pensions or SS in stocks. The compounding affects of a broad S&P portfolio will destroy an all bond portfolio in a 20-30 time frame. And now that we are printing all this money and have massive unfunded liabilities, there will be serious inflation in the next 20 years - I have no idea when, but bond yields will drop or become negative at some point while equities will perform much better. And this is Charlie Munger and Warren Buffett's view as well.

fr0sty 16y ago
> there will be serious inflation in the next 20 years - I have no idea when, but bond yields will drop or become negative at some point. These two statements are contradictory. Bond yields will skyrocket in the face of inflation. If you meant bond prices (which move inversely to yields) then you would be correct but your assertion, as presented, is false. Also, please pick a 20-30 year timeframe in the last century where investment in bonds (for the entire period) would have underperformed (be destroyed, in your words) the S&P 500 for the same period.

rada 16y ago

I really feel that the article missed the biggest reason why "the stock market may never recover", i.e. accounting fraud. Today's case in point, Cisco (CSCO). First, this early morning post from a respected financial/economic blog: Reading headlines alone, one might wonder if two headlines from today on Cisco were from the same quarter. Bloomberg reports Cisco Misses Estimates on Sluggish Corporate Spending. Meanwhile, the Wall Street Journal reports Cisco Profit Jumps 79%. Sounds like a great opportunity to go long Cisco, right? It's trading down 9% on the missed estimates news while in reality, having your profits up 79% and same-quarter sales up 20% over last year, especially in this economy, is not a bad thing. But wait, here is a later post from another equally respected blog: The book cooking continues. CISCO comes out with "great" earnings but hidden in there is the fact that they're writing their own financing - and holding it off-book. Better hope $21 holds, because if it doesn't it's a LONG way down. Wait a second - so those supposedly realized profits are really just an I-owe-you note from Cisco to itself? Ok then. Here is my point. Almost every company out there is hiding assets and liabilities off balance sheet where nobody can see them. It's fun to talk about complex economic theories but come on, the biggest reason the average investor can't get performance out of the stock market is the book cooking. Had the banking industry not held all that subprime risk off their books, the market would not have seen all that volatility, and we would have seen real Dow growth. As things stand, value investors short of a team of private investigator-style analysts simply cannot afford to trust their own judgement. When the SEC stops focusing on Martha Stuart's insider trading and start going after the real issues, the stock market will recover, democratization or not.

cynicalkane 16y ago
There's all kinds of things wrong with what you said, but I'll focus on the off balance sheet asset claim. Sure, almost every company "hides" assets and liabilities off balance sheet because it's standard accounting practice. There's lots of rules about it and it's perfectly reasonable to do in many situations. For instance, securitized risk is held off balance sheet because it effectively isn't an asset, liability or risk to the company that securitized it anymore. (That's the whole point of securitizing risk.) It is in general not true that "nobody can see them", since stuff like this generally has to be declared in financial reports. Yeah, you can't see it... if you're a lazy investor who just reads the quarterly financial statements and thinks that constitutes responsible investing. There are some companies that try to cook the books and game the rules. Surprise. Whenever there are rules people will try to game them. All this tin-foil hat nonsense about "book cooking" as reported in "respected blogs" leading to the ruin of "almost every company" and the entire stock market seems too silly be true.

api 16y ago

I have never believed in retirement, nor have I ever thought that I would get social security or that any magical financial system would allow me to "retire." I would like, in my later life, to maybe step down into more scholarly pursuits. But I'm sure I'll still be doing something for revenue.

hyperbovine 16y ago
Isn't it funny? The idea that you could spend you entire professional career at, say, GM, retire at 65, and live out your years on a comfortable pension + social security, seems so amazingly quaint and outdated. I can hardly believe that that was the universal expectation in this country just a few short decades ago, but my elders insist it was true. Nobody in my peer group (millenials, I think we're called) seriously thinks they are going to see any of the money we are paying into social security. Pension? What's that again? On the other hand, the expectation that we are going to be working forever seems to have made us dwell a lot more on what job fulfillment actually means, which is probably a good thing--not too many people I know are willing to put up with the sort of "deferred happiness" model that prevailed in earlier generations.
- jerf 16y ago
  Historically speaking, as in, over the past several thousand years, what was your best retirement plan? Loving children. Are we returning to that world? To be honest, though, I think things are not as bleak as we think. We are fantastically, fantastically wealthy, overflowing with technology and the tech keeps coming and growing. We are not poorer than our parents; we are substantially wealthier but we have accumulated a proportionally greater load of parasitic loss and bad commitments, and a proportionally greater idea of what we "should" be able to afford. (It is no win to be twice as wealthy as your parents if you try to spend three times as much.) Defined-benefit plans will have to come to be seen as a peculiarly-20th-century delusion, as will the idea that the government is an unlimited charge card.
  - api 16y ago
    We are fantastically wealthy, but we have a gigantic parasitic entity that sucks most of our surplus wealth away and burns it in endless pointless wars and in building bridges to nowhere and similar things.

maukdaddy 16y ago

I wish this article had spent more time talking about dividends in addition to price appreciation in stocks. If the equity premium is indeed going to be lower for the next few decades, then you should start to see increasing dividends to reward stockholders. We might have to get out of the "holy shit I gained 400% on this stock in 6 months" mentality and instead start learning that an income producing basket of dividend stocks at 6% is the way to save for retirement.

hristov 16y ago

It is a standard operating procedure for republicans after they fuck up to get philosophical and start talking about overall trends in the economy and generally treat the whole economy like some kind of force of nature that ebbs and flows on its own and that we cannot do anything about. While there is an economic cycle its effects can be rather mild if properly managed. The fact of the matter is that the dismal performance of the stock market in the last 10 years just matches the dismal performance of the overall economy in the last 10 years and is simply the result of terrible leadership. Yes, it is mostly the fault of George Bush, and Alan Greenspan and Bernake and the new brand of "conservatism" that got popular in America in the later Clinton years (and that includes a lot of conservative democrats). I put conservatism in quotes because this is a type of conservatism that is foreign to many actual honest conservatives. I do not have the time to list all the fuckups, but let me just list the important ones: rampant financial deregulation while still ensuring that the government will guarantee the banks, incredibly expensive wars all over the world without honestly taking the expense into account, a policy ensuring high oil prices for a country that is the greatest importer of oil in the world, trying to fix the effects of wars and high gas prices with low interest rates, when any economist will tell you that these are not things you can fix with low interest rates, support of outsourcing and all kinds of policies that destroy the earning potential of the middle class, refusal to invest in infrastructure, etc. etc. So the stock market is doing badly because the economic policies we had in the last 10 years failed. That is pretty much it.

stretchwithme 16y ago

Consider the gold versus dow ratio: http://seekingalpha.com/article/141811-the-importance-of-the-dow-gold-ratio

gamble 16y ago

It seems strange to me that the comments on this thread are so dismissive of retirement. Retirement is FU money for the average man. Planning for retirement doesn't have to mean ignoring the present, or wasting away on a beach in Boca when you hit 65. What it does mean is having the ability to do or work on whatever you want. By the time you hit sixty and realize you've only got another ten or so good years left on this earth, that kind of freedom is going to seem like the most precious thing in the world.

predictibility 16y ago

Don't worry! Planned War World III by the elites, who by the way were beneficiaries of this retirement scam, will solve all problems. Now when peasants are no needed, they will rid off most of them. The Iran war drums are beating.

bsandbox 16y ago

Along with 8% return, the other big constant in retirement planning is retirement age of 65. Over time, this is going to be seen much more as a variable than a constant. If markets don't perform, retirement age is going to rise pretty dramatically.