I’m drawing a blank! What were the 3 long-term equity return drivers that were mentioned in the LII curriculum?
GDP growth, distribution ratio between labor/capital, etc?
GDP, Corporate Profits as a % of GDP and P/E ratio.
GDP is the only structural one that holds over long horizons. Corporate profits are cyclical and will mean revert as the power dynamic shifts between labor and capital and the P/E is cyclical as well because valuations will theoretically mean revert.
GDP can further be broken down in to growth of working population (labor), growth of capital (deepening) and growth productivity (sort of a residual to the model).
“Animal spirits”.
Awesome, thanks!
I’ve been reading boggleheads and other financial-independence-retire-early stuff lately and many of the diehard FIRE people seem to be basing their return expectations on equity market’s historical average, 7-10% depending on the person. I’m thinking that is that even remotely attainable with a passive indexing approach?
If you assume that the future GDP growth rates will most likely be well below the average GDP growth rate of the past 100 years, to me it would seem logical that the equity returns will follow suit and be well below the historical average returns?
It’s actually very possible. Gdp is more like revenue than earnings. And earnings can rise despite modest revenue growth through higher margins. Lastly eps can rise despite flat earnings if the amount of shares decrease. So if income becomes more concentrated then those returns are achievable.
Finally gdp focuses on domestic spending measurement. But many of the companies we have invest internationally. So our overall earnings can significantly rise despite domestic earnings remaining modest. I also think that Investment earnings is also not included in gdp.
So gdp is more of a measurement of your personal income, rather than what you save per year, or overall net worth.
Yes so, the key to understanding the US historical market return being higher than US GDP is essentially a combination of:
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The S&P grew from very domestic to firms having a ~45% exposure to international business. In the process, they captured not only exposure to the higher global growth rate, but also gained share over that period and managed to grow above trend.
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Industries have significantly consolidated, so the larger name indices have gained by consolidating industry share and gaining growth and efficiency by swallowing smaller firms that are not in the indices.
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Financial engineering as leverage became a greater part of capital structures.
With that in mind, yes as global growth rates slow, you would generally expect equity market returns to slow below the historical base. The world bank estimates population on current trend will peak in 2040 and we’re already seeing major slowdowns and negative population growth rates in various regions (population growth is the primary driver of GDP growth over extended periods). China itself is facing a major boomer demographic headwind from the one child policy and a lot of estimates see growth continuing its decline in China from ~15% in 2010 to 6.5% now to ~2% in 2030. India may pick up some, but likely not all of this. That being said, it’s sort of a relative game because other asset classes should see returns fall although if we enter a period of sustained central bank engineering, that could cloud the picture over the medium term.
Agree with what bs said. Also to add. Gdp growth can easily spike up if we have a technology renaissance.
Gdp is an attempt to measure productivity when it really just measures spending which people equate to ones income.
anyways the solow growth model makes an attempt to measure productivity. and it’s a function of labor, capital, and technology!
I get the technology argument (not unique to Solow and that’s probably not even the best application of it) and there’s validity to it, but my more immediate concern is how over the next 20 years these economies are going to transition to this new lower growth base with these debt overhangs and aging populations and infrastructure adding further liabilities. What I outlined above is sort of a linear view of how economies move, but typically the process is not that smooth and I’m guessing this one will be no exception. I’m not sure its fair to call GDP more like revenue, it’s sort of in between because in theory all revenue is captured by somebody as earnings, because all the costs between sales and earnings are in theory payment to someone for something.
MMT BRO
gdp = spending. C I G XM which is consumer spending, ivnestment spending, government spending, and net exports.
debt wont necessarily reduce gdp in the future. if it was used to become more productive then gdp will rise both in short term and long term.
if it was used to be unproductive then gdp will rise short term and fall long term.
also there are two ways to take care of debt.
if you pay it off then you will eat away future consumption. (thus gdp will drop)
or you default on them, either by not paying them, renegotiating terms, or inflating away the debt.
any of those moves will cause rates to rise, which will reduce consumption and investment, lowering gdp!
lastly the key to gdp growth or spending growth is to become more productive! since the more productive you are the more money you earn, and the more shit you spend!
I can’t remember seeing so much used to say so pointlessly little.
had to. didnt seem like you understood how gdp or debt works.
