The Last 15 Years In the DJIA: 0.14% Annual Return

Submitted by Simon Black via Sovereign Man blog,

One of the great myths about investing that we’re told by the mainstream investment education is that we should “buy and hold” for the long term.

I remember being taught in a personal finance class long ago that I should just buy the S&P 500 index, walk away, and that years later I will have achieved huge gains.

The premise is that over a long period of time, it doesn’t really matter at what point you get in and out. The long-term trend of the stock market portends that you will make money.

It’s those kinds of investing myths that become axiomatic through repetition. You keep hearing the same thing over and over again and pretty soon people believe it.

Let’s look at the data.

It’s true that stock markets have plenty of peaks and troughs. Going back to the last relative peak, the Dow Jones Industrial Average (DJIA) hit just over 14,000 in October 2007; back then this was an all-time high.

If you had bought the DJIA back then, your return on the increase in share prices through today would work out to be a measly 3.5% on an annualized basis.

If you adjust that for taxes and inflation (even using the government’s own monkey numbers for inflation), you’re looking at a real rate of just 1.2%.

Now just think about everything that you saw in the last 7 years. The volatility. The risk. The turmoil.

Was it worth it? Probably not.

But if we go back further and hold an even longer-term view, the picture must brighten, right?

Let’s go to the peak before that. In early 2000, stocks once again reached what back then was an all-time high.

If you had bought the S&P 500 index back then (which is exactly what I was told at precisely the time that I was told), your annualized rate of return through today would be just 2.17%.

If you adjust that number for taxes and inflation, your real rate of return would be a big fat 0.14%… as in less than 1%. It’s practically ZERO.

Think about what you saw over the last 15 years in the markets—the collapse after 9/11, interest rates cut to zero, interest rates ratchet up again, huge swoons in markets, the credit crunch, Lehman’s collapse, the debt ceiling debacle, etc.

Is all that really worth a return of 0.14% per year? (i.e. 14 cents on every $100 invested)

It makes absolutely zero sense to do this with our money. But that’s what we’re forced into right now with most conventional investments at their all-time highs.

Bottom line—you don’t HAVE to be invested in the market. Sometimes the best investment you make is the investment you don’t make.

The challenge is, of course, that if you’re not invested in the market, your money is just sitting at the bank, earning less than the rate of inflation.

Welcome to the world of mainstream financial options. You’re damned if you do and damned if you don’t.

The conclusion here is very simple. It’s time to move on from the mainstream. There’s too much technology and too many global options now to be lulled into conventional investments that are born to lose.

Central Banks Need $200 Billion Per Quarter To Avoid A Market Crash

From Zerohedge:

We have all seen it countless times before: visual confirmation that without the Fed's (and all other central banks') liquidity pump, the S&P would be about 70% lower than were it is now.

Most recently, this was shown last Friday in "Another Reminder How Addicted Markets Still Are To Liquidity" in which Deutsche bank's Jim Reid said:

The recovery from the lows after Bullard spoke yesterday is another reminder how addicted markets still are to liquidity. Indeed in today's pdf we reprint and  update a table from our 2014 Outlook showing the various phases of the Fed's balance sheet expansion and pausing over the last 5-6 years and its impact on equities and credit. We have found that the relationship broadly works best with markets pricing in the Fed balance sheet move just under 3 months in advance. We've also included our oft-used chart of the Fed balance sheet vs the S&P 500 to help demonstrate this. So end July / early August 2014 was always the time that this relationship suggested markets should enter a new more difficult phase. So we still think central bankers hold the key to markets going forward and there seems to be a hint of change in the Fed.

Another view was shown over the weekend, in "The Chart That Explains Why Fed's Bullard Wants To Restart The QE Flow" which shows that when the Fed's excess reserve firehose is turned on Max, stocks surge; when it isn't - as has been the case recently - they tumble.

So now that "best Keynesian practices" are out of the window, and everyone has once again turned Austrian, and only the "flow of money" (either inside or outside) matters, the question is how much do central banks need to inject to keep the stock market from crashing, let alone continuing to levitate. Luckily, Citi's Matt King has just done the math, and the answer is...

Here is his answer:

We think the markets’ weakness owes more to an almost belated reaction to a temporary lull in central bank stimulus than it does to any reduction in the effect of that stimulus in propping up asset prices. Figure 5 shows the rolling 3m combined liquidity injection by the Fed, the ECB, the BoE and the BoJ, plotted against the rolling 3m change in spreads. While the relationship is not perfect – liquidity flows across asset classes and across borders, and there are announcement and confidence effects in addition to the straightforward impact on net supply – it is this, not fundamentals, which we would argue has been the major driver of markets for the past few years (Figure 6 shows the same series plotted against global equities).

In case anyone missed it, and in case there is still any debate about this issue which we first explicitly stated nearly 6 years ago and were widely mocked by the all too serious intelligentsia, here is the key sentence again:

"it's the liquidity injections, not fundamentals, which we would argue has been the major driver of markets for the past few years."

And with that piece of New Normal trivia behind us, we continue:

For over a year now, central banks have quietly being reducing their support. As Figure 7 shows, much of this is down to the Fed, but the contraction in the ECB’s balance sheet has also been significant. Seen from this perspective, a negative reaction in markets was long overdue: very roughly, the charts suggest that zero stimulus would be consistent with 50bp widening in investment grade, or a little over a ten percent quarterly drop in equities. Put differently, it takes around $200bn per quarter just to keep markets from selling off.

If anyone ever needed any confirmation of what we said in June 2012, that "The Stock Is Dead, Long-Live The Flow: Perpetual QE Has Arrived", now you have it, and only qualified but quantified. Because to translate what Matt King - Citi's most respected strategist and the only person on Wall Street to warn about the Lehman collapse and its consequences before it happened, just said - if and when the global central bank liquidity tracker ever drops to $200 billion per quarter or less, the market will crash.