Robert Fitzwilson continues:

“Since the beginning of our firm in 1979, we felt that the only metric for returns that truly mattered was the gain net of inflation and taxes.  In those days, inflation was running at a 12-14% pace and the marginal tax rate was 73% (70% Federal and an effective rate of 3% for California taxes, allowing for the deductibility of state taxes against Federal obligations).

We used the U.S. Gross National Product as a proxy for after-tax and after–inflation returns.  At the time, the U.S. GNP had grown at around 2.5% for decades, so we rounded that number up to 3% for our proxy of after-tax and after-inflation returns. 

To achieve a 3% after-tax and after-inflation return required a gross return of about 35%.  We knew that a sustainable compound return of 35% was highly improbable. However, we assumed that gross returns would settle back down following declines in inflation and taxes....

Continue reading the Robert Fitzwilson piece below...  


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“The charts below from the Bureau of Labor Statistics reflect the trends of U.S. productivity in the decades following World War II for the non-farm business sector and since 1987 for the manufacturing sector.

Productivity change in the non-farm business sector, 1947-2011:

The huge post-WWII economic expansion coincided with an average annual percent change in productivity of about 3% from 1947-1973, roughly coinciding with the gain in GDP.  During the recession years of 1973-1979, productivity fell off of a cliff and averaged about 1.1%.  Productivity then increased steadily for almost 30 years, culminating with a 2.5% run from 2000-2007.  Since 2007, productivity has once again begun a slide, back below 2%.

The second chart (above) is quite startling.  Productivity in the manufacturing sector rose dramatically in the 1990-2007 period, but has since fallen in half.  This decline in productivity occurred in spite of the post 1980 decline in the cost of capital and the $1 trillion investment in technology infrastructure from 1995 until the dot-com bust.

Important observations can be made in looking at the data presented in the charts.  If real growth of GDP relies upon an increase in the population and productivity, an aging and shrinking work force combined with declining productivity do not bode well for growth.  However, the people in charge of the printing presses are attempting to reverse those trends by creating more and more fiat money.

The reason is simple.  Printing money over and above the real needs of a growing economy is a tax.  Since 1971, it has been quite a lucrative arrangement.  Governments could harvest an ever increasing nominal amount of taxes.  They could then spend and commit these funds for future programs so long as the growth rates in the economy could support it and the people tolerated the watering down of their savings. 

This system was working well from their perspective until the harvest of current and future taxes through printing proved too much in 2008 and people once again began to care about sound money.

The various forms of stimulus and “saving the system” took massive amounts of future taxes and deployed those funds to save the banking system, rather than stimulating future growth.  Income was also harvested from savers by the forcing down of interest rates. 

Despite all of the drastic actions taken, we see a parade of horrible global economic statistics week after week.  The banking system might have been saved, but the global economy and the people are reeling.  The “cure” is rapidly becoming worse than the disease.

We frequently hear that “we are at a fork in the road” or that “a slow-moving train wreck” is heading towards us.  Well, here it is in two pictures (above).  We have declining real GDP, along with declining productivity, coming face-to-face with an out-of-control requirement to harvest current and future taxes.  The only tool remaining for the central banks is the printing press.  That is what they have done for 40 years, and it is in their DNA.  Bankers appear to be oblivious to any other course of action.

Another important effect of these policies is that real investment returns going forward will be much lower than the common belief or hope.  There certainly are people that have enjoyed periods of higher real returns while taking advantage of the tailwinds in the 1980s to 2008, but the data suggest that expectations should be in that historic 2-4% range.  Policy seems to be printing to generate higher nominal GDP and stock prices, but this is folly founded on quicksand.  Contrary to the prior decades of printing, the need to shock the economies of the world higher with rampant printing is more likely to generate much lower real rates of return for traditional investors.

Desperation is in the air.  The Central Banks must choose between devaluing fiat money or a steep global economic slide of historic proportions.  Underfunded and unmet social safety net programs will also lead to unrest and rioting if the current trends in employment and economic decline are not reversed.

We now face a tough row to hoe.  The incoming French president is talking of returning to economic growth, but simultaneously speaks of lowering the retirement age, increasing the top tax rate to 75%, and expanding state-funded teaching jobs by 60,000.  Those policies have not historically been associated with economic growth.  As he is a self-described socialist, we feel that nothing of substance will change.  The French will be forced to once again reach into the same old bag of tricks to continue their part of the coordinated global currency debasement.

There is only one way to protect wealth at this moment in time and that is to accumulate real assets which are not subject to the whims and foibles of politicians and central bankers.  These are hard assets such as gold, silver, real estate, etc..  I would also include mining shares because they are so incredibly undervalued.”

© 2012 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

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