Nominal figures are not adjusted for inflation. "Real" numbers are adjusted for inflation (in economics-speak).

The stock market (e.g. S&P 500 index) has real earnings that have consistently grown over time (although earnings are quite volatile). The real dividends paid by the companies that make up the stock market have also grown over time.

Jeremy Siegel, a finance professor at Wharton, wrote a great book called Stocks for the Long Run that shows stocks have grown about 7% per year (inflation adjusted) over the last 200 years.

> What would the market look like if we corrected for the money supply?

I think it's better to correct for inflation. The money supply can grow and it doesn't necessarily cause inflation (see the 2008 monetary response to the Great Financial Crisis as an example).

> It seems like the stock markets (USA) growth is strongly correlated to inflation

I'm not sure this is true. In the 70s, inflation was high and stock returns are low. In the 90s, inflation was low and returns were high. In 2021, inflation was high and returns were high.

He suggested the hypothesis that that's a reflection of the rise of the United States as a superpower over the last 200 years, and if anything were to impugn the United States' status as the market of refuge, those numbers would not be predictive of consistent long-run returns in the future.

That's a hard hypothesis to refute. Are there similar long-run numbers from all stable countries around the world, or is the US market unique in that aspect?

"Between 1692 and 2018, stock prices increased at an average rate of 1.87% per annum before inflation and 0.36% after inflation, and with reinvested dividends averaging 5.04% per annum, investors received a total return of 6.62% per year. £1"

Now, that being said, during this time frame, clearly the UK is also a western superpower, and after a certain point in time the UK & US stock markets probably have a very strong correlation with the rise of electronic trading/risk management.

For another example of an older equity market, we might look to Japan, which has had a negative rate of return: https://www.afrugaldoctor.com/home/japans-lost-decades-30-ye...

That being said, as we see in that article the monthly $833 purchase DCA still gave a positive return over 30 years.

It's not impossible, but it would take a lot of time and Japanese culture isn't exactly known for xenophilia.

I doubt that Japan will be going in that direction any time soon, but if they wanted to, they could.

Tokyo is crowded, however.

https://en.wikipedia.org/wiki/List_of_stock_exchanges

MSCI China over the last 2 decades has returned over 12%.

I don't know if your statement about MSCi China is correct but if so you are cherry picking based on an unusual start date.

Not per year: https://www.msci.com/documents/10199/aa99c3a4-d48b-44ac-8caa...

You two are talking past each other. When he says inflation, he means M2, you're referencing something that adjusts to CPI.

I may be a layman but I'm pretty sure that was just one type of inflation.

> I'm not sure this is true. In the 70s, inflation was high and stock returns are low. In the 90s, inflation was low and returns were high. In 2021, inflation was high and returns were high.

I'm not exactly talking about returns. I mean prices. In my eyes when you look at the S&P 500, every time there's money printing it's like a rolling snowball. It just gets bigger and bigger. But it's weird because that growth itself is not reflective of companies doing things but just them investing money or buying back stocks.

Inflation will hit some parts of the economy differently than others.

Consumer goods, homes, stocks, bonds - different kinds of inflation.

Quantitative Easing and other such policies, may impact the stock market differently than others.

As interest rates drop, the amount of leverage goes up dramatically, causing bubble.

Recent increases in valuations were not commensurate with profits, ergo, an ugly kind of inflation.

But we also have downturns that reduce returns significantly. If you average out the returns the presumption is that the cost of that "inflation leverage" is accounted in the inevitable bubble pop.

See also Japan for several decades:

* https://fred.stlouisfed.org/graph/?g=PA7P

The second sentence doesn't follow from the first. Owning stock literally means owning part of a company. Now the worth of that ownership is determined by what people are willing to pay, and what people are willing to pay is subject to all the whims of human judgement. The money supply is just one piece of that though, it's not the end-all-be-all (not for stocks, and not even for "inflation"). For one thing, the perception of the money supply and the stock market as a whole are major influences, but the fortune and perception thereof of individual companies will move related to its performance which over time will diverge from broader macroeconomic trends.

