Simple chart from David Rosenberg of Gluskin Sheff showing the 10 year returns by asset classes:
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If you believe in mean reversion over the long term — and this is a 10 year chart — then you probably are cautious on Gold here and more constructive on equities for the next 10 years.
While yesterday's US stock market close was poor, Asia and Europe didn't follow today as debt in Greece, Spain, Portugal, etc... rallied, their CDS narrowed and stocks bounced. The Greek finance minister said January tax revenues came in above expectations and that spending was below target for the month and said "that means the deficit reduction for January is well within what we have promised." The euro is rising in turn. Also helping is the story that Trichet is headed to the European Union leaders summit a day early in order to address Greece's problems even as the Greek finance...
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September 23rd, 2009 at 11:35 am
Gold/silver/copper market = ten thousand monkeys in a telephone booth.
September 23rd, 2009 at 11:37 am
Wow, quite a chart. Kind of blows a hole into the old buy equities argument. Am with lb though. Gold a crowded trade if there ever was one.
September 23rd, 2009 at 11:41 am
If you believe in mean reversion over the long term, you probably shouldn’t:
http://upload.wikimedia.org/wikipedia/en/c/c9/Dollar_value_chart.gif
September 23rd, 2009 at 11:45 am
All of those innovations in gold quality, quantity, manufacturing, accounting, and allocation are all clear indications that gold is a bubble waiting to burst.
Gold has risen because it’s stable.
September 23rd, 2009 at 11:45 am
The chart is very decieving as the previous 18 years the mkt averaged over 18% a year returns. yet again taking a favorable chart and skewing the true. ASK JAPAN ABOUT MEAN REVERSION.down 75% from 20 years ago. regardless of what the mkt does the next 10 years this mkts the most overbought and one fo the most expensive in eyars and due for a 15-20% hit
September 23rd, 2009 at 11:58 am
or maybe you believe that over the last ten years equities have changed from owning part of a business into participating in a machavilian compensation scheme for key insiders….
the heart of equities has been ripped out by speculators, stock options/buybacks, non-GAAP financials, and now the elimination of dividends.
September 23rd, 2009 at 12:02 pm
Marcus,
Pardon me if I read more into the chart you posted:
Inflation is a general phenomenon: it affects all prices and all asset classes, so in that way Barry is more correct. Mean reversion would prove exactly his point. He’s not saying that the USD will regain its purchasing power, just that what it will purchase has dramatically shifted: a lot more equities an a lot less gold. In that framework, it would be natural to buy more equities and less gold since the likelihood of excess returns respectively gold to equities is a lower likelihood under the law of averages.
Statistics is a mainstay of technical analysis; voodoo is not.
Chuck Ponzi
September 23rd, 2009 at 12:12 pm
Barry:
“…. If you believe in mean reversion over the long term — and this is a 10 year chart — then you probably are cautious on Gold here and more constructive on equities for the next 10 years…..”
If you apply the reasoning of cyclical transitioning, as so many of our friends in the corporate and academic domain, your statement would be valid. However we are in the very early innings of a secular mega-transition, the recession within the depression.
In the same manner that many of our colleagues define unemployment as a lagging indicator as a means to distort sentiment, at some point in time, they will either have to define it as a leading indicator, or just shut up about it and never mention unemployment as an indicator at all.
We are at this point already, however, the sensational equity speak is distracting.
Wikipedia: for lack of anything better at the moment….
“…. In economics, a depression is a sustained, long downturn in one or more economies. It is more severe than a recession, which is seen as a normal downturn in the business cycle.
Considered a rare and extreme form of recession, a depression is characterized by abnormal increases in unemployment, restriction of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuations, mostly devaluations. Price deflation or hyperinflation are also common elements of a depression….”
Beat regards,
Econolicious
September 23rd, 2009 at 12:16 pm
Too bad commodities and precious metals cycles average 18 years… for those mean reversion folks looks like we have another 8 years to go.
September 23rd, 2009 at 12:21 pm
Vermont – I guess that’s why you are a trader. I agree totally. Stocks are sold as a piece of a company, present value on future earnings and dividends, long term investments. But, by every measure of reasonable value, they make no sense.
Just compare what a business in your city would sell for as a percent of earnings, cashflow, assets, profits, etc. Nothing like stocks.
September 23rd, 2009 at 12:30 pm
The selection of this particular starting date – Aug. 1999, smack-dab in the middle of the dot-com boom — might have just a wee bit to do with the performance of equities over the following time period. Do a 15-year chart and you’ll draw an entirely different conclusion.
September 23rd, 2009 at 12:41 pm
[...] you probably are cautious on Gold here and more constructive on equities for the next 10 years. PERMALINK September 23rd, 2009 | Category: [...]
