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This chart shows the real yields on three month treasury bills in the 1970s. Each point on the chart represents the gain from the purchase three months prior and was adjusted for the inflation during those three months. The net was then annualized to show the the real annual return (before taxes).
Yields on treasury bills were often high during the 1970s but inflation was generally even higher. Therefore, real inflation adjusted yields were actually negative. To add insult to injury, this does not factor in the the taxes paid on the treasury bill interest generated. As interest rates rose, so did the taxes on that interest.
Source Data:
FRB: Treasury bills (auction high) (discontinued)
St. Louis Fed: Consumer Price Index for All Urban Consumers: All Items
19 comments:
Taxes are a killer. Asset allocation aside, there are only two things that most investors can control: taxes and fees. This is why equity index funds are superior to actively managed funds over the long haul. Especially in a taxable account. In bull markets, most investors take two steps forward and then one back (fees and taxes). Then when the the bear market comes, its two steps backwards and panic. The surest and most important path to wealth is through SAVINGS. The compounding of imputed gains combined with consistent savings leads to wealth.
The market is trying to tell us lately that the days of two steps backwards and panic are over.
Kudlow was quoted this morning on CNBC. I wish I got a dollar for every time he said resilience.
It's an interesting word. Dictionary.com says:
ability to recover readily from illness, depression, adversity, or the like
Kudlow has some resilience himself. He recovered from his repeated dot bomb recommendations as well as a substance abuse problem (oops, that is supposed to be kept on the down low). Remember, SAVINGS, fees and taxes. Complicated wall street stuff is all part the the grand sales illusion.
It can be quite taxing to be a grand illusion salesman.
I wonder how well this chart correlates with the return on gold. Gold is not an inflation hedge, rather a hedge on reckless central banks that keep negative real interest rates.
poszi,
I mostly agree with you (we'd only quibble slightly over the wording perhaps). Gold is an inflation hedge but in order for the government to stop you from wanting gold they have to offer you a reward in the form of higher real inflation adjusted interest rates. If they fail to offer such a reward, we tend to start hoarding. That's what I did from 2004 to 2006 anyway (the period when I owned gold and silver).
Here's a chart that shows the real Fed Funds rate vs. various metals. Wonder no longer! :)
http://illusionofprosperity.blogspot.com/2007/09/fed-fund-rate-vs-metals.html
There's more to it. First, FDR confiscated the public's gold, declaring private gold ownership illegal. This remains the greatest violation of the Constitution ever. Immediately after seizing the public's gold, FDR devalued the payments previously made for such gold by increasing the dollar value of gold. None of this is taught in schools or subject to public debate.
Even today, gold is taxed as a collectible; 28% in lieu of the more favorable 15% capital gains tax. Gold jewelry purchases result in sales taxes. Payment of income taxes cannot be made in gold. Despite all of this, gold has risen from $33/oz to $800/oz since 1971. Not bad considering the dow has risen from 1000 to 14,000 during this time. Of course gold pays no dividends, but it is not subject to the reverse dividend of government sponsored inflation either. Gold is impartial. Our free spending politicians are not. If you want the Government to run your life protect your wealth then gold is your enemy.
MAB,
I'd agree with you that making the private ownership of gold illegal was a very serious breach of the Constitution.
As for the return on gold, let's not forget that the gold price was held down (the price was fixed) until 1971 though. Part of the gain was due to the loaded spring action inherent in the system when it finally broke (or we went broke, depending on how you look at it). I'd prefer to look at the price of other metals that were not similarly held down to see a more accurate picture of monetary inflation vs. productivity miracles.
Ultimately, you'd be spending gold to buy more productive assets in the grand scheme of things (such as food, water, and oil). If push really comes to shove, Mad Max was not touring the countryside trying to scrounge up gold. (This coming from someone who owned gold and silver for several years and partly wishes he still did.)
Warren Buffet once gave a speech at a univeristy stating that gold had no utility. He described the gold process as follows: We expend work mining it, then melting it, then storing it. All of this truly looks like folly when viewed in isolation. However, when you compare it to the effort expended in trying to protect purchasing power from inflation, I think he's off base. Buffet's simplistic arguement could be applied to most if not all defense spending. Did Buffet serve in the military?
Also, consider what has happened to all fiat currencies throughout history. Fiat money seems better suited for socialist societies, not republics where individual rights are protected. Strangely, it France that complined the loudest to Nixon. GDP measures quantity, not quality. Exxon Valdez, Iraq War and Katrina all added to GDP and no doubt benefited Berkshire share holders. But where is the associated wealth? I don't need government sponsored wealth without freedom.
