Are ETFs the Result of the 2008 Financial Crisis? (w/ Grant Williams and Steve Bregman)


GRANT WILLIAMS: The implications for this
are just so broad, because everybody owns ETFs. From the lowliest retail investor who just
has a couple of thousand bucks in the stock market, I guarantee he’s in an ETF unless
he’s inherited shares from— STEVE BREGMAN: This is now the mode of investing. But up to active managers who now– I mean,
everybody is in these things. Not everybody, but you are correct that what’s
happened is that there are secondary effects that happen over time, and then tertiary effects. And reality changes. So the ranks of analysts, equity analysts,
has thinned tremendously in recent years. I don’t have a way of quantifying it, but
I know that they have, because either when their employers– a large brokerage firm or
investment bank, a mutual fund company– begins to change its business focus to provide index
products, they no longer need security analysts. So security analysts either leave the business
or they convert and become ETF analysts. Then you have managers, they’re active managers,
who have been necessary participants in the outflows, which I’ll talk about, from active
management. And they’re just losing business and losing
business, because they’re not able to demonstrate their competence versus the indexes. We’ll talk about that. And sometimes you just go with the flow. So they’ve adopted index-based investing,
modeling, robo-advisors. You can get it for free now from a robo-advisor. So not all of them have given up. You’ll have people, active managers, of note,
renowned, regaled. People like Mario Gabelli, who won’t change
what they do. They’re not going to fold. And they lose money every quarter, every month. And they’re putting up with it. They’re holding their ground. Well this is– I mean, you said, I think when
you talked on this yesterday, you made a great point. You said, what are the statistical odds that
all these household name managers all got stupid at the same time? Well, so yeah, we keep a list. And it’s not a complete list. Actually, when I mention it to somebody, they’ll
give me another name or two, which I haven’t– Right, yeah. –people I wasn’t thinking of. But when people– sometimes a picture’s worth
a thousand words. So this is a list. So I made up a small list of managers, some
of whom– like the fellow at Fairholme, Bruce Berkowitz, he was named manager of the decade
only a few years ago. Right. So you have Fairholme Fund. You have Gabelli Value Fund. You have David Wintergreen, Wintergreen Fund. Longleaf Partners, Pershing Square Holdings,
Icahn Enterprises, Carl Icahn, Greenlight Reinsurance with– David Ein– Yeah, David
Einhorn. Einhorn, yeah. You’ve got Royce, Chuck Royce. Anyhow, in 2014 and 2015, and then now in
2016, you have some of these managers with two years back-to-back underperformance relevant
to the S&P 500 of 10 to 20 percentage points a year. Yeah. All of them. Yeah. And they’re not just numbers. Context is really important. None of these managers does the same thing. If you were to line up all of their portfolios
next to each other, there’s very little overlap. They have different interests, different skill
sets, different techniques. They’re doing very different disciplines. And how is it possible that that many securities
with people who’ve demonstrated their skills over market cycles, as I said, suddenly all
got stupid together? They all lost their touch. The odds, probabilistically I think, are very
slim. So it begs the question, is it them or is
it the market? That sounds bizarre, or certainly a trumpet
note of hubris, to say maybe the market’s wrong, right? Right. And it sounds that way until it happens. But instinctively, I get that impression that
people think that’s it– this is not right. You hear that all the time when you talk to
people at this type of event This is not right. They don’t have the language and they don’t
have the knowledge or the history to figure it out. And that’s what this talk was about. So if I take you through some of the steps,
there are two trends that crossed paths ’round about 2007 at a juncture. So the two trends were, one was the decline
in interest rates, which has been happening since 1981 when 10-year Treasuries were about
15%. And then in the wake of the financial crisis,
they were driven down even further, toward zero. And OK, that was necessary. People should understand that interest rates
this low and this sustained and worldwide has never happened before. Not in 5,000 years of recorded financial history. Understand that– I know you had a bit of
