In the Shadow of 1937

[Finster]

Re: In the Shadow of 1937

But my point isn't about that. I maintain that the apparent out performance of stocks over commodities over the long term is, at the very least, highly over stated.

I’m willing to concede that even the specific figures I cite above could overstate the sustainable price outperformance of stocks vis-à-vis commodities somewhat. The reason is that the time frame begins in what was a period of relatively low valuation of stocks (early forties) and ends in a period of relatively high valuation of stocks (now). But the degree of low/high valuation can only explain at most, say, a two-three-four factor of price appreciation. This based on accounting for such things as dividend yields, book values, and the total value of the equity markets relative to GDP (whether on a US or global basis). This compares to an overall increase in the nominal price of stocks of 132.8 times versus 4.27 times for commodities. Thus even viewing the data in the light harshest to stocks, we’d still have stock price appreciation of 33.2 times for stocks versus 4.27 times for commodities. So while we could quibble about the degree of long term historical price outperformance of stocks, the fact of its existence is beyond question.

The price of stocks, as I have shown before, tracks overall GDP remarkably closely over long periods of time. It ought to, since stocks represent productive capital. The price of commodities, on the other hand, over time represent a shrinking portion of GDP. It likewise ought to, because the advancement of technology means that fewer hours of labor need be devoted to their production. Decades ago, a it took a quarter to half to population to produce our food supply, while it now takes a small fraction of that. The productive effort thus freed up now goes into the production of things that are not commodities, like electronics, entertainment, movies, television, Internet. The total fraction of productive effort devoted to commodities has been in decline for virtually all of recorded history, while equity capital tracks it proportionately.

So the price underperformance of commodities per se is not only a historical fact, but reasonable in terms of economic rationality.

As for the historical fact, no one need take my word for it. The data I’ve charted above is widely publicly available from respected sources such as Dow Jones, Morgan Stanley Capital, Standard and Poor’s, and the Commodity Research Bureau, and any one wishing to do so can corroborate it themselves if they wish.

It's also not a valid apples to apples comparison, and could be compared to a statement that a new dining room table at $500 can be validly compared to one's grandparents new dining room table bought new for $50 in the '20s.

The official CPI-U has roughly 10x'ed since the '20s and it seems to be a valid comparison. That table is 10x more expensive than theirs and the CPI has 10x'ed and they both do the same function well... apparently. But they're nowhere near the same table. One is solid wood and the other is plastic, veneer and particle board. There are obviously many more differences, and I could go off into a diatribe about "reverse hedonics" but that would just be off the subject and point.

As you know, I am happy to concede the existence of your "reverse hedonics", since I have complained myself about the diminution of quality in, for example, agricultural commodities due to the introduction of cheaper gene-spliced substitutes for the "real thing" of yesteryear, as well as numerous other substitutions of questionable quality "equivalents". But that does nothing to detract from the indisputable apples-to-apples nature of the data I cite. You could just as easily argue that the stock of a Monsanto or Cargill is a cheaper substitute for the "real thing". And even more to the point, the fact of such substitution is already embedded in the commodity price indices. The question of the quality of the commodities themselves is completely independent of the actual, factual, historical record of commodity prices. The commodity price indices are constructed to represent the experience of an average investor owning commodities, just as the stock price indices are constructed to represent the experience of an average investor owning stocks. If we are to truly conduct an apples-to-apples comparison, we can hardly compare real stocks with hypothetical commodities.

This last point you raise speaks not to the relative price performance of stocks versus commodities, but to the question of inflation and the relative value of the currency to stocks and commodities respectively. It is an extraneous third variable which we eliminate by using the same monetary unit in which to price stocks and commodities, thus factoring out the common denominator. No matter how you slice it, the price of stocks as a class relative to commodities as a class, over the sixty-four year period cited, has risen by a factor of 132.8/4.27 - over thirty. No matter what currency you use and regardless of the degree of inflation it has undergone, the ratio stock:commodity remains the same.