At some point, journalists and media decided that the stock market indices are a good indicator of the economy. It's convenient. They don't have to actually investigate anything to see how the economy is doing - they just look at one number.

That's been the economy's benchmark for decades. I think that around the 90s, regulators started to bias their behavior based on this observation. These are people who tend to lose their jobs when the economy crashes and fails to swiftly recover. Nevermind that the stock market crashing doesn't necessarily mean that the economy crashed. But I think they realized that if they make choices that result in the stockmarket going up, then they get to keep their jobs (or they even get praised for being oh so smart).

So. We have a kind of inflation. It's really a case where the benchmark that is being reported as "the status of the economy" is being actively hacked by regulators. Given any opportunity to intervene, they will carefully finetune the intervention with the singular purpose of making the benchmark look good.

So. We have been getting poorer since the 90s while the stockmarket has been skyrocketing in a historically unprecendented way. These are two sides of the same coin, and that coin is that the purpose of modern monetary and fiscal policy in democratic countries is to elevate the stockmarket even if it makes everything else go to shit. They do this because they know that then, journalists will report that the govt is doing a Great Job and the regulators get to keep their jobs.

Furthermore, if the stocks didn't go up liek they did, there would be a massive issue meeting pension and retirement obligations.

I'm not an economist, but I have some speculation (no pun intended):

When the government prints money, most of it ends up with the rich. The smart rich know that it's unwise to have lots of money lying around, so they buy investment assets, like real estate and stocks.

When quantitative easing started in 2008-ish, guess what got more expensive? When COVID hit and money printer go brrrr, what got more expensive?

That is also true of money "printed" by commercial banks. It is also true of money you spend. It is basically true of money anywhere in the economy.

Why? Because investment income i.e. capital gains scale with how much capital you have. If you can live off interest, your wealth is basically guaranteed to grow exponentially from that point onwards. You earn more than you spend, and the surplus is invested into assets that allow you to earn even more. It is a positive feedback loop that grows stronger and stronger over time. It has absolutely nothing to do with what the government does. It is purely the nature of compound interest.

The only thing the government can do is implement negative interest rates because interest rates go down as wealth concentrates. If interest rates become negative, then the rich no longer earn more than they spend from their capital. Instead, they must work to maintain the capital they have.

I can't tell if this is good or bad or not. Because it seems like funny money to me.

This investment would, if done smartly, will produce more goods and services to justify the higher prices of those financial instruments.

Thus, the economy grows. The financial growth leads the goods/services growth. Unless, of course, the financial growth is spent poorly (which is of course, totally possible), and thus you get nothing out of the spent resources.

GME did a secondary offering during the memestock rise in price. https://www.shacknews.com/article/125255/gamestop-gme-comple...

it created funding, which they could've used to pivot their business. Whether they use this money wisely to generate more profit is a different question, but you'd expect a business to generally try.

Just because some activities are extractive, doesn't mean all activity of that type is extractive.

yes, that is a concern, but only for those who are investing. Not for society in general imho. The investment would lose money if it wasn't wise, and the investor who did it suffers the loss. unless, of course, this loss is subsidized by taxpayers (e.g., a bailout).

Cheaper capital allows for investments that otherwise would not have happened to happen. An example is the massive amounts of dark fiber left over from the dot-com boom. the losses from building out those fiber is suffered by the investors, but the benefit is now being reaped by whoever that purchased it on discount after the bust.

I wish the same could've been said for fracking shale oil - unfortunately, that didn't happen (and thus led to high prices of oil today). So it's not always the case that unwise investments turn out to be useful in the future, but you can't really know ahead of time.

- Population growth

- Growth in productivity per capita

- Dividends

- Inflation

It used to be that populations were growing and productivity was increasing and dividends were high (becuase PEs were normal). Those days are all over. You can forget about seeing any return above inflation. Population growth has slown to 0.5% (down from about 1.5%+). Productivity per capita is almost 0 for the last 20 years (down from 2% per year for the last 200 years prior). Dividends which used to be 4.5% in the 60s+ and 6%+ at 1900-1950 are now down to about 1.3%.

