Dow Finishes Worst December Since Great Depression - CNN

[Zippyjuan]

Maybe zippy thinks people would work under a 100% income tax rate.

Where doe he suggest that?

[Madison320]

Stocks vastly outperform inflation now. If stocks didn't outpace inflation there wouldn't be a point in owning them.

Think about that for a minute. What would happen to the relative price of stocks compared to other things if that were always true?

[Krugminator2]

I think you're so used to existing in an inflationary environment that you're having trouble picturing a non-inflationary one.

Assuming a stable population and a stable money supply how could stock prices go up in general? You'd have roughly the same number of companies, same number of shares, same amount of money available to purchase them. Obviously some would go up, some would go down but the market cap/share price should stay the same.

You would want to own shares for the dividends. That's how it's supposed to work in a free market which we don't have. The owners (share holders) get some of the profit in the form of a dividend. The price of the share doesn't need to go up.

GDP is positive now when you back out population growth and inflation. In a free society innovation makes things better and cheaper.

Why would someone invest in owning an innovative company if their only expected gain was with dividends? You take an ownership stake in the company because you are expecting them to reinvest in the business to make even more money i.e. capital gains. Dividends are fine for businesses that are mature and don't require as much reinvestment like a utility. Why would someone buy a drug company or a biotech without the expectation of capital appreciation?

[Krugminator2]

Think about that for a minute. What would happen to the relative price of stocks compared to other things if that were always true?

Stocks would go up? That's kind of how it is supposed to work. Stock as an asset class are risky. In order to be enticed to take on that risk, they have to have a positive expected return otherwise there wouldn't be a rational reason to take on that risk.

[Zippyjuan]

Stock prices are based on what investors expect a company to do in the future. If they don't expect a company to grow, they won't buy their stocks.

[Madison320]

Why would someone invest in owning an innovative company if their only expected gain was with dividends? You take an ownership stake in the company because you are expecting them to reinvest in the business to make even more money i.e. capital gains. Dividends are fine for businesses that are mature and don't require as much reinvestment like a utility. Why would someone buy a drug company or a biotech without the expectation of capital appreciation?

It makes no difference how your investment goes up, either by dividends or by a capital gain. Suppose you buy a share of Widget, Inc for 100$. You make the same amount if the price goes to $110 or if it pays a 10% dividend.

[Zippyjuan]

It makes no difference how your investment goes up, either by dividends or by a capital gain. Suppose you buy a share of Widget, Inc for 100$. You make the same amount if the price goes to $110 or if it pays a 10% dividend.

Dividends tend to be paid by companies with lots of cash and slower growth. Investors like the regular income from dividends which get paid even if the value of the stocks go down. The security of the dividend attracts investors who like safety and those who may not be attracted by their slower stock price growth. I have a couple dividend stocks which have done well for me. Utilities are a good example. Or "old school" companies like Coca Cola or IBM.

[Madison320]

Stocks would go up? That's kind of how it is supposed to work. Stock as an asset class are risky. In order to be enticed to take on that risk, they have to have a positive expected return otherwise there wouldn't be a rational reason to take on that risk.

If stock prices always beat the rate of inflation, they'd be much higher than all other prices over time. A car and a share of IBM would eventually be the same price. Since that is obviously wrong, your theory must also be wrong. I'm quite sure that over time the average price of a share of stock is going to be about the same relative to other prices.

The reason stock prices have been rising faster then the general inflation rate is because stock prices are the first to be affected by the Fed's inflation. In fact that was their stated reason for QE and ZIRP. Eventually that's going to even itself out and other prices are going to catch up to stock prices.

[Krugminator2]

It makes no difference how your investment goes up, either by dividends or by a capital gain. Suppose you buy a share of Widget, Inc for 100$. You make the same amount if the price goes to $110 or if it pays a 10% dividend.

Dividends are tax inefficient. Capital gains are tax deferred. Dividends are immediately taxable.

Setting aside the tax argument. if you can earn more money for investors through reinvestment, as an investor, why wouldn't you want the company to reinvest in the company as opposed to paying a dividend. Microsoft was famous for not paying a dividend and their stock went up a zillion percent. It clearly made sense for them to plow that money back into the business.

Think about it on a micro level. Let's say you own a truck stop. You can take all the money out of the business as wages and dividends or you can retain earnings and buy another truck stop and grow.

[Krugminator2]

If stock prices always beat the rate of inflation, they'd be much higher than all other prices over time.