We can even control for reverse hedonics if we like, by looking only at commodities whose essential makeup is the same over time. Such as gold. One can convert any desired index of stock prices from inflating currency units to gold and one will still see a sustainable, long-term increase in price. This is because of the same phenomenon of advancing technology and productivity as cited above in connection with commodity prices in general. For actual historical data, one can refer to the well-known Ibbotson Associates. Just using the same time frame as cited above, the price of gold was $34 per ounce in 1942, and the S&P 500 was $9. Thus the price of gold has increased by 18-fold since 1942, while the price of the S&P has increased 158-fold. Eliminating the dollar unit, the price of the S&P 500 has increased by 158/18 - or over eight times - even in terms of gold. Similar results occur with any representative equity and commodity group over sufficient time, as here, to encompass one or more full secular cyles.

Reviewing the record developed thus far, it is clear that we have abundant hard data showing conclusively that stock prices have far outperformed commodity prices over very long periods of time. We have no data at all showing otherwise.

[bart]

Re: In the Shadow of 1937

This compares to an overall increase in the nominal price of stocks of 132.8 times versus 4.27 times for commodities.
...

As you know, I am happy to concede the existence of your "reverse hedonics", since I have complained myself about the diminution of quality in, for example, agricultural commodities due to the introduction of cheaper gene-spliced substitutes for the "real thing" of yesteryear, as well as numerous other substitutions of questionable quality "equivalents". But that does nothing to detract from the indisputable apples-to-apples nature of the data I cite.

You don't see the contradiction or logic issue between those two statements?

We can even control for reverse hedonics if we like, by looking only at commodities whose essential makeup is the same over time. Such as gold. One can convert any desired index of stock prices from inflating currency units to gold and one will still see a sustainable, long-term increase in price. This is because of the same phenomenon of advancing technology and productivity as cited above in connection with commodity prices in general. For actual historical data, one can refer to the well-known Ibbotson Associates. Just using the same time frame as cited above, the price of gold was $34 per ounce in 1942, and the S&P 500 was $9. Thus the price of gold has increased by 18-fold since 1942, while the price of the S&P has increased 158-fold. Eliminating the dollar unit, the price of the S&P 500 has increased by 158/18 - or over eight times - even in terms of gold. Similar results occur with any representative equity and commodity group over sufficient time, as here, to encompass one or more full secular cyles.

Ah yes, grasshopper... I expected that... and I ask you to consider the issue of a level playing field (without intervention or support of any kind).

The bottom line is that it is a logical failure to attempt a true and valid comparison when the playing fields and/or the items being compared are very different over a significant period of time.

[Finster]

Re: In the Shadow of 1937

You don't see the contradiction or logic issue between those two statements?

No. As noted, the question of fact before us is simply whether equity prices have increased in relation to commodity prices long term. If they have, then my contention is correct.

Ah yes, grasshopper... I expected that...

Sometimes a little like chess, no? ;)

... and I ask you to consider the issue of a level playing field (without intervention or support of any kind).

The bottom line is that it is a logical failure to attempt a true and valid comparison when the playing fields and/or the items being compared are very different over a significant period of time.

You are more than welcome to present what you consider a true and valid comparison. So far the only facts and data presented have been those I have offered in support of equity prices outpacing commodity prices. If we have only arguments and allegations against which to weigh them, then the conclusion is obvious. Equity prices have outpaced commodity prices.

Check.

[bart]

Re: In the Shadow of 1937

No. As noted, the question of fact before us is simply whether equity prices have increased in relation to commodity prices long term. If they have, then my contention is correct.

No wonder you didn't see the logical issue. Your assertion isn't what I was talking about...

You are more than welcome to present what you consider a true and valid comparison. So far the only facts and data presented have been those I have offered in support of equity prices outpacing commodity prices. If we have only arguments and allegations against which to weigh them, then the conclusion is obvious. Equity prices have outpaced commodity prices.

Check.

Sorry, I don't take checks from the *fin* man, only cash or .999 fine gold... ;)

I have enough trouble with my tinfoil hat as it is. And besides, its fine with me that failing to look at the raw facts and areas that would allow you to see valid & logical comparisons is your choice... mate.

http://www.nowandfutures.com/grins/rimshot.mp3

[Finster]

Re: In the Shadow of 1937

No wonder you didn't see the logical issue. Your assertion isn't what I was talking about...