So, the answer to your question, at least going forward from here is NO, it's mostly just going to be inflation plus 1.3% from dividends. Note, this was not the case for the last 100 years.

Companies don't pay out all profits to shareholders as dividends. They can also reinvest in their own business (e.g. build a new factory) or buy back shares.

The go-forward nominal rate of return on stocks should be higher than the inflation rate + the dividend yield. The nominal rate of return could be closer to shareholder yield + inflation (shareholder yield is the dividend yield + share buybacks). I think the real earnings growth is the best predictor of long term returns. Earnings growth is correlated with population growth & productivity growth, but those aren't the only important variables.

So if Pop growth and productivity growth are 0 in the long term (it might be higher i don't know), GDP is Inflation. if GDP is inflation then equity returns without dividends is inflation as well.

That's not true. Here's a calculator you can play with that shows S&P 500 returns for any time period you like. Or you can go to FRED data and play around and get the same information.

https://dqydj.com/sp-500-return-calculator/

in the past, we had great returns due to increasing population, plus productivity increases and in large part due to dividends. all three of those are severly decreased going forward for the next 100 years.

Good luck.

In the long term however we’re all dead so being proven right in 80 years time is meaningless to any investor.

Just because weather is a series with such prediction characteristics has no bearing on asset prices having such prediction characteristics. By this reasoning, I could claim since some series are completely predictable, thus stocks are too. Since this level of hand waviness is clearly wrong in the latter case, it is also wrong in the former.

The fact is that asset prices represent value of underlying items, and if those items gain in value, then asset prices likely do too. Since not all asset prices grow or fall in lockstep, then there is always growth in investments possible, if you have enough insight to pick more growing and less shrinking assets.

And the entire set of assets is also likely to grow in value, since people are still working at creating more value.

>being proven right in 80 years time is meaningless to any investor being proven right in 80 years time is meaningless to any investor

True, since they very rarely care about 80 year investments. If they can obtain growth in the near term, then that is pretty much all they need.

So are you now saying there is growth possible, just not in 80 years? Or that you really just don't know?

GDP growth is tied to working age populations growth and productivity growth which are very long term, predicable trends.

Long term returns on stocks will need to return to GDP (or less) but that could be tomorrow or 100 years from now. While I can be certain that it will happen if it happens and I’m right in 100 years is matters little as I’m dead and it does me no good.

This makes zero sense. GDP is not some fixed cap on economic activity. As earnings increase, so does GDP, and there is ample room for all other categories.

Also, taxes and labor are not parts of GDP. I don't think you're using any of these terms correctly, which explains the confusion.

>GDP growth is tied to working age populations growth and productivity growth which are very long term, predicable trends

No, those are factors related GDP growth, but are not sufficient or necessary. GDP can grow without them, it can shrink while those grow, etc.

Inflation alone growths nominal GDP, for example. Other factors include lower interest rates, capital growth, govt spending, devaluation against other currencies, consumer confidence, predictability, and many more.

>While I can be certain

It seems you're basing this certainty on misunderstanding of macroeconomics and ignoring important empirical evidence.

Source: https://ourworldindata.org/grapher/labor-productivity-per-ho...

Intuitively, it certainly seems like humans are a lot more productive now than we were two decades ago with wider adoption of the internet

VTI (Vanguard Total Stock Market) + BND (Vanguard Total Bond Market).

If you're saving for retirement, 30% BND + 70% VTI is a good starting point. Bonds grow slower than stocks, but stocks are riskier than bonds. Both grow over time.

VTI charges a 0.03% fee/year.

BND charges a 0.03% fee/year.

These are very low fees. The management style is hands-off (which is why its so low): VTI buys every stock in the stock market proportional to their size. BND buys every bond in the bond market proportional to their size (ie: mostly US Treasuries, but also some company-debts). Since these are broad and diversified, you should perform decidedly "average", which is fine.

--------

If you're saving for something near term (ex: new car, new house) that's within 5 years, you'll want to be more-bonds and fewer-stocks, 50/50 or maybe even 70% bonds / 30% stocks

Research bonds and stocks very closely. Learn their details, how companies work, dividends / profits are distributed (in particular, learn the theory between dividends vs capital expenditures vs stock buybacks).