this discussion with Jim Grant and he was giving you specifics– that interest rates
might have touched this level for a period of time. And in some cases longer. But still, it wasn’t to this degree. We have sovereign debt, trillions of dollars
of sovereign debt in the world. Germany for instance, German Bunds, that have
negative nominal yields. There was secured lending and a history of
interest rates. There are a number of books from authors who
spent decades of their lives collecting this data from all around the world going by 5,000
years of interest rates. It’s never been lower. That should give anybody pause. It’s a special time. No one wants to be a footnote at an inflection
point in history. There’s something different now. Therefore, you should pay attention to. Inflection points are important. So you have that. At the same time, you had the slow increase
in usage of ETFs, which are a relatively new tool. Had to be proved. Which is basically a mutual fund, except instead
of buying at the NAV, at the end of the day, what it’s worth at the end of the day, and
then issuing new units, open-ended mutual funds, these can be traded every minute of
the day. And the prices of the securities inside are
priced every minute of the day, every second. Every few seconds really. So that it’s now tradable. People like that. And it could be cheaper. And it’s more liquid. So it was being used more and more, but not
a lot. But then came these two, the decline in interest
rates and the availability and slow growth of ETFs. Those ETFs were now available at the juncture
of the financial crisis. So you have financial crisis, and every market
participant, not to be florid about it, but is true, in a vertically integrated fashion,
was traumatized to some degree. Yeah. From the retail investor to the retail broker
to the higher end financial adviser at a large firm to the consultants who evaluate managers
to pension fund trustees. And at that moment in time, they wanted away
from risk and away from volatility. They wanted away from security-specific volatility,
from manager volatility, from sector volatility. At first they just went to cash, which was
not, in retrospect, the right thing to do. Right, we’re back to that scar tissue thing. Yes. Exactly, yeah. And then when they wanted to venture out again
after the market was up– this always happens– and ETFs served the purpose. So in its most simplistic use or utility,
if I pick my favorite REIT, maybe that’s when it goes to zero. Even Simon Property Group, which is what’s
called the class act of the group, fell 70%. So at least if I buy my favorite REIT ETF,
whether it does well or not, I know it’s not going to zero. Yeah. And if I’m a manager, or I’m a pension fund
trustee, or an advisor of some sort, that’s helpful to me. OK, so what happened is money began coming
out– I should say pouring out– pouring out of equities in the United States of America
on a net basis. And certainly, every single year, bar none,
from December 31, 2006 through December 31, 2016, money came pouring out of actively managed
equity mutual funds. At the same time, without an exception, money
began pouring into, year by year without exception, index funds, ETFs and index mutual funds. And if you add the two up, they both add up
to about $1.4 trillion. $1.4 trillion out of Mario Gabelli and David
Einhorn funds. And $1.4 trillion into index funds and ETFs. That’s a lot of asset allocation going on. That’s a lot of supply and demand. So two things are happening. So it’s not just that Mario Gabelli– I just
use him because he’s fun to use– and it’s not just that the stocks he owns people aren’t
interested in and aren’t doing so well. He’s also a forced seller. Yeah. So there’s a downdraft on those. And meanwhile, the money is flowing in to
index funds. OK, and that’s an automatic inflow. Now, to get to the nitty gritty of it, some
people like the ExxonMobil example. Yeah, I think it’s a good one, because– Everybody
can relate to it. Yeah, exactly. So ExxonMobil, give or take, is usually one
of the largest companies in the S&P 500. People know what it is. First, I have to explain, though, the business
of indexation a little bit. So you have to understand someone else’s business
model. Now, I say, I’m in the 1% business. Typical investment adviser. Someone brings me an individual account if
that’s what I’m doing, or you have a mutual fund. And you have the 1% fee, let’s say. And I met a woman two weeks ago. We had a nice long discussion. And she has her own investment advisory business. And she charges a 1% fee. And she has $100 million of assets under management. And between her and her assistant and her