This is what I meant when I suggested we were talking past each other. My core assertion, pursuant to DemonD's statement, is, over the long term:

Equity prices have outpaced commodity prices.

Now that we agree on that, do you still want to talk about shorting and leverage? :eek:

[jk]

Re: In the Shadow of 1937

maybe i missed it, but bart brought up the issue of substitution of index components, and i did not really see it addressed.

we have survivorship bias in the stock indices. furthermore, survivorship is an issue not just for the indicies but, more broadly, for whole markets. stockmarkets disappear, in toto, along with the political regimes that provide their context. i'm not holding any iraqi bonds issued by the current so-called government, but they exist. i am skeptical of their long-term value. and i suppose there may have been bonds issued by the now departed saddam's goverment. i wonder if there is a market for them?

similarly, whole stockmarkets have disappeared. what happened with the markets of austro-hungary? i know they had a bond market, i don't know anything with regard to austro-hungarian equities.

i read a neat article about risk perception in 18th to 20th century european bond markets. after the napoleonic wars, the british bond market, for example, was very skittish in the face of geopolitical risks. but after 1880 it and the other european markets got progressively more stable and even complacent. after the assassination of archduke ferdinand in 1914 the british market didn't move. about 3 weeks later it sold off to the tune of [only] 1 basis point- from [iirc] 3.3 to 3.31% 7 days later all the european bond markets closed.

after the war was over some of those markets re-opened. and some didn't.

this brings us back to the post that started this thread. economic instability breeds political instability and geopolitical risk and, possibly, war more widespread than the ones we've already got going.

[Finster]

Re: In the Shadow of 1937

maybe i missed it, but bart brought up the issue of substitution of index components, and i did not really see it addressed.

There are several ways to address this. First, from the standpoint of the weight of the evidence. Even if the evidence I have provided is imperfect, we nevertheless have no countervailing evidence. Imperfect evidence still beats no evidence.

Second, no case has been made that survivorship bias is not present in commodities. It has not been shown why survivorship bias needs to be disproven for stocks if it does not also have to be disproven for commodities.

Third, index providers such as Dow Jones go out of their way to construct "investable" indexes. See e.g. the discussion at http://www.djindexes.com/mdsidx/inde...howTotalMarket. The Dow Jones Industrials - one of the longest-running indexes available - is such an index, as being added to the index is equivalent to buying a stock and removing it selling it, which an investor can do. Dow Jones applies the same principles to the construction and calculation of equity and commodity indices alike. In fact, component substitution is a factor with both.

[jk]

Re: In the Shadow of 1937

There are several ways to address this. First, from the standpoint of the weight of the evidence. Even if the evidence I have provided is imperfect, we nevertheless have no countervailing evidence. Imperfect evidence still beats no evidence.

Second, no case has been made that survivorship bias is not present in commodities. It has not been shown why survivorship bias needs to be disproven for stocks if it does not also have to be disproven for commodities.

Third, index providers such as Dow Jones go out of their way to construct "investable" indexes. See e.g. the discussion at http://www.djindexes.com/mdsidx/inde...howTotalMarket. The Dow Jones Industrials - one of the longest-running indexes available - is such an index, as being added to the index is equivalent to buying a stock and removing it selling it, which an investor can do. Dow Jones applies the same principles to the construction and calculation of equity and commodity indices alike. In fact, component substitution is a factor with both.

what was the original commodity for which bushels of wheat was substituted? nuts and berries? roots and grubs?

more seriously, i just think it's important for people to remain aware that looking at historical index returns does not provide an untainted view of asset performance. otherwise, they're likely to fall into the "stocks for the long run" delusion, and kid themselves into not perceiving the risks that are always present. i have no worries about your own awareness of this, finster. my comment is more for the general and less sophisticated reader of these threads, should such a creature exist.

[Finster]

Re: In the Shadow of 1937

more seriously, i just think it's important for people to remain aware that looking at historical index returns does not provide an untainted view of asset performance. otherwise, they're likely to fall into the "stocks for the long run" delusion, and kid themselves into not perceiving the risks that are always present. i have no worries about your own awareness of this, finster. my comment is more for the general and less sophisticated reader of these threads, should such a creature exist.

