
End of Golden Era for Investors Spells Troubles - rezist808
http://www.bloomberg.com/news/articles/2016-04-27/be-afraid-be-very-afraid-if-you-re-investing-for-the-long-run
======
cm2187
I think it can get much worse than that.

I don't know why people think the current levels of accumulation of debt are
sustainable but there is a limit to what even the US can roll in term of debt.
All developped nations are at around 100% debt to GDP, more than 200% if you
include private debt, and growing at 3-5% per annum.

Now does anyone really think that sometime soon any developped country will
start making public surplus and deleverage for 30 years? That's never going to
happen.

I think one or both of two things will happen: 1. massive defaults of states
and therefore of banks and insurance companies. 2. Long period of high
inflation.

Either way savings from people now in their 30s will be wiped out. A little
gift from the departing generation (baby boomers)...

~~~
Amezarak
The US federal debt was even higher in the wake of World War II.

The US government did not run surpluses and deleverage in the following
decades. The economy grew, without hyperinflation, and the debt became
irrelevant.

The solution to high levels of debt is sustainable economic growth, not
deleveraging. Mass deleveraging would be an economic catastrophe.

~~~
Retric
US still has a significant chunk of WWII debt after one of the greatest
sustained economic booms of all time. Growth really is not the answer.

Inflation sounds great, just default without technically defaulting, until you
actually see what it does to the economy. The real solution is to simply spend
vastly less money accepting that pain now is better than letting the US become
a failed state.

~~~
Amezarak
> US still has a significant chunk of WWII debt after one of the greatest
> sustained economic booms of all time.

Let's pretend this is true. (I doubt it.)

Let's keep in mind that US debt is owed in bonds, redeemable in US dollars.

If I get a 30 year mortgage in 1945 and simply rollover the debt whenever it
comes due, but my wealth has increased dramatically, my mortgage does not
matter. If I take out a 100k mortgage and then go on to found Apple and become
a multibillionaire, then yes, growth was the answer. My debt may not have
changed, but it is completely and utterly irrelevant when considering my
financial situation.

> Inflation sounds great, just default without technically defaulting, until
> you actually see what it does to the economy.

Which is why the 50s and 60s were known as horrific economic times, right?

Assuming by "inflation" you just mean an increase in the money supply -
quintupling the money supply since 2009 doesn't seem to have led to the sky
falling.

> The real solution is to simply spend vastly less money accepting that pain
> now is better than letting the US become a failed state.

No, the real solution is to _spend more money now_ , taking advantage of
historically low interest rates that at times have _been negative in real
terms_ , to do whatever you can to kickstart economic growth, and let the debt
inflate away 'naturally'. Preferably you do this by investing in
infrastructure projects, education, and science, and other things that produce
real benefit, but if you want to fill mines with hundred dollar bills and fill
them in so others can mine them out, that's fine too. In this case there is no
pain.

Spending less money now isn't accepting necessary pain, it's causing
unnecessary pain.

The US will not become a failed state because of mild inflation.
Hyperinflation will never be a problem in the US barring a world war or huge
resource or natural catastrophe. People have been preaching the doom-and-gloom
inflation story for probably a century now. Every year, it's just around the
corner.

Well, it isn't. I can only speculate why the story is so popular. I can only
assume that people have been taught to internalize all debt as a moral issue:
less debt is Good, more debt is Bad, and there must therefore be dire
consequences visited upon the guilty nations that don't treat debt as it must
be treated. But the debt of sovereign, money-printing governments bears no
resemblance to the debt of individuals, and there really are no consequences
to a government being in debt _forever_. (Actually there's no consequences to
individuals being in debt forever either - I am in perpetual debt to my credit
card company, and spend the majority of my paycheck on it...but I pay it off
every month.) It would in fact be a _bad_ thing if there were no US bonds to
purchase; you've suddenly eliminated a huge source of safe investment from the
market.

~~~
cm2187
I think you are discounting the Zimbabwe and Weimar Republic experiences a bit
too quickly. The equation I print money = I create inflation does hold. Right
now we see a very concentrated inflation in real estate and stocks which are
not counted in the CPI indices, because the money printing is done through
bank balance sheets and asset managers (by buying treasury and ABS securities)
but as soon as the gvt starts paying its employees and suppliers with printed
money, even the CPI indices will go wild. In any case it's not because the CPI
index doesn't say there is inflation that there isn't. My rent is going up
every year at a much higher rate than the CPI index. Not treating property as
a cost of living is just absurd.

~~~
kspaans
I've always wondered what the reasoning for not including housing in the CPI
is.