research assistant, they make a nice living. That’s the 1% business. The ETF business is a basis point business,
meaning fraction of 1% business. So for instance, the S&P 500 today as an ETF–
BlackRock or Schwab or Vanguard- – could be as low as four or five basis points. If you collect $100 million, or $300 million,
or $400 million for a fund like that, you’re not making money. So the key for the indexation business is
being a low fee business, it has to be done in scale. And to do it in scale, you need, particularly
when you’re dealing with hundreds of billions of dollars, trillions of dollars, you need
to use companies that have sufficient trading liquidity. I say liquidity, I’m not talking about the
balance sheet. I’m talking about the share trading. And the reason why is that you don’t want
to be constrained in your scalability by– within your roster of securities in your ETF,
whatever it is, a REIT ETF or something else– you don’t want to be constrained in your ability
to get more money, manage more assets, by the least liquid members. So let’s say halfway down your roster of names,
going from the largest to the smallest in terms of weighting, halfway down is a company
that has got 40% inside ownership. And so there’s really not that much trading
volume. And yet it’s a fairly significant position. You can’t go any higher. You can’t make it from a 1% position– you
can’t make it higher. You’re not allowed to. Or down at the bottom, the bottom few stocks
are just not trading enough. And you can’t scale up. So what do you do if you’re a rational business
person? You figure out a way to reduce them. So Standard & Poor started this process of
adjusting the rule set to accommodate liquidity needs in 2005. And until that time, my understanding of the
Standard & Poor’s business was it was a pretty good business. They collected fees for information about
the index and the subindexes. So if you go to your Bloomberg and it gives
you all the information you want about the S&P constituents and the returns and so forth
and so on, you’re paying Bloomberg. And Bloomberg pays S&P. They also collected some basis points in the
nice business. If some mutual fund invested according to
the S&P 500 model, or compared themselves to the model or whatnot, they got paid basis
points on that billion dollars. But they wanted more. They wanted to be in the asset management
business. They wanted to create an ETF, S&P 500 ETF,
and they began to think about this problem of scalability. So they went to what’s called a float adjusted
mechanism, meaning that if Microsoft, and let’s say Walmart had roughly 40% inside ownership,
which they did, they would adjust their weightings in the index downward to account for that. It had a certain logic. So Microsoft was not 4%. I’m just using it because the numbers are
easy. If Microsoft was a 4% position and they adjusted
downward for the 40% inside ownership that’s not available to trade, it would become 2.5%
to 2.6% position. That’s how it worked. So you see how, therefore, the business model,
the incentive system, begins to affect the rule set. And it’s actually the inverse incentive system
to the one that’s in the best interests of the stakeholders, essentially. Yes, yes. So what will happen is, so let’s say Bill
Gates– let’s take the same company and take two events which might or might not have happened,
or whenever they did happen. Let’s say Microsoft decided that its stock
was so cheap– and I don’t think they did this, but let’s say they did– so cheap they
decided to embark upon a massive share buyback program. For some reason, people didn’t like it at
a certain point. It’s a PE of 10. They know what they’ve got. And they buy back 20% of their shares. And the way that the indexation system works,
the market cap weighting system, is Microsoft would now have 20% fewer shares, 20% lower
market cap. And it would be given a reduced weight in
the index, meaning the index– reducing it, meaning all the managers, including active
managers who kind hug the index, would have to be sellers. Sure. And index funds and ETFs would have to be
sellers automatically, even as Microsoft is buying. On the other hand, if Bill Gates retires,
as he did, and he decides to start lightening up and selling shares, so his shares now come
into the float. They’re now available to trade. And therefore, the market cap of Microsoft
expands, the float expands. And they’re going to raise the weighting,
meaning managers are forced and indexes must buy the shares, even as he’s getting out. Yeah. Isn’t that interesting? Yeah. OK. And this is Bill Gates being a good guy retiring. This isn’t some director knowing that there’s
