We thought it would be worth highlighting another exchange in our interview with Vanguard founder John Bogle on Wednesday. (See my earlier post.) Strikingly, in the midst of this week’s volatility, he said that he expects the stock market “to deliver a return … in the 10 percent range” over the next ten years. Here’s the exchange:
TOM ASHBROOK: Would you have the nerve to stride into an index fund today?…
JOHN BOGLE: … If everybody gets scared to death, the market could easily go down another 10 or 15 or 20 percent. I’ve no way of knowing that. But the value of business is not going to go down that much. And in the long run it’s that business value that is created for investing….
I don’t see any reason that corporate earnings — from this relatively low level, particularly in the financial sector, which is going to have problems for a long time — I don’t see any reason corporate earnings can’t grow about 7 percent a year, compared to the long-term rate of 5, because we’re starting from a depressed level…. I’m talking about over the next 10 years — earnings will double at 7 percent in 10 years, so that would be a 7 percent earnings growth, and a 3 percent dividend yield. I think from somewhere around these levels the stock market will ultimately deliver a return — I’ve been saying 6 or 7 or 8 perent for quite a while — but now that the market is down I’d say the future returns ought to be in the 10 percent range, just because we’re at the depressed stage in earnings.
ASHBROOK: Sounds like a buy signal from a pretty big investor.
He also had this to say about John McCain’s proposed cut in the capital gains tax as part of a response to the current economic crisis.
ASHBROOK: Capital gains…. John Bogle, what about John McCain saying let’s cut it back down to seven percent? Do you see that as somehow an economic kick-start? I wasn’t sure how that would work here.
BOGLE: I think that’s absolutely absurd. And the reason I think so — and I haven’t seen anybody else mention this simple fact — and that is, it was only maybe 50 years ago, not very long as time goes, where institutions, financial institutions, owned 8 percent of all stock, and individual investors owned 92 percent. Today these financial institutions own 76 percent of all stock. And individuals own 24 percent. Now the important point about that on taxes is, that almost all of that 76 percent institutional holding is exempt from capital gains tax. They don’t pay any capital gains taxes — if you’re a pension fund, if you’re in 401K as an individual investor, if you’re an endowment fund manager, none of that gets paid….
ASHBROOK: … So why do you say … it’s absolutely absurd to call for a capital gains cut now?
BOGLE: Because you’re cutting capital gains taxes on a very small, maybe even tiny, part of the population, given all these tax-deferred holdings.
(Listen to the full show here.)
Can I make the logical assumption then that since so few are exposed to the capital gains tax that they revenues generated are insignificant as well. So what’s the big deal with cutting the tax. Plus we should be encouraging Americans, who currently have a negative savings rate, to save and invest particularly in the stock market. As Bogle pointed out, stocks are cheap relative to the outlook for corporate earnings growth. Unless Bogle thinks we can all live off of Social Security and meager defined contribution plans, then we should be incentivizing Americans to save and invest by noting not only the potential for high returns, but the fact that Americans will get to keep more of that gain because it will be unencumbered from tax. Discouraging savings and investment is what is absurd Mr. Bogle, especially now!
Posted by Jack, on October 24th, 2008 at 11:20 AMSome industries will come back as strong as ever. Retail, as one of your recent shows indicated, will not.
We are at a watershed moment in our economic history. We are in a recession but the way we do business after the recovery will be different from the post-recoveries over the last 70-years.
In the past, we worked our way out of a recession with the help of the federal government providing some kind of stimulus package. In one to three years, the economy was back on a growth track and there were no serious, long-term casualties. We continued to spend and consume as in the past.
That was then and this is now.
Our economy has too much debt. Our federal government is running record-breaking federal deficits and the American consumer is dangerously overextended with mortgage and consumer debt. This has happened at the same time as the value of his principle asset, his home, has fallen in value by 20 to 30 percent. Further, we have been transferring our wealth to oil producing countries at a rate of $700-billion per year and other nations are getting stronger economically.
The federal government is doing the right thing spending money to revitalize the financial infrastructure of our economy and trying to stimulate short-term demand. These actions are necessary to prevent a depression and the total collapse of our economy: not to prevent a recession. The recession is here and will not go away soon.
In the long term, we need to reduce the amount of debt that we use to support our life style; or change our way of life. This is true as a nation, as investors and as individuals. If we do not, we will lose the economic battle with the rest of the world and the United States will no longer be the super power that we perceive.
Reducing our use of debt means that less money will be available to consume. Less consumption converts to less demand for the goods and services produced and excess capacity in the system to produce and deliver the products. Excess capacity will mean less demand for retail space and that in turn will mean lower rents for commercial properties and higher vacancies.
Lower rents, higher CAP rates and conservative underwriting will mean lower values for commercial properties.
Recovering from a hangover is painful.
Posted by steve Banicki, on October 25th, 2008 at 12:23 PM[...] The Times, Jeff Sommer’s article on Sunday about the wonderful John Bogle and a recent radio interview with Mr. [...]
Posted by More on Stock Valuation - Economix Blog - NYTimes.com, on October 29th, 2008 at 7:27 AMEverybody has their own opinions, who’re right who’re wrong? Time will tell.
Posted by Hanstaruna Invest Tools, on October 30th, 2008 at 9:55 AM