Did Geithner Tell Americans That A 10% Or Better Return On Investments Is An Illusion?

Did Timothy Geithner really tell Americans a 10% or better return is an illusion? I’ll let you decide after hearing exactly what he did say in a recent interview on Meet the Press.

Timothy Geithner was interviewed by David Gregory on Meet the Press on Sunday (click on link for video and transcript) where Gregory asked the following question;

“What is a fair expectation for Americans to have out of the capital markets, if they see that as a place for savings, when for so many years we’ve heard, “Hey, you’ll get 10 to 15 percent returns over the long-term.” Is that what Americans can really expect?”

Before getting to Geithner’s non-response, please note that in my over 20 years as a financial advisor, 10% was the figure that was rammed into our brains as the historic norm for investors. No good financial advisor would tell anyone to expect anymore than 10% or the 15% that Gregory referenced “hearing” about. As you’ll see in a moment, even 10% is going to be a far fetched return to obtain in the years to come.

Geithner’s Non-Response

Geithner’s response was to not answer the question, but speak to how U.S. citizens can borrow easier for education for their children, a home, car or have access to credit cards. In other words, Geithner wants you to borrow, borrow, borrow as if it’s “the American way!”

My advice is if you have debt, pay it all off! As far as a car, if you live in a big city, analyze whether you need one and if you would be better off just renting one when you have to travel outside of the city. As far as those who are thinking of taking out a loan and buying a home right now, my advice is to wait as I wrote about not too long ago. At this time, consider debt your enemy and don’t listen to Geithner, do all you can to eliminate it.

Geithner, went on to talk about clearer disclosure on the risk and tell Gregory that citizens need to make more responsibile decisions.

Here is Geithner’s response in full;

I think what they can expect from these reforms is much more accessible, much more simple, much clearer disclosure about the terms in which they can borrow to finance education for their children, borrow to finance a home, borrow to finance a car, take a credit card.  Much more clear, transparent, simple disclosure than they had over the past several decades, and much better information about the risks you take in investing.  That’s a sensible thing for the government to do.  Now, of course, you need people to be able to make responsible decisions.  We can’t make those decisions for those individuals.  They’ve got to take that responsibility themselves.

Since Geithner didn’t answer the question as to what returns investors can expect in the years to come , Gregory interjected and asked the question again;

“But hasn’t the world fundamentally changed in the markets that you simply cannot expect to get the kind of return on investment that you’ve enjoyed and so many Americans have enjoyed for so many years?”

This question by Gregory is right on the mark as will be shown in this article. But Geithner again, is vague in his response by claiming, “I think it’s hard to know,” and reiterating his position of how citizens need to make better decisions and that they are saving more of their money.

Savings is a great thing and it’s good to see people saving more of their income. Naturally Geithner thinks this is a good thing as it gives much more needed capital to the cash strapped banks.

Geithner’s second response to the question in full;

I think it’s hard to know.  What you want people doing is making better decisions, more careful decisions about how much of their income they spend, how much of their income they save, what they use those savings for, how much they borrow.  And I think the trauma caused by this crisis is going to be profound and long-lasting, and you’re already seeing it induce, I think, an ultimately healthy and necessary change in behavior because people are already saving more of their income, and I think that’s going to be a good thing for the country.

So while its great that U.S. citizens are saving more, whether that money should be put into stocks and what one can expect in return on their investment is something Geithner couldn’t provide an answer to.

Geithner Tells Americans a 10% Or Better Return On Your Investments Is An Illusion

While Geithner was rambling on about taking on more debt, responsibility and savings, it’s what he didn’t say that leads one to the conclusion that any double digit return on investments is something he can’t visualize. Granted he can’t go on television and tell everyone to expect to get 10% to 15% returns for decades to come, but investment advisors have been telling people for years to “expect to receive 10% or more on your investments over the long run.”

Why Won’t Geithner Answer the Question?

Why won’t Geithner answer the question as to what he thinks stocks will do in the future? It’s because he knows the truth. Geithner’s claim of not knowing whether investors can obtain the double digit returns is a way for him to answer the question without revealing what I think he already knows to be the answer. His answer in my opinion is, there is no way investors are going to obtain double digit returns using the same techniques of investing they have in the past.

While I won’t go into detail in this article on what I think investors should do to achieve double digit returns (I will in future articles), I will explain why they shouldn’t expect to obtain that kind of return for years to come.

This Is Not your Father’s Stock Market and Don’t Expect His Returns Either

In studying the stock markets of our forefathers, stocks have enjoyed a nice 10% return over the years as seen in the following chart from Ed Easterling’s site, Crestmont Research.