a flaw in the balance sheet. That’s right. Because there are other companies in which
somebody is distancing themselves for an economic business reason. OK, so there is that. Now, what you’ll find is that there really
are not that many companies that are liquid enough, large enough and liquid enough in
terms of their trading capacity, to suit these needs. I’ll call it industrial scale investing. There are not that many of them. A couple hundred. And if you go overseas, there are even fewer. Yeah. And therefore, all the different ETFs– and
we’ll go through some of them– momentum ETFs, value ETFs, growth ETFs, which are all subsets
of the S&P 500 or the Russell 1000 or Russell 2000, they keep trafficking in the same securities
over and over and over again. Whatever they call it. So I’ll give you an example. The Central Bank of Switzerland, the Central
Bank, buys US stocks. When you talk about price discovery in a free
market, it’s important. It’s important that prices be developed freely
between buyer and seller, this natural tension. But if you have a central bank with essentially
unlimited funds buying stocks, buying US stocks– and in what fashion are they buying them? Are they buying them with an evaluation of
their future value or present value or price? Is there something else at work? So for some reason, and we don’t know why,
the Swiss Central Bank has been buying US stocks. And they have a portfolio of it. And they buy every month. And it’s so large now, the market value of
the holdings. So in the middle of 2015, it was like $39
billion worth of stocks. And as of the end of 2016, it was $63 billion
worth of stocks. It would be one of the largest ETFs in the
country if it were an ETF. And the way they buy it, they have 2,564 positions
as of year end. That’s a lot. Very diversified, right? Yeah. But the top 10% of it, by weight, is only
250 names, 256 names. And as a share of the portfolio, those top
10% of the names account for 75% of it. And the average market cap of those is basically
$60 billion. It’s just an algorithm. They have a robo-advisor set up that buys
stocks all the time, like the S&P 500, essentially, or the Russell 3000. But it’s limited by the liquidity. They can only buy that much with the top names. And to show you how much value and price is
completely irrelevant, we showed that they’re actually buying Israeli stocks too. They don’t know they’re buying Israeli stocks. Someone set up the program, apparently, and
I’m inferring, to buy on the basis of the CUSIP numbers. The CUSIP number is identifying number for
every single security. And they’re going that way. Now, there are companies, Israeli companies,
there are dozens of them that are in here, that that trade in the United States, but
the programmers for the Swiss bank didn’t know that if the CUSIP is preceded by a letter,
it’s a foreign company. So they’re buying those too. That’s how blind it is. So now, with that as an introduction, you’ll
see that money is flowing in every day. There’s an automatic bid, as we’ll call it,
for any stock that’s a major holding in a major ETF or index. It automatically gets bought. And that’s valuation indifferent. It’s got nothing to do with valuation. There is no factor in the decision making
process for valuation. It’s just based on exposure. So the ExxonMobil example, start with an easy
one, was that I use the conceit that if you were sitting in a train station– here in
New York City, it would be Grand Central Station– waiting for a train, and you saw someone had
left a tear sheet from an annual report, page from the annual report, on ExxonMobil. And you looked at it and you saw something
strange. What was strange about it was that it had
been left by a time traveler from 2016. And so there you have before you everything
you want to know about the balance sheet and income statement of ExxonMobil several years
into the future. So I think I chose a three year period from
2013 to 2016, OK? So here are the facts that you could avail
yourself of from this tear sheet from 2016. So we know oil prices went down. That’s not in there. It’s not in the tear sheet. So we know that the revenue went down 45%. So ExxonMobil had just a touch under $100
billion of revenue in 2013. And it’s $54 billion in 2016. We know that the earnings per share went down
74%. We know that the dividend payout ratio ballooned
from 1/3 to 160%. It quadrupled. The book value per share was up a percent
or two. And the debt almost doubled. Not a problem, not an existential problem,
but the debt almost doubled. OK, so I don’t know about you, but with that