For Bonds, learn about inflation risk, interest-rate risk, and more.

Once you understand the basics, feel free to branch out and put small amounts of money into specific stocks (or specific stock-sectors).

But, the mainstream investment handbook is a little out of date. With a 50 year Bond bubble brewing, bonds are close to an all time high right now, which means interest rates are close to all time lows. This means, you'll get very low returns from bonds, much lower than the last 50 years and almost certainly won't keep up with real inflation. Much of the bond returns from the last 50 yrs were from increasing bond prices/decreasing interest rates. those days are over. so, now we only have the yield left, which averages about 2% or so.

In a secular low rate world or ever low rates, risk assets, unfortunately are the only life boat available to rescue us from the onslaught of inflation. :(

this is Not financial advise.

There's a lot of instruments out there.

I-Bonds are super-safe since they have a minimum (currently a 0% minimum) rate. TIPS can go negative during periods of deflation. But if you actually want an inflation hedge, then TIPS exist for that reason.

A more conservative suggestion that I read once and have mostly adhered to says that any money you expect to need in the next five years should not be in the stock market at all.

>BND (Vanguard Total Bond Market)

Individual bonds and bond funds are two quite different types of investment and should not be considered equivalent.[0]

[0]https://www.fidelity.com/learning-center/investment-products...

Bond funds move based off of the sum of bonds that are inside of them.

Much like we programmers study assembly code to understand the machine, even though we write code in C++ or Javascript, any bond fund owner should study bonds to understand the underlying mechanics and risks of the overall fund.

If you invest in GOLD, do it in an IRA otherwise you will be hit with 28% collectibles tax, no matter how low your income is.

Get some bitcoin (or GBTC in an IRA), the two wrongest allocations for bitcoin are 0% and 100%, but many financial professionals today will recommend 3-5%.

Disclaimer: I know nothing and This is NOT financial advise.

Most importantly, try not to pick winners. that's a fools errand. Pros that know absolutely everything can't even beat the market, so just try and be average. If you can be average with the VTI, then you'll beat the returns of most people who try to pick winners.

There is no high-income restriction on contributing to a traditional IRA. Only the possible tax deduction is limited, however earnings on any contribution are still fully tax deferred.

>, you won't be able to sell that in any year where you make income above 40K because of "capital gains"

Let's clarify: for U.S. tax purposes, if your taxable income (which is much lower than gross income) as a single filer is below about $40K (double that if married filing jointly), your tax rate on long term capital gains is zero (for now). But even if you go over that, you still receive a highly favorable rate of only 15%, it doesn't go higher than that until taxable income gets up around $450K, so if you must sell with a gain, it's still quite tax-friendly. (Unfortunately, some states such as California have no special capital gains tax rate).

Yep. Which is why I think it's a great little bucket for REITs and perhaps dividend stocks where distributions would have counted toward your annual income but don't when you use the TRAD IRA.

Dividends are taxed at max 20% (AFAIK) but REIT dividends are taxed like income at your highest marginal rate, so if your marginal rate is high enough (above 20%) you may want to buy REITs in a traditional IRA.

This is not financial advice.

  Most importantly, try not to pick winners. that's a fools errand. 

But start with index and etf because if you start with individual stock you are already over 10% ;)

This series of articles https://www.investopedia.com/articles/basics/11/3-s-simple-i... gives a good overview of how to start investing. However, it don't cover country specific things like taxes and 401k.

Edit: Disclaimer: I know probablay less than throw8383833jj about finance so This is NOT financial advise.

But I do think I have some 100% guaranteed "advice" (this isn't financial advice and you would be stupid to listen to anything I write here) which is that you should always max out tax-advantaged accounts. It will depend on your income level and specifics, but you should basically max out your 401k and any IRA vehicles you have access too (depending on income level) with whatever you do. While the regulatory environment can and will change, based on what you know today and can predict, these accounts are huge up-front 0 risk ways to save even more money.