I'm sure there is no more general and less sophisticated reader of these threads than myself, JK. So we ought to be confident that no one will read a single post out of context and then take his entire nest egg, put it into all-stocks, zero-commodities form, and delude himself into thinking he has adopted a safe and effective investment posture for the next three or four years.

If he has, he evidently missed the following from the preceding posts in this very thread:

DemonD is probably referring to pure commodity prices, which are widely outpaced by stocks. Commodity futures, on the other hand, over time have been shown to be capable of providing returns comparable to stocks. This is because of a number of additional attributes such as "roll yield", and the "insurance" component the futures investor provides. This has been discussed in depth by researchers such as Gary Gorton and K. Geert Rouwenhorst, in Facts and Fantasies about Commodity Futures.

Over the long haul, stock prices have roundly trounced commodity prices. So DemonD's statement "Stocks historically obliterate commodities" is utterly correct. But this statement alone sidesteps the question of whether returns from investing in commodity futures are comparable to those from investing in stocks. The asnwer to that question is entirely different - in the affirmative as shown by Gorton and Rouwenhorst.

Worth emphasizing, however, is that these are price-only charts.

Let it not be lost that I am not trying to make a case for investing in stocks over commodities, especially now! As they say, past performance is no guarantee of future results.
Quite the contrary. The weight of the evidence is in favor of commodities - conspicuously including futures on commodities - for probably at least the next few years. My guess is that these past three or so years we've seen but the first wave of two of exceptionally strong commodity performance. Too much money has been printed and interest rates kept too low too long; rates will have to rise and this will be a headwind for the traditional financial assets stocks and bonds. And as you must be aware from the record, while I think most investors should have stock exposure in their portfolios, my position is that stocks of commodity producing companies are first and foremost stocks, and are therefore not a substitute for exposure to commodities through direct holding (as in the case of bullion) and the futures markets.

My core assertion, pursuant to DemonD's statement, is, over the long term:

Equity prices have outpaced commodity prices.

[bart]

Re: In the Shadow of 1937

This is what I meant when I suggested we were talking past each other. My core assertion, pursuant to DemonD's statement, is, over the long term:

Equity prices have outpaced commodity prices.

But not only was that not DemonD's statement, it is relatively meaningless to state that equity prices have outpaced commodity prices when (generally) neither equities nor commodities are anywhere near the same products over any significant period of time.

Surely you can't be suggesting that, for example, the corn of 70 or 40 or 20 years ago is the same as that of today?
Are you also suggesting that, as another example, the "playing field" for gold and stocks is similar?

You ask for proof, but don't address the points I bring up... or the substitution bias that jk brought up... hmmm... what's an amateur *fin* to do... ;)

[Jim Nickerson]

Re: In the Shadow of 1937

my comment is more for the general and less sophisticated reader of these threads, should such a creature exist.

I'm here. I'm here.

[Finster]

Re: In the Shadow of 1937

But not only was that not DemonD's statement…

Eccccch … (insert screeching of brakes) … No one said it was.

Let’s recall the context in which that point arose. DemonD said "Stocks historically obliterate commodities.", and you challenged the statement as overly broad. I responded by pointing out that DemonD’s statement is correct insofar as prices were concerned (which also does not contradict your challenge), even though overall returns from investing in commodity futures have been shown to be comparable over the long term.

My comment that "My core assertion, pursuant to DemonD's statement, is, over the long term: Equity prices have outpaced commodity prices." in no way misquotes DemonD.

…, it is relatively meaningless to state that equity prices have outpaced commodity prices when (generally) neither equities nor commodities are anywhere near the same products over any significant period of time.

We are of course not talking about individual assets, but asset classes. Asset class selection, rather than being meaningless, is one of if not the most important determinants of an investor’s return.

Surely you can't be suggesting that, for example, the corn of 70 or 40 or 20 years ago is the same as that of today?