special knowledge nobody else had, I would short the stock. Yeah. And I would have lost money, because the share
price has gone up. And you wonder, how can that be? Well, maybe people saw through the cyclicality. But if you look at other oil sector companies,
that’s not what happened. Their stocks went down a lot. Yeah. OK, so the question is why? And the reason is that ExxonMobil is about
the most liquid trading security you can possibly find, and about the largest market cap. And therefore, if you’re an ETF provider and
you need to build a new ETF, attract money– and I’ll tell you why they’re so desperate
to do it in a moment– you’re going to use ExxonMobil. You need to– You find a way to shoehorn it
into your index somehow. You’ll find that ExxonMobil will be in– I’ll
read them to you. ExxonMobil is in the iShares Core High Dividend
ETF. That’s high dividend yield. It’s in the Russell 1000 Value ETF. It’s a value stock. It’s in the PowerShares 500 BuyWrite ETF,
where they buy and write options, I guess. It’s a low beta stock. It’s in the Low Beta Income ETF, the First
Trust Low Beta Income ETF. It’s in the SPDR S&P 1500 Momentum ETF. it’s
a momentum stock too. Good. It’s in– basically, you’ll find it everywhere. It’s a growth stock. I was going to say, it’s– OK, it’s a growth
stock too. Fantastic. Yeah. So it’s everything. And it needs to be everything, because it’s
necessary raw material in industrial scale investing. Now, here’s why it’s everywhere. If I’m in the business of being an ETF provider,
when I started back in, let’s say 2007, I saw the opportunity. And a lot of ETFs providers have become more
concentrated. But your BlackRock or your Vanguard, your
State Street, your Schwab, it was all set to be a fairly comfortable oligopoly. So you charge your 50 basis points. It’s a lot cheaper than a mutual fund. It’s more liquid, easy. It could have been that way, except for a
confounding factor of Vanguard. Because Vanguard is a not for profit institution. And every time they expand and get more assets
under management, then their unit costs go down. They lower their fees a bit. So Vanguard began to lower its fees. And so on the plain vanilla funds, the easiest
ones like the S&P 500 or the Russell 1000 or the Russell 3000 or 2000, the fees went
down and down and down. So they’ve gotten fees down, as I said, to
like four or five basis points. Now, they can’t make money at four or five
basis points, but they’re not intending to. But neither can BlackRock. Now, BlackRock is a rational player. We understand how they think, how are they
being rational. Well, one way to make money, therefore, is
to differentiate your product. And they’ve been differentiating products. People have been doing it for years. You’ve got– how do you differentiate shampoo,
right, or vodka? That’s how it’s done. So they would come up with a slightly different
exposure. So you’ll have S&P 500 Value. You start easy. Or S&P 500 Growth. When you issue a new ETF, the business of
it is, first of all, it has to back test well. You have to have your 5-year back test or
10-year back test and show that these holdings did pretty well. You have to have a beta volatility– people
don’t want volatility– below one. Less in the market. And they will figure out a way to have a rule
set that encompasses stocks that have these characteristics. And then when they issue the ETF, it’ll start,
usually, with 50 basis point fee. And over time, you’ll see, the older they
get and Vanguard gets involved, the fees go down to 30, and 20, and so forth. That’s why we have this proliferation of ETFs. The essential concept of indexation, as created
by the founding fathers of indexation, the intellectual founding fathers of indexation,
Paul Samuelson and Fischer Black, and even Jack Bogle, was, you just want exposure to
the entire market, the asset class. The notion of subdividing it runs counter
to that. Now you’re picking and choosing. So now indexation, with all this proliferation
of subsets and ETFs as the business end of indexation, they use the terminology of it. But they’re really not doing that. So you can see why they’ll need an Exxon-Mobil. They’ll need it. Now, as a further proof, too many people might
know of Exxon-Mobil. They might insist that somehow it’s a factor
of cyclicality. People looking through the cycle. I can do this next exercise with almost any
of the major blue chip traditional companies in the S&P 500, whether it’s McDonald’s, or
Procter and Gamble, or Colgate, or Pepsi, or whatnot. A few statistics on McDonald’s. 2008 versus 2016 is a good period for them,