~~~
eli_gottlieb
Because the culturally normative lifestyle in the USA is to _own_ your
housing, not rent it. You're thus supposed to count housing inflation as a
rise in your asset portfolio, not a rise in costs.

~~~
cm2187
But typically people borrow to buy, and the more expensive the property the
more they have to repay, so the impact on their purchasing power is the same
as if they were all renting.

------
marvin
Honest question: How is is possible to lend any weight to predictions like
these when, even when it comes to the lower profits of the last few years,
predictions have always been based on the recent past and wrong?

There's any number of "black swan"-type events that could prove this to be
incorrect.

~~~
fauigerzigerk
I wouldn't put a lot of faith in such predictions either, but there are a few
reasons to believe that exceptionally good returns might not be repeatable.
One is simply regression to the mean. Others are high global levels of debt
and a significant wave of globalization having just run its course.

But I think productivity growth and our ability to redistribute the fruits of
that productivity growth are the big unknowns for the next 20 years. The
current step change in our AI capabilities could throw a spanner in all
attempts at making any reliable predictions.

~~~
vog
_> The current step change in our AI capabilities could throw a spanner in all
attempts at making any reliable predictions._

On the other hand, vastly improved AI capabilities could mean that future
prediction systems are more reliable.

At some point in the future, all further predictions may become roughly
accurate. Maybe these AI sytems are clever enough in make only predictions
which are self-fulfilling prophecies. In other words, that they are able to
calculate their own influence to the world into their predictions, which is
especially important for economic predictions made by influential institutes.

~~~
fauigerzigerk
That's a nice thought experiment but I don't think we have the slightest
indication that such a thing is even theoretically possible.

Our current AI systems are pretty good at identifying patterns of past
behavior. But the extent to which past behavior contains information about
future behavior may be limited. Information that isn't there cannot be found
irrespective of how clever any predictor may be.

------
peteretep

        > "A coming collapse in investment returns"
    

And yet McKinley are writing research about it, rather than liquidating the
company to take short positions, which should tell you something about the
pinch of salt required.

~~~
darawk
I don't think they're claiming that _prices_ will collapse (which is what you
would want to short on), but rather that returns will collapse. That over
time, the return of say, the S&P 500 will be half of what it has been over the
previous 20 years.

~~~
joosters
In either case, you'd want to sell your shares and invest the money somewhere
better. If you believe the article, that is.

~~~
nostrademons
I think part of the article's point is that there _is_ no better place to put
your money, and that we are likely to see reduced returns to capital across
all asset classes. It is possible to have a glut of both capital and labor if
there's no innovation in the economy.

(Conversely, this makes it a _great_ time to be an entrepreneur if you have a
good idea, but part of the article's point is that most of the low-hanging
productivity gains have already been picked, and so it's becoming increasingly
more difficult to have a good idea.)

Basically, it could be summed up with the old Dennis Leary song, "Life's Gonna
Suck When You Grow Up."

[https://www.youtube.com/watch?v=3OjnwxhL72o](https://www.youtube.com/watch?v=3OjnwxhL72o)

~~~
Ntrails
>* there is no better place to put your money*

I'm not sure I buy into that in the slightest, alternative asset classes exist
for the very purpose of allowing diversity when market returns are poor. Some
of them are rough to access as an individual, but others are not.

The real kicker is that the absolute size of a retirement pot is utterly
meaningless without reference to the interest and inflation rates _during_
retirement. Let alone what the mortality tables look like when you get there.

You're going to live longer, and so you're going to need to retire later with
more money than your predecessors. That means saving towards it from the
moment you start work, and ensuring that you access as many different return
drivers as possible - even at the cost of some fees. Yes I'm a walking talking
believer in DGFs.

~~~
darawk
No, the point of the article is that all asset classes across the board will
experience lower than normal returns. Diversification will not help you.

Whether or not its thrust is correct is hard to say, but that appears to be
their thesis.

~~~
kspaans
I only see bonds, and equities specifically mentioned.

~~~
Ntrails
Indeed. There are whole investment industries built up around property,
reinsurance etc etc because they do diversify. The risks are relatively
uncorrelated, so the returns are too.

Honestly, this is a PR/opinion piece designed to get coverage - and that's
fine. I'll bet you good money that there are opposing views on the 20 year
outlook from different investment experts though.

------
noir-york
We're gonna be overdue for a large war within 20 years so the pension pot of
today's millenials, or indeed, anyone's, is going to be the least of their
worries.

By large I mean either a world war or a big regional one - and large wars have
a habit of resetting economies, technology and societies. Most likely
flashpoints: Russia and/or South East Asia.

Best investment - I am guessing either a New Zealand or a South American
passport...