This is the same 10% return that financial advisors are telling their clients to expect by putting their IRA’s and 401k’s in mutual funds and ETF’s.
But what are the components that make up the 10% historical return?

From Easterlings site:

There are only three components (excluding transaction costs and expenses) to the total return from the stock market: dividend yield, earnings growth, and the change in the level of valuation (P/E ratio). To assess the potential returns from stocks for the next decade, this analysis presents the total return and its components for every ten-year period since 1900.

These components can be seen graphically in the following chart.

The fact is, most of the 10% return investors have enjoyed that investors have been achieving over the last 100 years has come from dividends, represented by the brown color above. The rest of the return was capital growth represented by the blue color.This dividend yield averaged around 6% up until about 1950, but has steadily been decreasing, especially since the 1980’s, and today has fallen to under 2% as seen in the following chart.

What Does This Mean To You the Investor?

In order to obtain that more than 10% return Gregory was asking Geithner about, over 8% of it has to come from capital growth (10% total return minus 2% dividends leaves the 8% that has to come from capital growth).

There have been only two times in the last 100 years where 8% capital growth was even close to being obtained. The first was during WWII and the second was the second was during the high inflation years of the late 70’s and early 80’s.

Capital growth has been falling ever since the late 70’s. In fact, real GDP has been negative in the U.S. for many years, even during the era of high flying real estate prices.

To make matters worse, today we are following in the footsteps of the 1929-1933 deflationary era where capital production fell 60%. Most citizens already know banks aren’t lending and consumers and businesses aren’t borrowing. Businesses are just trying to hang on, hoping for some sort of government reprieve as they cut expenses by laying off more and more workers. In fact, the government spending is the only thing keeping the game going!

What will happen when the music stops and the government’s  stops their spending spree?

Hopefully, if you have been reading my articles, you’ll have a golden chair to sit upon.

Timothy Geithner Knows the Truth but Doesn’t Want To Cause Panic in the Markets

I don’t think Timothy Geithner is mistaken by not being specific in answering Gregory’s question on what American’s can expect. His answer of “I don’t know,” is meant to not cause panic in the already fragile stock market that has been playing games above and below the 10,000 mark for a few months now.

I’m Not Afraid To Tell You the Truth

I can tell you straight out and not mince my words. The stock market, defined as the S&P 500 in this case, via a buy and hold approach, is not going to get you a 10% or higher return until companies start paying dividends in the 6% range again. Capital growth alone cannot get you even 5% return historically and the fact that most businesses aren’t growing today tells me that 5% figure is too high.

As seen in the “10 Year Stock Market Return (Components)” chart above, the era of the late 20’s and early 30’s were a decade of zero to negative capital growth. At least in those days, the yields were averaging 5%. Today, dividends are less than half that return, presently hovering around 2%.

So if we are in a deflationary credit contraction spiral like I think we are, capital growth is soon to be non-existent. In doing the math, how does anyone expect to obtain double digit returns in the years to come if it can’t be attained by yield and capital growth?

Ed Easterling goes as far as saying one can “never” expect to obtain those kinds of averages again. While I don’t rule out never, I do expect at some point inflation to rear its ugly head. The inflation rate could negate any future double digit returns as it did in the late 70’s and early 80’s. Meaning that if you are earning 10% and the inflation rate is 12%, you are actually losing wealth.

A Word On Manipulation of the Stock Market

I don’t think I’m too far out of line when I make a statement that big money can manipulate markets. I’ve witnessed unusual activity in the past when the market makers will drive the price up on a thinly traded stock after I have shorted it (back in the day).

Is it possible for the now holding banks; Goldman Sachs, J.P. Morgan’s, Bank of America’s to get together under the direction of some higher authority and go long the S&P to drive up the price? You’re damn right it is possible, but its only speculation. That’s why a “trader” can make money in any market. But in the end, the truth will always be born out in the financials of the companies. In the end, the buy and hold investor will be the loser while the large banks make all the profit. My goal is to help the little guy out. It is you who is the backbone of America and it is your investments that I want to see you keep and grow.

Bad News to Good News for Investors

I’m sorry to be the bearer of bad news in relaying my opinions on what I think the future holds for stocks. But I do believe there are ways to take control of one’s investing. While your financial advisor may still recommend the relic approach of “buy and hold hope,” the game has changed on them. It doesn’t mean it has to change for you.

While Geithner didn’t specifically tell Americans a 10% or better return is an illusion, it’s the fact he didn’t answer the question that speaks volumes for U.S. investors. I’ll do all I can to help investors separate fact from fiction and reveal truth they can profit from in the months and years to come.

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About Doug Eberhardt

Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534


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