September 23rd, 2009 at 12:47 pm
Chuck Ponzi:
If you say so (Barry put it better: “If you believe . . .”).
BR’s examples of the relative value over time, is in percentages, not in dollars – the dollars themselves fluctuate (of course, we measure in dollars, but the unit of measure is not fixed, therefore, it isn’t really a “unit” of anything). I BR’s statement should be qualified, as the fiat dollar is just another “commodity” that can be, and is, grossly manipulated (talk about voodoo). That was the point of my comment and the chart I linked to.
Personally, I “believe” gold to be the benchmark and is the mean that anything that can revert, will revert to (in units of measure).
Based on the chart I provided, how does the “law of averages” pertain to the dollar? To buggy whips?
Equities? Have at ‘em.
September 23rd, 2009 at 12:49 pm
That’s some serious data mining there….Rosie needs to chill out a little or else we’ll start thinking he’s losing it….
There’s plenty of OTHER reasons to be cautious on gold than this chart….most notably the extraordinary long positions of speculators of all stripes and colors…
http://andystechnicals.blogspot.com/2009/09/latest-cot-report-investors-still.html
September 23rd, 2009 at 1:07 pm
i have come to a conclusion-
stocks are a manipulated racket-
EMH- please- what a joke-
how can you “invest” in a stock for any time horizon- when you expect the rug to be pulled out at any moment?
speculation at best- but most likely a racket- especially when the largest market makers- are just that- the market- and set prices at will
September 23rd, 2009 at 1:08 pm
If we expand that chart to 30 years it looks much different.
September 23rd, 2009 at 1:13 pm
How about (1) cash and (2) foreign cash?
September 23rd, 2009 at 1:14 pm
I track the S&P 500 from specific dates:
5/7/1993 442.31 CAGR = 5.55% Total Return = 142.29%
7/31/1995 562.06 CAGR = 4.66% Total Return = 90.67%
9/22/2009 1,071.66
Gold
5/7/1993 357.50 CAGR = 7.12% Total Return = 164.67%
7/31/1995 383.35 CAGR = 6.57% Total Return = 183.80%
9/22/2009 1,014.60
I’m sure different dates would give different results but those are the dates I finally opened retirement accounts. Gold looks pretty. I’m guessing they’d all look pretty good compared to equities.
September 23rd, 2009 at 1:51 pm
Not convinced, what good is gold anyway?
September 23rd, 2009 at 2:03 pm
Not convinced, what good is gold anyway?
_______
Gold is good as the basis of a monetary system, and not much else (other than a few industrial applications, where it drives the cost of the finished product/utility up). It’s not perfect, but it fits the criteria better than anything else. Criteria: it’s an element, relatively rare, relatively fixed in quantity, non reactive, universally accepted as having value (without treaty or edict). Nothing else comes close.
FWIW, I’m not a “gold bug”, per se, but I do understand why gold is valuable.
September 23rd, 2009 at 2:43 pm
“Gold is good as the basis of a monetary system, and not much else”
Once upon a time. Since money as money isn’t anything real (real: something that would materially exist without any acknowledgment of its function in the consciousness), but the highest possible abstraction of exchange value expressing a social relation between the participants in a market economy, it doesn’t need any commodity as basis. To abandon gold as basis commodity in the world economy at some point was just consequential. Not even paper money is really needed. Some abstract points booked between accounts do it too.
rc
September 23rd, 2009 at 2:52 pm
I agree with Marcus Aurelius. and i can vouch for that since i am from india, where even the poorest of poor buy gold due to thousands of year old tradition(security).
but still gold is another speculative stuff…not even as good as oil is…..the day we feel there is no need to hedge by buying gold….it maybe all over for it.
September 23rd, 2009 at 2:57 pm
Comment on gold by Liz Ann Sonders
http://www.forbes.com/2009/09/22/gold-bubble-commodities-intelligent-investing-inflation.html?partner=popstories
“Liz Ann Sonders, chief investment strategist at Charles Schwab says, “There is only one example in history (1979-1980) of a big move in gold being a sign of rapidly rising inflation,” she says. “In 1983, gold rallied nearly 50%, yet inflation fell. From 1985-1987, gold was up nearly 65% yet inflation was calm. In the early 2000s, gold was up nearly 60%, yet inflation fell.” Sonders adds that the opposite has also happened. Gold fell over 10% in 1987, yet inflation rose sharply from then through the early ’90s. And, of course, 10-year yields, as noted, have moved counter to gold”.
September 23rd, 2009 at 3:01 pm
I recently sold my GDX at $46, but I plan to buy it again on a pullback. As long as Fed funds is under 1%, GDX is going a lot higher. I think GDX could keep rising, at least until Fed funds gets to 4%.