~~~
Afforess
I'm not sure why you suspect Russia or SE Asia, when both are paragons of
stability compared to the Middle East. I think the unwinding of the value of
oil over the coming decades is going to take away the last pillar of stability
holding Middle Eastern countries together.

~~~
noir-york
True, the ME is volatile, but its been unstable for decades. The biggest
change in the balance of power was when the West removed Iraq as a buffer
between Iran and Saudi Arabia. Now that's gone, and with the recent
rebalancing of the West towards Iran, SA is getting antsy. The question is
whether the US can act as a moderating influence on both.

However, Russia, and even more so, SE Asia are powder kegs. China is on the
move, Japan and SK are starting to make counter moves. An arms race is on, and
I really really hope it doesn't end badly. Past history however doesnt give
much hope...

------
dursk
> The McKinsey study focuses on U.S. and Western European stock and bond
> markets and doesn’t take investments in emerging markets into account,
> largely because of a lack of reliable long-term data.

Wouldn't that imply that their predicted returns are much lower than they'll
most likely be? Assuming that majority of growth over the next X years will
come from emerging markets, if they're leaving emerging markets out of the
calculation then their estimates are going to be low.

------
gabemart
A reduction in stock market growth to 6% or 6.5% does not make me "very
afraid" about long-run investing. The threat of global climate change and the
resulting possibility of long-run negative returns seems a bigger threat to
me.

------
arca_vorago
What is really going on is that the uberwealthy elite (.01%) have built their
empires on exploiting third world countries via central bank douchbaggery and
IMF corruption. (to elaborate on that point alone is a thesis paper waiting to
happen)

Now that all the third worlds have been exploited into the ground, and the
cannibals have no new prey, they are turning inward on their own populations,
and are already in the process of extracting wealth from the first world
countries.

Where are they extracting it from? The upper-middle-class wannabe wealthy.
When all the "rich" people in your neighbourhood are actually upside down in
everything because they jumped into the debt based system, they only seem
wealthy. When the banks start calling dues, stuff will start collapsing (as
can be seen in my area of the Texas oil boom.) When stuff collapses, it's the
perfect opportunity for the big players to buy up assets for pennies on the
dollar.

As for investing, it's the same thing. You have huge players who have the
ability to do things like spike/brown LIBOR and other super-shady backroom
stuff that manipulates the market, all the while increases in cyber-security
of the trading platforms is going to muscle out all the hungry investor
startups trying to do the same thing. The entire stock market system is a huge
ponzi scheme, but instead of crashing down, the crashes are created and used
as huge pivot points to profit for those in the know.

I've said it before, and I'll say it again:

Bankers are the true terrorists.

------
dantiberian
So if emerging markets are going to outcompete western companies then...
invest in emerging markets?

~~~
pbhjpbhj
Isn't that a self-fulfilling prophecy: shifting investments should cause a
shift in financial success?

------
jpmattia
Link to McKinsey report that the article is based on (PDF):
[http://www.mckinsey.com/~/media/McKinsey/Industries/Private%...](http://www.mckinsey.com/~/media/McKinsey/Industries/Private%20Equity%20and%20Principal%20Investors/Our%20Insights/Why%20investors%20may%20need%20to%20lower%20their%20sights/MGI-
Diminishing-returns-Full-report-May-2016.ashx)

------
justinjlynn
The me generation was aptly named, generation X ate the table scraps, and now
we millennials are being left with the bill.

Edit: I suppose the question now is, what can we do about it?

~~~
kabouseng
That is a very defeatist and ultimately useless world view. Every generation
is mad at the generation before it about something, and argues the previous
generation could have solved the problems but now the current generation is
left with the problems.

Your statement above about millennials being left with the bill, meanwhile gen
x feels the baby boomers did them in like another comment here states, the
baby boomers is mad at the generation before them (silent generation) about
sending them to the disasters that was the vietnam and korean wars, and they
in turn is mad about WW1 and WW2 and the great depression that they had to
endure because their parents were living it up in the swinging 1910's and 20s.

