Comment by dredmorbius | Hacker News Reader

Comment by dredmorbius | Hacker News Reader

If you're looking at the economy and financial returns, there are a number of factors other than strictly cyclical characteristics of stock market and financial vehicle returns to consider. Pardon the self-link spam, but this is a topic of some interest to me:

There's the Shift Index by Deloitte's Center for the Edge, which shows a long-term secular decline in return on invested capital (ROIC) from 1965 to 2009 by 75%. It's fallen from 6.2% to 1.3%, and is on track to negative returns in a little over a decade. http://redd.it/1y3z3n

There's the relationship of GDP growth to the price of oil (WTI), as portrayed in this FRED graphic from 1945 - 2012: http://i.imgur.com/hfBRw9f.png

Prior to 1974, WTI tracked a very predictable 2.5% price trend. This was the period during which the TRC, Texas Railroad Commission, effectively set the price for oil through extraction (production) quotas. In March of 1971, the TRC lifted those quotas, effectively removing any limits on extraction rates. US oil extraction had peaked. 1971 is the watershed. Oil prices never resume their previous level of stability, and GDP cycles become more random and volatile. Afterward, oil prices are often higher (much of the 1970s and 2000s), sometimes lower (1984 - 1999), but always volatile. The regularity of GDP cyclical trends is lost. http://redd.it/1tz6y2

Though there have been financial panics before, the period from 1929 - 2007 is exceptionally notable for its lack of any widespread panics. There were a few edgy times -- going off Bretton-Woods in 1971, the 1987 stock market crash, the Asian currency crises of the 1990s, but central banks held the show together until 2008 and the fall of Lehman Brothers. Observers such as Michael Lewis, particularly in The Big Short, have commented on the financial restructuring that's sustained paper profits while real wealth growth is questionable. The YC and HN crowd might want to look at where all that magic money making Rails coders so much more valuable than janitors comes from, and how long the music will play.

I think you mean Michael Lewis.

As for the price of oil and GDP cycles. I am not sure I understand your point. Can you please elaborate?

First world economies are more based around services than industrial production at this point, so while oil is still a hugely important commodity, there have clearly been structural changes in what comprises world GDP.

Yes, thanks, corrected.

There's a set of heterodox economic schools which hold that it's principally energy which is responsible for economic growth, and specifically the abundance, const, and convenience of that energy. Hydrocarbons, especially liquid hydrocarbons, are a spectacularly convenient form and store of energy. Electricity is a useful form of energy, though it's not particularly storeable. This has been suggested and explored by numerous economists and others since the early Industrial Revolution, notably: William Stanley Jevons (The Coal Question (1865)), US Navy Rear Admiral Hyman G. Rickover, Kenneth Boulding, Nicholas Georgescu-Roegen, Charles Odum, Charles A.F. Hall, and others. Generally, "thermoeconomics", "biophysical economics", or "ecological economics".

Decoupling of energy (and resources generally) from GDP growth has been argued by numerous authors, though I find their case unconvincing. It's been argued against by others.

Global GDP vs. primary energy consumption shows a pretty strong correlation, and I find the causality argument plausible: http://i.imgur.com/42I4Jmf.png (from Wolfram+Alpha).

Yes, efficiency has improved, but so has overall consumption: http://i.imgur.com/Hu0NWsI.png

As for oil and GDP cycles: my point is that while the price and supply of oil were highly stable, GDP variation was very regular. As oil price and supply began to vary, GDP stability went all to heck.

Just to check - I have long assumed that real "value/wealth" was created through more efficient use of energy / discovery new sources energy (chimney / coal)

Is that the jevons / Rickover etc argument?

I don't have a full or easy answer to that myself yet.

Real value (as opposed to financial value) is created by re-structuring your environment to provide more useful services.

A huge problem with existing economic theory is the failure to account for stock depletion in natural resources (there are other problems, but that's a biggie). So while you can convert stuff in the ground to cash in hand, what you haven't done is to increase your total wealth. You've exchanged your physical stock for financial purchasing power.

You can use those stocks to create more value, but in the case of energy tend to consume it in the process (materials can often be recycled).

You can look at the economic value created by a quantity of energy -- I've done some exploration of this in terms of $billion GDP/quad (quadrillion BTU energy) or $/barrel: http://redd.it/1vlksg

One way of considering a barrel of oil is in how much economic benefit you get from it. In various countries:

US: $1022

China: $528

Japan: $1678

Syria: $498

Egypt: $441

India: $493

Germany: $1465

UK: $1586

Switzerland: $2792

Mali: $4425

Note that industrialized nations tend to get $1000+ per barrel, nonindistrialized ones (Mali excepted) $400-500 or so. Oil's been running around $100 - $120/bbl the past couple of years.