MAB,
Buffett is a very practical man. He sees gold as an extremely expensive shiny rock. He can't eat it. It has very little utility. I suspect he'd say the same things of lipstick (if he felt it was expensive per ounce, which I can't say).
I'm willing to entertain the middle ground between practical and emotional, becuase part of the appeal of gold is emotional.
If gold brings the average person comfort during times of inflation (or more precisely, negative real rates of return), then I'd want to buy before the average person does.
I'm still somewhat fond of gold as a stagflationist as you can imagine. I'm just not willing to risk what could go wrong if deflation actually sets in. The average man may want gold, but he may be selling all he has just to buy food before all this is over (and not necessarily because food has suddenly become outrageously expensive).
Gold has had a nice runup and it is possible that the easiest fruit has already been picked. When I bought in the low $400s it didn't feel all that easy (it was at the top of its trading range and was well off its $250 lows). It wasn't easy to sell in the $600s. It looks so easy in hindsight, but at the time I was very unsure on both sides of the trade. I'm still unsure even to this day. The first parabola scared me off. I didn't really plan on a second one replacing it. Such is life! In any event, I told myself that once I sold I was done. I was prepared to hang on 30 years if necessary. Right or wrong, it took about two.
Stag,
I don't care for gold personally. I think the real evil is inflation. Gold just has a great track record against inflation. I blame the politcians more than any fed for inflation though. Its clear to me that congress and wall street will never allow true inflation hawks to temper their agendas.
Mark,
Wow. Amazing chart. I have to admit I didn't realize just how bad the 70's were in this regard. This really changes my opinion toward I-bonds.
AllanF,
Yeah, the 1970s were a saving nightmare. Is it any wonder people flooded into hard assets?
Here's a question I just thought of, can you determine the real rate of return in dollars of foreign currencies during the 70's? I'm thinking the German mark, Swiss franc, Japanese yen and particularly the Norwegian krone would be good samples.
AllanF,
Hard to track it all down but I'm fairly confident that real interest rates were a worldwide problem.
There is an ugly chart of 1970s international real interest rates in the following link.
http://www.norges-bank.no/Pages/Article____17929.aspx
It also has some nice commentary on today's situation.
Thanks for the link, um, I guess. It was kind of a downer.
I would have expected with the North Sea oil wells coming online the krone would have done quite well during the 70's. Having now seen the answer, I imagine that being an oil exporter when the world's largest importer is devalueing their currency isn't necessarily a good place to be.
I reckon that when the rest of the world has negative real rates, one country cannot stand against that and provide positive real rates. What are they supposed to do with the resultant inflows?
Geez this stuff sucks. I think I'll go back to watching Mad Money... Cramer says there's always a bull market somewhere. That is a lot more comforting than the links you drag up. :-)
AllanF,
Cramer says there's always a bull market somewhere.
Well, let's see if we can find it then. Other than TIPS, which do very well if real yields fall (since you'd be locking in a higher real yield at the time you buy, as has been the case this year), there must be something else out there.
Let's review the last few years. Medical costs have soared. The stock market and real estate have doubled. Gold has tripled. Oil has quadrupled (and then some).
Perhaps there's something I'm missing. We're looking for something that people need but don't yet know they need, and has therefore not yet doubled or tripled in price.
If only I could put my finger on it. Nothing's coming to mind. Oh well. I tried. If only investing was as easy as stocking up on CANNED GOODS. As hoarded CANNED GOODS go up in price due to inflation, there is no capital gains tax since you never resell them. You consume all the gains and there's nothing left for the government to tax. Hahaha! Brilliant! The same holds true for PASTA, RICE, BEANS, TOILET PAPER, CLOTHING, SHEETS, TOWELS, and any other goods that you will someday need to buy in the future but could just as easily buy today. (Probably best to avoid the discretionary items and items that a productivity miracle could seriously affect, like electronics.)
Too bad I can't think of anything to invest in though. I'm too busy thinking of things to hoard apparently! If I'm wrong to hoard, all I'll be doing is sighing in relief anyway. It isn't like I bought things I didn't eventually need.
Further, hoarding is actually saving. It is what people used to do, you know, before there was fractional reserve banking that allowed one dollar saved to be loaned out more than once to the next person. There was a time when people did not expect savings to actually grow much, if any. It was simply something to be set aside for a rainy day.
The saying is:
A penny saved is a penny earned.
I don't know how we got to this point:
A penny saved is a penny earned for the banker, and a few other pennies loaned out to your neighbors.
I'm tempted to think that someday we'll be looking back and laughing at what we've done (in a gallows humor sort of way).
But I don't buy canned goods.
Yeah, I know what you're thinking: you will... you will.
Sh*t, I hate canned goods. :-)
AllanF,
Named must your fear be before banish it you can. - Yoda
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