~~~
cm2187
The amount of debt that the baby boomers will leave behind is a very objective
thing. This is the biggest accumulation of debt in peace time in the history
of mankind (and objectively the parents indebting their children to buy a
shiny new TV, a behaviour that would be universally unacceptable if it wasn't
state wide).

~~~
kabouseng
Sorry this is taking your comment on a tangent, but it is not exactly peace
time for the USA, nor has it been since the 1960's or arguably since WW2 if
you take the cold war into account. The USA has been involved in one or
another war for literally decades now...or does minor wars not count?

~~~
cm2187
I don't think we can compare the Gulf wars with the all out World Wars. And
none of the European countries or Japan were making any war effort, and
accumulated as much if not more debt over the same period.

~~~
Theodores
Didn't the US drop more bombs on Laos in a secret war than all the bombs
dropped in WW2?

I do not have the figures but in these 'little wars' there has been a lot of
silver spent on munitions. The whole process is just a lot more efficient so
we are not at total war on the domestic front, just paying our taxes so the
military can buy vastly more effective killing machines. Things may have gone
away from the unguided bombs of times gone past, war zones may be in different
places, but otherwise, there is a lot to compare today's wars with WW1/WW2
when it comes to $$$ spend and devastation caused.

~~~
cm2187
During ww2, the US were constructing one aircraft carrier a week. I don't
think anything of these conflicts matched that ever since.

------
ramblerman
I don't know if there is reason to be either optimistic or pessimistic, but
let's not be simplistic.

The long run is incredibly hard to predict, with all the cool tech around the
corner and scientific advances that may be available in 30-50 years, the stock
market may simply not be a big factor in most people's lives.

Maybe that is the worst fear of a company like Bloomberg that exists to be the
ESPN of financial randomness.

~~~
pascalxus
Those cool tech and scientific discoveries won't help you when you get kicked
out of your house for not paying your mortgage or property taxes. The biggest
problems society faces aren't technological: they're political.

------
StanislavPetrov
"The Long Run" is a completely relative term. As someone who used to trade, I
know plenty of people who consider 3 months "the long run".

The unfortunate fact is that markets are all about leverage based on future
returns, and the estimates for future returns have been massively inflated for
decades. In 2008 this started to become apparent, so central banks everywhere
have been printing and loaning trillions while buying up everything in sight
to try to hide the fact that the assumptions that markets would grow 7% a year
forever are totally false. The fact is that the bill is coming due very soon,
and all the printing and suspension of accounting rules("mark to market") and
jawboning won't do a thing about it.

~~~
madaxe_again
Many traders consider 15 minutes the long run - which it is, when most of your
positions last microseconds.

Me, I'm making time and running a business while waiting for the system of the
world to collapse. It's hard to take this life too seriously when you know
you're just playing the loading screen prelude to a survival horror game.
Pensions? Don't make me laugh.

------
LAMike
Those lucky enough to find the winners will be rewarded an order of magnitude
better than the previous generation, it's just that those big wins will be
much less common than before where a few companies could share the market.

Think about the market opportunity for companies that achieve a winner-take-
all success on a global scale, it's hard to underestimate.

------
harperlee
So what SHOULD we do with our savings? I guess the main one would be to put
money on a house, as that's going to be one of the biggest costs on life, but
then again that also normally entails going into debt for the amount you don't
have...

------
eruditely
Seems like generational luck related to returns on assets will start to matter
a lot more, we can legitimately say "you were luckier to have been born back
then" as opposed to now.

sort of.

------
kfk
While P2P lending and all the new stuff coming from new technology in finance
(for individuals and businesses) can easily average above 6.5%, but taxation
is horrible (it's part of the income tax in Europe).

Taxation is the real shame in all of this. We need better laws on deferred
accounts (non taxed accounts). We should be able to keep money invested for x
years (where x can be <10) and not paying any taxes until the end of this
period. Paying taxes every year kills the compound effects of YoY capital
appeciation (a 40% on a P2P lending interest rate of 8% means you net 4.8%
instead).

------
SixSigma
I really do dislike this style of reporting :

A bold claim stated as fact.

Claims report by X.

~~~
shrewduser
also the article says there's two ways it could go, low growth or similar
growth compared to the past 30 years.

given that these predictions are always wrong i'm going to say some big
revolution in technology comes our way and we see higher than previous growth
and everythings going to be great.

put that in a headline.

~~~
randomgyatwork
Something like skynet?

~~~
shardinator
Yes. Via chatbots. Dead serious.

------
jakobegger
this makes me feel good about my habit of spending all my money right away :)

~~~
oolongCat
While I get the sarcasm in your comment, if you really are serious about you
not saving, then this means you need to be even more scared about what would
happen to people with no savings, in a situation as described in the article.