Lol and not a single point was made. For starters, you’re missing the point that GDP consists of the total value of all FINAL goods and services produced in an economy over a period of time. It does not compute intermediary good such as raw materials. It can equivalently be calculated using the INCOME methodology. The reasoning by economists is that the FINAL value of a good includes the value of all the the summed incomes that went into producing it. Because there are layers, every cost line item is someone else’s income. For instance, if you are a software company and you sell $10, keep $5 and $5 goes to labor, that’s also $5 of someones labor on their own income statement. But this is not the same thing as the sum of revenues because the value of intermediary goods in the economy is not included.
“GDP For a Country is Not the Same Thing as Turnover for a Business”
As always, a pleasure to educate you.
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You completely missed my point on GDP, just reread it a few times.
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RE: Debt you used a lot of words to say nothing. The majority of the US government debt has gone to fund entitlements increasingly slanted towards the boomer generation and defense and this remains consistent across other regions as well (Europe). So saying “acchually produchivity!” is like giving some spherical chickens in a vacuum response.
You then go on with this gem:
"also there are two ways to take care of debt.
if you pay it off then you will eat away future consumption. ( thus gdp will drop )
or you default on them, either by not paying them, renegotiating terms, or inflating away the debt.
any of those moves will cause rates to rise, which will reduce consumption and investment, lowering gdp!"
Ok, so there are two ways and any of them lower GDP. Thanks Socrates.
I know it takes you a little longer to figure these things out Nerdy, so here’s an additional explanation.
https://www.investopedia.com/ask/answers/070715/how-do-you-calculate-gdp-income-approach.asp
The income approach to measuring gross domestic product (GDP) is based on the accounting reality that all expenditures in an economy should equal the total income generated by the production of all economic goods and services. It also assumes that there are four major factors of production in an economy and that all revenues must go to one of these four sources. Therefore, by adding all of the sources of income together, a quick estimate can be made of the total productive value of economic activity over a period. Adjustments must then be made for taxes, depreciation, and foreign factor payments.
Ways to Calculate GDP
There are generally two ways to calculate GDP: the expenditures approach and the income approach. Each of these approaches looks to best approximate the monetary value of all FINAL goods and services produced in an economy over a set period of time (normally one year).
The major distinction between each approach is its starting point.
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gdpis in between what? you were not clear and very vague. what are you comparing gdp to? also gdp is cumulative spending. so revenue captures it its entirety since it is in the top line.
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no argument there. im just saying not all debt is bad dave ramsey! also you are focused on government debt which only represents 15% of all debt in US.
again not all debt is bad. if the debt is used for more productive means while the interest rate of the debt is low, then it will add value both long and short term!
lastly ur an idiot. when they say income they dont mean net income. its like when i ask you whats your income. you dont tell me what you save. you tell me your gross income aka top line revenue.
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Forbes agrees with me.
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GDP is not “cumulative spending” you keep saying this, but it’s false. It’s the sum of spending on final products, which is different.
https://www.investopedia.com/terms/g/gdp.asp
Gross Domestic Product (GDP) is a broad measurement of a nation’s overall economic activity. GDP is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.
Also, income means income (from investopedia in prior link).
“Conversely, the income approach starts with the income earned (wages, rents, interest, profits) from the production of goods and services.”
Noteably, this is approach does not take corporate revenues, it takes CORPORATE PROFITS.
Now you’re stuck with arguing some semantics lolz:
LMAO. Nice try Nerdy, K thx bye!
In no context is gross income “aka” revenue. Gross income is gross income. And at the corporate level your weak analogy completely implodes. The simple fact is it is not a summation of corporate revenues. GDP is a summation of corporate PROFITS using the income method as well as individual INCOME and using the expenditues method it is only a summation of the production of FINAL goods and services.
https://www.investopedia.com/terms/g/grossincome.asp
haha damn that final good definition. guess ur right on the gdp. respect. haha thx for the fact check.
corporate profits + wages + rent + int.
i never got into the minutae of that haha.
Haha, no worries, thanks for the entertaining Friday fight, have a good weekend mang.
its such a weird definition though. guess you cant make that metaphor!
for the individual level its top line since it wages.
but for the corporate level it shifts to bottom line.