I'm quite sure that over time the average price of a share of stock is going to be about the same relative to other prices.

Except stocks are much higher than all other prices over time. I mean it is a historical fact. Germany lost two world wars and had hyperinflation and German stocks still did pretty well in the 20th Century.
https://www.amazon.com/Triumph-Optim...stment+returns

I am trying to figure out who told you the average price of equities is going to be the same relative to other prices. I have literally never heard anyone say that. That is clearly wrong. Somebody must have planted that in your head. Inflation will never catch up to stocks except in a purely command economy where government just confiscates all property.

[Madison320]

Dividends are tax inefficient. Capital gains are tax deferred. Dividends are immediately taxable.

Setting aside the tax argument. if you can earn more money for investors through reinvestment, as an investor, why wouldn't you want the company to reinvest in the company as opposed to paying a dividend. Microsoft was famous for not paying a dividend and their stock went up a zillion percent. It clearly made sense for them to plow that money back into the business.

Think about it on a micro level. Let's say you own a truck stop. You can take all the money out of the business as wages and dividends or you can retain earnings and buy another truck stop and grow.

Once upon a time, in a free market world, reinvestment meant buying new equipment, making new and more efficient factories. Not buying back stock.

Anyway my other argument blows all of that out of the water. If your theory is correct that stock prices always outpace inflation, stock prices would eventually cost as much as a Ferrari.

[Danke]

Buybacks are discussed too:

Ep. 1306 The Stock Market Demystified

https://tomwoods.com/ep-1306-the-sto...t-demystified/

[Krugminator2]

If your theory is correct that stock prices always outpace inflation, stock prices would eventually cost as much as a Ferrari.

I wouldn't call it a theory. I would say it is an accepted fact like gravity. I am not sure what that means that stocks would cost as much as a Ferrari. But yeah if you bought 100 shares of SPY at 275 at some point your investment would be worth more than a Ferrari. I say that with 100% certainty.

Stocks go up between 1 million to 1.5 million percent a century net of inflation. https://books.google.com/books?id=wJ...entury&f=false

Once upon a time, in a free market world, reinvestment meant buying new equipment, making new and more efficient factories. Not buying back stock.

It it depends on how define a free market. They have a similar effect over the long term. The big difference is buybacks defer taxes. If you are a very long term investor, hold money in a taxable account and you have a choice between buy backs for dividends you would choose buy backs.

[Madison320]

Except stocks are much higher than all other prices over time. I mean it is a historical fact. Germany lost two world wars and had hyperinflation and German stocks still did pretty well in the 20th Century.
https://www.amazon.com/Triumph-Optim...stment+returns

I am trying to figure out who told you the average price of equities is going to be the same relative to other prices. I have literally never heard anyone say that. That is clearly wrong. Somebody must have planted that in your head. Inflation will never catch up to stocks except in a purely command economy where government just confiscates all property.

What? German hyperinflation proves my point! In that case the price of ordinary stuff went up much faster than stock prices.

Maybe I'm not being clear. If you are correct that stock prices tend to go up faster than the general price inflation rate, stock prices would eventually be much higher relative to other things, like a loaf of bread for example. Let's say the average price of a share on the SP500 is $4 and a loaf of bread is $4. Are you saying that over time the bread is going to be $5 but the average share price is going to be $10?

Since houses have been targeted by Fed inflation also, would you say the same thing about house prices? Do they also always go up faster than the rate of inflation?

I'll bet if you look at the ratio of (the average share price) to (a dozen eggs, or a loaf of bread, or a gram of gold) the ratio has been roughly the same over time.

[Krugminator2]

What? German hyperinflation proves my point! In that case the price of ordinary stuff went up much faster than stock prices.

Except stocks outperformed the effects of the currency depreciation. So it proves the exact opposite point. That was the whole reason I posted.

Maybe I'm not being clear. If you are correct that stock prices tend to go up faster than the general price inflation rate, stock prices would eventually be much higher relative to other things

You were clear. Yes. I'm saying stocks would be much higher relative to other things. Come on man. Are you trolling?

Dow Jones in 1900- $68
Dow Jones in 2018- $23,000 (That doesn't even take into consideration reinvesting dividends which is a huge part of investment returns)

Gold Price in 1900. $20
Gold Price in 2018- $1280 (no dividends to factor)

Since houses have been targeted by Fed inflation also, would you say the same thing about house prices? Do they also always go up faster than the rate of inflation?