We already disposed of this point earlier as well:

As you know, I am happy to concede the existence of your "reverse hedonics", since I have complained myself about the diminution of quality in, for example, agricultural commodities due to the introduction of cheaper gene-spliced substitutes for the "real thing" of yesteryear, as well as numerous other substitutions of questionable quality "equivalents"…

Are you also suggesting that, as another example, the "playing field" for gold and stocks is similar?

Yes. People can choose whether or not and when and how much to invest in either. More significantly, it isn't even relevent to the question of whether stock prices have risen more than commodity prices, since the statement is either historically, factually, true or it is not. Quite independently of whether we deem it to have been "fair" or "unfair".

You ask for proof, but don't address the points I bring up... or the substitution bias that jk brought up... hmmm... what's an amateur *fin* to do... ;)

The argument is about stock price indices versus commodity price indices. How can substitution bias in stocks be an argument against the former if commodity indices have the same problem?

[bart]

Re: In the Shadow of 1937

Eccccch … (insert screeching of brakes) … No one said it was.

Let’s recall the context in which that point arose. DemonD said "Stocks historically obliterate commodities.", and you challenged the statement as overly broad. I responded by pointing out that DemonD’s statement is correct insofar as prices were concerned (which also does not contradict your challenge), even though overall returns from investing in commodity futures have been shown to be comparable over the long term.

My comment that "My core assertion, pursuant to DemonD's statement, is, over the long term: Equity prices have outpaced commodity prices." in no way misquotes DemonD.

Yes, but that is relatively meaningless since not only have I shown that they don't obliterate commodities, but also that the two classes are not logically comparable.

We are of course not talking about individual assets, but asset classes. Asset class selection, rather than being meaningless, is one of if not the most important determinants of an investor’s return.

Yes, and I expect the sun to come up tomorrow too... and wouldn't dare change the subject on you either...

Yes. People can choose whether or not and when and how much to invest in either. More significantly, it isn't even relevent to the question of whether stock prices have risen more than commodity prices, since the statement is either historically, factually, true or it is not. Quite independently of whether we deem it to have been "fair" or "unfair".

You're obviously welcome to make any comparisons that you like, whether they're valid or not (how am I doing on *finning* the *fin* meister? ;)).

The argument is about stock price indices versus commodity price indices. How can substitution bias in stocks be an argument against the former if commodity indices have the same problem?

As I just said, you're still welcome to compare anything you like and attempt any conclusion you like, whether its valid or not. This is Earth after all... ;)

So now you're admitting that its an unfair comparison per the substitution bias issue?

[Finster]

Re: In the Shadow of 1937

Yes, but that is relatively meaningless since not only have I shown that they don't obliterate commodities…

But you haven’t shown anything … only questioned my showing. I have presented data, and you have (rather fruitlessly ) attempted to impugn it. You have presented no countervailing data .. actually no data at all.

… , but also that the two classes are not logically comparable.

Given that I have just posted a logical comparison of the two classes, wouldn’t you say the burden was yours to at least make a case as to why they are "not logically comparable"? As opposed to merely state your conclusion to that effect?

Yes, and I expect the sun to come up tomorrow too... and wouldn't dare change the subject on you either...

… you wouldn’t dare do an impression of the V-monster, huh? … :eek:

You're obviously welcome to make any comparisons that you like, whether they're valid or not (how am I doing on *finning* the *fin* meister? ;)).

See above…

So now you're admitting that its an unfair comparison per the substitution bias issue?

I have said nothing about whether it is fair that stock prices have trounced commodity prices for time immemorial. Only that it has occurred.

[bart]

Re: In the Shadow of 1937

But you haven’t shown anything … only questioned my showing. I have presented data, and you have (rather fruitlessly ) attempted to impugn it. You have presented no countervailing data .. actually no data at all.


Given that I have just posted a logical comparison of the two classes, wouldn’t you say the burden was yours to at least make a case as to why they are "not logically comparable"? As opposed to merely state your conclusion to that effect?

I don't have to. Not only is there the absolute fact that you can not deny that corn (as an example) is not the same item over the last many decades, but you've actually made comments about GMO corn elsewhere.

Simply noting a false premise is usually enough for *normal* people... ;)

… you wouldn’t dare do an impression of the V-monster, huh? …

Moi?!?! (insert best innocent look of shock and dismay ;))