With all of that being said, generally it's advised to follow something like a 2 or 3 bucket portfolio with a mix of total US stock market (or S&P500) making up something like 90% at your age and then reducing by 10%/decade + emerging market funds + bonds. Allocations depend on goals/ideas.

Speaking of goals, the #1 thing to do is figure out your goals. Want to be financially independent at 35? Well you will want to put money into different accounts and probably different assets. Want to "work" until you are 50? That's a different strategy. Etc.

When it comes to investing, you don't get rich and then all of a sudden you are rich.

It would look like it does right now! You're almost asking the right questions, but not quite. People look at stretched valuations and high price to equity ratios and other metrics, to forecast doom and gloom (big selloffs). It is true that earnings have not increased with prices for quite some time. But there is are decent metrics to track this kind of thing (which you won't find in Technical Analysis books from 40 years ago, so just burn those), one metric is to look at the price to equity ratio to treasury bill interest rate spreads.

During money supply expansion, whoever has access to cheap money then goes and buys stocks (amongst other things), hoping to increase that cheap money faster than the money is given to other people (diluting the purchasing power of the money the last person received). Many times these people are publicly traded corporations, who buyback their own stock, or their shareholders who also increase their positions in the same source of wealth. There is a psychological component, and when people say that, it really relies on identifying who the biggest movers in the market is and what they do and why. Hope that helps.

Just my 2 cents. I'm not a professional anyway.

Different things inflate in different amounts. Right now the inflation on fuel is much higher than the inflation on tomatoes or hotel prices where Russian instagirls used to visit.

When central banks started printing money, people didn't bid the price of bread, butter or automobiles up. So this didn't register as a increase in the cost of living (except for housing, which they did indeed bid up).

This central bank money went to financial assets like stocks. That is why the price increases in stocks have been faster than the price increases in consumer products.

The stock market represents only a part of the total capital stock, as not all capital is owned by companies, and not all companies are public. But, on the whole, one should expect the stock market to rise over time so long as society is not dying.

That's the rub, eh? Are there limits to the growth on a finite planet? Is climate change posing an existential threat? Has technology produced highly scalable and entirely altogether too interdependent international production systems?

Yes, but we are 4 orders of magnitude away from them. Adding the potential for space industry, this grows to 13 orders of magnitude. That's ~1000 years of 3% annual growth assuming no efficiency gains, but we still have about 8 orders of magnitude available in computation efficiency, which gives us about 1600 years of 3% growth until hitting 2 on the Kardashev scale. Only close to it limits to growth become a real consideration.

Anyone claiming we are hitting fundamental limits of growth now is a doomer. We may be hitting limits of growth given currently deployed technology, but that's a completely different statement.

Would you mind providing a reference for this? I don't doubt your statements, but it would be great to be able to research further.

I think this would be a healthier form of investing in the ownership of companies.

I mean I can see the argument about the nature of nanosecond scale arbitrage, but hold times of a day would be quite wild.

https://www.theatlantic.com/business/archive/2016/06/iex-app...

There's also the LTSE which is an exchange focussed on long-term investment:

https://longtermstockexchange.com/

This printing nonsense forgets that accounting is a two sided relationship ...

Yeah sure the government does something but did it initiate or did it respond to something someone else initiated.

Instead of arguing the government did something, you can equally argue that the private sector did the opposite. Remember the earn more than you spend story that everyone is supposed to follow? It is obviously impossibly because where is the saved money coming from? Someone needs to obligate themselves to be liable for those savings and it turns out the government wants to be liable.

If the stock market is booming, expect it to be the result of people earning and therefore producing more than they spend and therefore consume. The excess has to be invested somehow and the most prominent investments are available on the stock market. That is the reason why the stock market is going up so high and interest rates are so low. Lots of people producing and investing the surplus. Not many consuming the surplus.

The moment people produce and save but don't invest, you get deflation which generally results in unemployment and debt defaults which is undesirable. So the government acts as the borrower or consumer of last resort.

What would the market look like if we corrected for the money supply? You would see negative or zero yields in the stock market.

Can you explain that? I don't really understand that sentence.

i don't buy it, because the amount of possible goods/services purchasable today is much higher than back in the 70's.