No. Residential home prices should not outpace inflation. A house is a depreciating asset. You do have things like population growth which increases land prices but the real return on homes plus land should be very small or negative which I have actually posted many times. They don't produce an income. Stocks and real estate are very different asset classes.

I'll bet if you look at the ratio of (the average share price) to (a dozen eggs, or a loaf of bread, or a gram of gold) the ratio has been roughly the same over time.

Okay? That sounds like it might be true. I'll assume it is true for now. Companies produce an income stream. Gold and bread do not.

[Madison320]

I wouldn't call it a theory. I would say it is an accepted fact like gravity. I am not sure what that means that stocks would cost as much as a Ferrari. But yeah if you bought 100 shares of SPY at 275 at some point your investment would be worth more than a Ferrari. I say that with 100% certainty.

And I'm telling you that the price of a new Ferrari would go up just as fast over time as a fixed amount of shares of stock.

Think about this. If you are correct eventually no one would ever be able to afford to buy a share of stock since it is outpacing everything, including everyone's paycheck.

[Zippyjuan]

What? German hyperinflation proves my point! In that case the price of ordinary stuff went up much faster than stock prices.

Maybe I'm not being clear. If you are correct that stock prices tend to go up faster than the general price inflation rate, stock prices would eventually be much higher relative to other things, like a loaf of bread for example. Let's say the average price of a share on the SP500 is $4 and a loaf of bread is $4. Are you saying that over time the bread is going to be $5 but the average share price is going to be $10?

Since houses have been targeted by Fed inflation also, would you say the same thing about house prices? Do they also always go up faster than the rate of inflation?

I'll bet if you look at the ratio of (the average share price) to (a dozen eggs, or a loaf of bread, or a gram of gold) the ratio has been roughly the same over time.

Gold and stocks can move counter to each other- gold does best when stocks do badly. For a gold/ stocks ratio to remain the same, they should move together. Gold vs S&P 500:



https://marketrealist.com/2015/12/go...markets#835186

Bacon and eggs vs gold (price of bacon and eggs in dollars and the price in ounces of gold):



https://oregoneconomicanalysis.com/2...son-inflation/

[Krugminator2]

If you are correct eventually no one would ever be able to afford to buy a share of stock since it is outpacing everything, including everyone's paycheck.

Stocks split for that reason. That reduces the share price to make it easier for more people to buy shares. It doesn't change the underlying value of the company.

But if you want an example of a company that doesn't split stock so that you can keep a fixed number of shares, Berkshire Hathaway fits the bill.

You could have bought a share for $20 or whatever in the 70s. Now a share is worth $300k.

[Madison320]

Stocks split for that reason. That reduces the share price to make it easier for more people to buy shares. It doesn't change the underlying value of the company.

Obviously for the argument we're having, you'd have to assume the number of shares was constant. If you want to take shares out of the equation then you could say the total market cap is going up faster than inflation. In other words the value of all companies combined is going up faster than inflation over time. Is that your claim?

[Krugminator2]

In other words the value of all companies combined is going up faster than inflation over time. Is that your claim?

Yes.

[Swordsmyth]

Yes.

All corporations are always successful and always increase in value?

[r3volution 3.0]

The tax cut goosed the stock market, but that was only icing on a long-developing bubble.

Absent the tax cut, the bubble would perhaps have burst a bit sooner (i.e. by a couple months).

On the other hand, the tax cuts also contributed to the increase in interest rates (more supply in the bond market).

Really, it didn't matter much one way or the other; this bubble was going to burst regardless.

...and now it has (interesting times ahead).

[Danke]

All corporations are always successful and always increase in value?

The Dow has booted out around 60 companies since its inception in 1896. So, yes many decrease in value or go out of business. The index looks great over time, but the individual investor could be hold those losing stocks.

Plus, taxes and fees are rarely (never?) discussed when talking about a DOW investment over the long time frame.

[Swordsmyth]

The Dow has booted out around 60 companies since its inception in 1896. So, yes many decrease in value or go out of business. The index looks great over time, but the individual investor could be hold those losing stocks.

Plus, taxes and fees are rarely (never?) discussed when talking about a DOW investment over the long time frame.

And there would be even more that lost value or went out of business in a truly free market, others might well plateau and stay stable for a long time while issuing dividends.

[Madison320]

Yes.