That means the US sees about $9 in returns for each dollar spent on oil, Switzerland nearly $27. Mali sees a large nominal return, but both its GDP and oil consumption are minuscule.

Egypt's in much worse shape: $3.41 in returns per oil dollar spent. India's slightly better ($3.93), China a bit above that ($4.82). But all are running on pretty thin margins. Increased oil prices will push a lot of marginal uses out of reach, and likely shrink their economies markedly. Note that Egypt and Syria in particular are two nations undergoing pronounced unrest -- and which have also recently gone from net exporters to importers of oil. This is a transition described by the Export-land model (https://en.wikipedia.org/wiki/Export_Land_Model).

Yes, increasing your efficiency of energy use is one way to increase wealth, but accessing more (or cheaper) energy is another route. You don't have to be more efficient.

Stock depletion seems like an odd issue in this context - if energy available is a form of value then the laws of thermodynamics basically make everything zero sum

So I would say that turning coal into kinetic energy in a train is an increase in wealth / value for humans. The externalities do need to be accounted for and minimised (climate ch age etc) but otherwise we cannot measure value increase in this seemingly useful way

Given what you have said, where should a US-based person put their savings in order to (1) keep up with inflation, and (2) make a reasonable return (somewhere in the 6-10% range)?

Just buy everything.

Retail investors are unlikely to beat the market as a whole, so just buy the entire market, hold it forever and keep costs low. For instance, Vanguard's Total Stock Market fund holds almost every publicly traded stock in America (~3700) and is dirt cheap.

But it also makes sense to hedge against the market to some extent, right? Have some amount in safer things (bonds, even money market and/or some t-bill equivalent), things that sometimes go in different directions than the market (eg. commodities). What's a good way to find a balance for that?

Of course, that fund was just an example.

John Bogle, founder of Vanguard, recommends "your age in bonds". So if you're 20, make bonds 20% of your portfolio. Some adjust this up or down depending on their appetite for risk (I think age minus 10 is the common advice from Vanguard now).

Finding the right portfolio for yourself is actually a pretty involved question. It depends on your personal situation: Things like whether you have kids, whether you own a house or are planning on buying, what your retirement goals are, etc.

A straightforward bond/stock split has been recommended, and it's probably the simplest but even then there are questions of which bond fund/ETF and which index/equity fund/ETF to choose.

Creating a plan requires understanding what your tolerance for risk is. It doesn't have to take a lot of time [1] and some basic reading and math will enable you to pick what's right for you. Basically, are you willing to tolerate more volatility (i.e. variability in year-to-year returns) in exchange for higher returns in the long-term?

1. http://www.finiki.org/wiki/Portfolio_design_and_construction

If you're hedging against a total market collapse, I'd suggest productive farmland and strong community ties.

from top-level comment:

>There's the Shift Index by Deloitte's Center for the Edge, which shows a long-term secular decline in return on invested capital (ROIC) from 1965 to 2009 by 75%. It's fallen from 6.2% to 1.3%, and is on track to negative returns in a little over a decade. http://redd.it/1y3z3n

The comment you are responding too is asking what to do assuming the top-level comment is correct, and the total return on invested capital is, in fact, declining.

Buying a low load index fund is advice that few people are going to argue with, but it doesn't answer the question.

The low-load index is still going to address the financial risk associated with carrying cash.

Both financial vehicles and cash presume that the economic system will sustain itself. There's always the possibility it won't.

The combination of insurance protection and high return is not something you're going to find. The general argument is to invest in a broad market index (or even a spread of several stocks and/or bonds (6-12 gives a pretty high level of diversification, though a broad index based on the top 100, 500, or 1000 securities is of course even broader).

That will give you protection from volatility in any one security. You won't be protected against general market (or financial system) risk.

There are several bond issues which are specifically inflation-indexed, e.g., TIPS for the US:

https://en.wikipedia.org/wiki/Treasury_security#TIPS

https://en.wikipedia.org/wiki/Inflation-indexed_bond

You're not going to find a 6-10% return on these though, generally.

For the average investor, who doesn't have copious amounts of time to do research, a low-cost index-tracking ETF would be one of the best investment vehicles.

You would want to tailor your asset allocation to match your risk profile. Furthermore, your timeline (i.e. when you will need access to the funds) will affect your asset choices. If you have a short amount of time (less than five years) it's usually too risky to have a high or even moderate exposure to equities. In fact, if I knew that I would need to spend the money within five years, I would keep a large percentage in safe (i.e. guaranteed) investments.

Reply on news.ycombinator.com