September 23rd, 2009 at 3:38 pm
Real interest rates have been negative for most of this decade (verite?). CPI not correct. Calculated, a la Argentina. While we may have technical deflation – as defined by wages and production -we will have continuing inflation in asset prices. Fiat (by decree, or by printing press) currencies always go to zero currently -95% since 1913 Fed creation, and gold way up since removing the gold std. in 1971 (another Nixon legacy). Why would one not buy an asset with limited supply to offset the unlimited supply of fiat paper dollars? Sure there will be corrections, but we’re not going back ot $32/oz., and in fact just the opposite. Think Zimbabwe. BTW US Constitution defines USD based on gold, or silver, and so gold is just reflecting reality now anyway. Weimaraner s/b Fed mascot.
http://en.wikipedia.org/wiki/Milton_Friedman
“Inflation is always and everywhere a monetary phenomenon.”
—Milton Friedman, A Monetary History of the United States 1867-1960 (1963)
September 23rd, 2009 at 3:42 pm
This understates the return of the S&P500 by excluding dividends. It’s still negative and not pretty, but include dividend reinvestment and you get a -9% return over the past 10 years if you bought and held in an index fund. That being said, speculating in gold and real estate is much more fun.
September 23rd, 2009 at 3:43 pm
Sharkbait,
apparently, if reality doesn’t agree with Friedman’s believe and it’s followers , reality must be manipulated by malice forces.
rc
September 23rd, 2009 at 3:45 pm
Bloody, am I sleeping? I try again:
Apparently, if reality doesn’t agree with Friedman’s and his follower’s believes reality must be manipulated by malice forces.
rc
September 23rd, 2009 at 3:56 pm
S&P 500 -50% in USD since 12/31/1999 (~10 yrs.) – vs. a basket of currencies.
S&P 500 -79% in gold since 12/31/1999 (~10 yrs.)
Source: Michael Pento, Delta Global Advisors, 9/16/09
September 23rd, 2009 at 4:38 pm
If you believe in mean reversion over the long term — and this is a 10 year chart — then you probably are cautious on Gold here and more constructive on equities for the next 10 years.
Well……maybe 20 years. We still have to work the boomers out of the markets and the shares out of the boomers
Secondly, how do you know that the last ten years of gold wasn’t mean reversion to the upside? I’m sure you’ll remember, and if not you do realize that in the ’90’s Greenspan actually made a statement that the Fed would do everything in it’s power to keep the price of gold suppressed:
“central banks stand ready to lease gold in increasing quantities should the price rise.”
From here:
http://www.federalreserve.gov/boarddocs/testimony/1998/19980724.htm
That was when gold was around $250 and they were having a dog of a time keeping a lid on it because back then it was still believed that the POG was a reflection of inflation
September 23rd, 2009 at 4:44 pm
From 9/1/99 to 8/31/99 I get -7.7% (cumulative) and -0.8% (annualized) for the S&P 500 (incl dividends). What am I missing? Also, to be inclusive the chart should include EM equities, +135.6% (cumulative) and +9.1 (annualized) (using MSCI EM Index).
September 23rd, 2009 at 5:05 pm
Anyone heard of currency debasement and monstrous fiscal deficits? Has anyone looked at government revenues versus obligations?
September 23rd, 2009 at 5:27 pm
Chuck Ponzi wrote: “Inflation is a general phenomenon: it affects all prices and all asset classes, so in that way Barry is more correct.”
This is a ridiculous comment! Crude oil has more than doubled off its’ lows while Natural Gas has been collapsing all year until the past 2 weeks…
September 23rd, 2009 at 6:06 pm
the wisdom of masses not much helpful.
but i dont blame you guys…even economist dont know $hit.
my opinion(based on reading a ton of blogs).
we are facing deflationary forces due to consumer de-leveraging which is being balance by FED printing press.
if speculation can be kept minimal….inflation/deflation should stay manageable =-10%.
but as we have seen speculation is such a bitch….anything can happen(oil=200 or oil=20, gold=$300 or $2000) etc..
September 23rd, 2009 at 6:09 pm
As others have inferred, who says the mean reversion is over? Stocks went to an extreme extreme in 2000 and are just back to some sanity, except that the economic outlook is pathetic and so some more P/E (or other valuation metric, pick one) contraction is still in order. These things tend to overshoot the mean, not bounce off them and go back to the extreme they were just at.
September 24th, 2009 at 2:18 am
[...] Source: The Big PictureMore in the Article [...]
September 24th, 2009 at 9:31 am
[...] Ten year asset class returns (graph): http://www.ritholtz.com/blog/2009/09/10-year-asset-class-returns/ Earlier this week I linked to an article by former market bear Jim Grant in which [...]
September 24th, 2009 at 10:23 am
[...] je zanimljivo: povrat po investicijskim klasama u zadnjih 10 [...]