If the total market cap of all businesses always grew faster than the rate of inflation, the total market cap would eventually exceed the total money supply, which is impossible.

Suppose there was a small island nation, on a fixed gold supply, with one business, a coconut grove. The total amount of gold on the island is 100 ounces, and it's fixed so there's no inflation. The market cap of the coconut grove is 10 ounces. If that market cap had to grow every year it would eventually exceed the total amount of gold available (100 ounces) which is impossible. What IS possible is that the coconut grove value stays at 10 ounces and generates an ounce of gold profit every year. That gold profit gets distributed to the owners (dividends), and they trade it with other islanders who eventually buy coconuts and the process can go on indefinitely.

As I said earlier I think you are so used to living in an inflationary environment that you can't envision a non-inflationary one.

Also I'm not saying that no companies grow faster than inflation. Some grow faster, some slower, some go out of business, but on average the net total will keep pace with inflation.

[Madison320]

All corporations are always successful and always increase in value?

I'm sure he'll say that some go down but the total goes up faster than inflation. My point is that if the value of all businesses constantly grows faster than everything else, eventually that value will be so much bigger than everything else that it won't make sense. If you said the cost of a bicycle will always grow faster than inflation, eventually that price will be out of whack with everything else. A bicycle might cost a million dollars and a car might cost 50K for example. The logic is the same for total market cap.

[Krugminator2]

My point is that if the value of all businesses constantly grows faster than everything else, eventually that value will be so much bigger than everything else that it won't make sense. A bicycle might cost a million dollars and a car might cost 50K for example.

The pie gets bigger. Wealth isn't fixed. Wealth isn't determined by raw materials like coconuts. Wealth is mostly determined by human ingenuity. As people make things better and cheaper, real GDP goes up and owning equities is a way to participate in that. Bicycles don't produce income streams.




You have to accept that your view has been completely wrong since the founding of the United States. Otherwise there is no point in talking further. It is a factually true statement that stocks have greatly outpaced inflation since 1800. That isn't an opinion. It isn't a hypothesis. It is a fact. I gave you think link to Triumph of the Optimists. You can read the reviews. That looked at world wide stock prices in the 20th Century.

Here is Stocks for the Long Run which looks at equity returns going back to the 1800s https://en.wikipedia.org/wiki/Stocks_for_the_Long_Run

The book looks at equity returns going back to the 1800's (back when deflation was a thing).

Stocks on the long term have returned 6.8% per year after inflation, whereas gold has returned -0.4% (i.e. failed to keep up with inflation) and bonds have returned 1.7%

[oyarde]

The Dow has booted out around 60 companies since its inception in 1896. So, yes many decrease in value or go out of business. The index looks great over time, but the individual investor could be hold those losing stocks.

Plus, taxes and fees are rarely (never?) discussed when talking about a DOW investment over the long time frame.

I do not have to pay taxes on my investments except property tax now that I am out of stocks .

[enhanced_deficit]

It's a mix of economics-politics news/views:

Trump: Market ‘glitch' in Dec, will rise again ; MB: Everything Trump Touched ‘Turned To Gold’

[Madison320]

Except stocks outperformed the effects of the currency depreciation. So it proves the exact opposite point. That was the whole reason I posted.


You were clear. Yes. I'm saying stocks would be much higher relative to other things. Come on man. Are you trolling?

Dow Jones in 1900- $68
Dow Jones in 2018- $23,000 (That doesn't even take into consideration reinvesting dividends which is a huge part of investment returns)

Gold Price in 1900. $20
Gold Price in 2018- $1280 (no dividends to factor)

No. The Dow and I'm assuming all stock indexes contain dividends. If you take out the dividends I'll bet you'll find the actual price of the stocks has kept pace with inflation. If the stock price of all the Dow companies stayed constant, but they all returned a 10% annual dividend, the Dow index would go up by 10% a year.

Companies don't need to grow faster than inflation to invest in them. They just need to have a high enough dividend. A business can have a constant price and generate a decent profit year after year. It doesn't have to grow it just has to be profitable.

Maybe there's a chart that tracks total market cap for the Dow over time. If I'm right that should roughly track with inflation. Think of it this way. Picture an economy as a bunch of pieces. There's businesses, houses, cars, land, etc. Suppose the average sized business was worth a thousand cars or 1,000 acres of land. If businesses always grew faster than everything else eventually an average sized business would be worth a trillion cars or a trillion acres of land.