This is incredibly hard (impossible?) to do in practice, but imagine that you create new money and use it to buy goods where supply can be perfectly adjusted in regards to demand. Now your money creation has zero effect on prices.

On top of that, a low level of inflation is actually a policy target. Low, but not null, because public policy wants to incentivize productive investment and not hoarding cash. And because deflation is much harder to curb (hello Japan) than inflation for a reasonably developed and productive economy.

If we have X, then each dollar is worth twice as much stuff (or, put differently, everything costs half as much). That's not a great outcome if, for example, you borrowed money to buy a house, and that loan specifies repayment of a fixed number of dollars. On the other hand, if you hid some dollars under your mattress, it's great. But it's unclear why society should want hiding dollars under your mattress to be the ideal investment strategy. That's not going to be optimal for society as a whole.

Or, we could have 2X dollars. Then each dollar will buy the same amount of stuff as before. That seems more reasonable. To do that, though, we have to increase the number of dollars in proportion to the growth of the economy as a whole.

(It's not that simple, of course. The velocity of money also matters. And the Fed is trying for 2% inflation, not zero.)

Inflation is not simply a matter of the government adding more money to the supply (although that's one of the actions that can help reduce the value of currency)... the flow of money (and power) is immensely complex, and inflation as a measure is a procrustean bed (https://en.wikipedia.org/wiki/Procrustes)

> So the market doesn't ...

No, your conclusion does not follow at all. That is like saying "if it rains the floor gets wet. So if I dump a bucket of water on the floor, it is going to rain."

Also, inflation rate is separate from the money supply. People have to be willing to spend and invest. If they're not willing to spend or invest then the prices of goods just stay the same or worse they begin to deflate. If you ever have a chance, then read about Japan's Lost Decades. Warning: you might get freaked out - https://en.m.wikipedia.org/wiki/Lost_Decades

There are actually a lot of scenarios that COULD happen to the stock market with a growing money supply; however, it's really hard to say if those implications will happen until they actually happen.

In general, the implication of a growing money supply just means that money becomes cheaper to borrow. When money becomes cheaper and you have the means to borrow it, then you have an advantage to take more risks.

The implication on the market CAN be the overvaluation by investors if they are borrowing and investing the money into stocks on exchanges like NYSE and NASDAQ, and have nowhere else to invest. There is a lot of retail investors and institutional investors that are borrowing due to cheap money - https://www.barrons.com/amp/articles/people-keep-borrowing-m...

Important thing to note though is the implication on those companies in the market. Some of them (not all of them) are able to borrow and invest the money to grow their businesses to makeup for what they borrowed. That in turn would increase the value of those companies, which in turn CAN increase the value of the market.

It could also be that those same companies are borrowing just to pay off debts. They don't use the money to actually invest which in turn would not lead to any growth and never have enough earnings to give investors.

Overall, it's really hard to know what the implications are until things actually happen.

In principle, the denominating currency does not matter: someone could give you some number of shoes for your share, and your dividends could likewise be in shoes. We tend to find it more convenient to work in dollars.

At the other end of the spectrum, inflation decreases the real value of future cash flows, so tech stocks have been hammered. Here's an explanation I like: https://fullstackeconomics.com/rising-interest-rates-are-ham...

I don't follow individual stocks a ton, since I have index funds, but I'm not sure I follow your question OP.

Commodities is a good place to be. This war does not look like it's going to end. You can expect high commodity prices as long as it continues.

What happens in 80 years when milk is $34 a gallon?

Milk was $0.14/gallon 80 years ago[1] ($.13/gallon 81 years ago), and $3.77/gallon last year[2].

$34/gallon in 80 years would seem to represent a slowdown of inflation.

[1] https://www.lmtonline.com/lifestyles/article/Milk-went-for-1... [2] https://www.ams.usda.gov/sites/default/files/media/2021Retai...

The stock market is composed of companies that are mostly productive - the unproductive ones go bankrupt. Bad luck for those holding those shares, but this doesn't make the total stock market a ponzi scheme.

people use "ponzi schemes" too often to incorrectly describe price increases.

tl;dr if there is any correlation, it is weak