because we’re starting from the bottom of the market. There was deep recession. So revenue between 2008 and 2016 was up in
total for all those years 4.7%, which is less than a percent a year. Net income in total over eight years was up
8.8%, which is 1% a year. Long term debt up 154%. Equity went from positive to negative. It’s now negative because they’ve been buying
back a lot of shares. So the only thing that moved up a lot on McDonald’s
balance sheet is the debt. And the only thing that moved up a lot in
its market profile is its share price, which is up 95%. And its PE ratio, which went from 17 to 22,
is up 30%, OK? So explain that to me. I’ll explain it. Years ago, before the rise of ETFs as the
mode of investing, people might have bought, let’s say, Walmart. When I left Bankers Trust Company at the end
of 1994, I’d been asked to approve adding Walmart to our list of stocks to buy. To someone on the committee that does that. And I kept asking the analyst who was prompted
to propose it questions that apparently I wasn’t supposed to ask. It was impolitic of me. The reason the head of the unit asked the
analyst to– why don’t you take a look? Take a look at Walmart and why don’t you make
a presentation to us in a couple of weeks, whenever you’re ready? There’s an implied statement there. Because we didn’t own it. It had done very, very well and it was an
embarrassment. So well, make it an option to buy it. So OK, so he’s talking about how wonderful
it is, how fast it’s growing. And I said yes, it’s a wonderful company. It’s growing very fast. It’s growing 30% a year in terms of earnings. I said, but it has a PE of 30. I said, don’t you think that’s a problem? He said, no, but they can continue expanding. I said, can they expand to 30%, like for a
long time? He said, they’re doing so many things. I mean, they have tricks. They can take the back of these huge stores,
and they have more land, and they extend the back 20%. Very little cost, right? More throughput and so forth. I said yes, but still, there is a law of large
numbers. If they’re are large they are and they grow
30% a year, and I forget how many years I calculated, but not too many years– They
would account for 100% of all the retail sales in the United States. So I said, at some point, it’s going to slow,
right? Yeah, it’ll slow. I said, yeah, but if it slows from 30% a year
to 25% a year, don’t you think the PE will contract? People would be a little disappointed if the
PE contracts to 25? He said, yeah, but it’s still good. You can do this for years. It’s like going up and down an escalator. Anyway, the older, more experienced, seasoned
portfolio manager next to me– there’s different ways to be seasoned– he’s there elbowing
me. Anyway, what happened is it never collapsed. But it was almost a decade it went nowhere. And even as earnings were positive and rapid
but slowing, until it’s finally a PE of 12, which is where it ought to be. So people voted with their feet. They bought Walmart, and little by little,
they decided not to own Walmart. But today with McDonald’s, nobody really is
buying– has bought McDonald’s lately individually. They bought it as part of a basket. They’re not even thinking about whether they’re
satisfied with it or not. But if they’re dissatisfied with McDonald’s,
they can’t sell it individually. They can only sell the basket. Yeah. Which begins to show you know how the money
flowing into the ETFs, and which ExxonMobil is a large constituent, or McDonald’s is a
large constituent, these stocks get an automatic bid. They’re being bought on the margin irrespective
of their growth pattern or their valuation. We’re not having price discovery anymore. And if you don’t have price discovery, how
do you know what you really own? Go back to the iShares Emerging Markets Bond
ETF, high yield bond ETF, what do you really own? What’s it really worth? You don’t know anymore, because the price
discovery mechanism, of which active managers with all their faults as well, the natural
dynamic tension between them, trying to figure out what a good price is. Not that they weren’t subject to the very
same ills and bad thinking that indexation is. But that’s broken down. So what happens now in the S&P 500, for instance,
is that the largest companies in there– Coca-Cola has had sales declines for years now. McDonald’s has no sales growth. Procter & Gamble has no sales growth. It’s simply a function of generations of their
expansion, law of large numbers, now they have saturated their markets. And there’s only so much more per capita of
diapers, of cigarettes, or alcohol they can sell. It’s a limitation. There’s nothing wrong with it. It’s just you don’t pay 25 times earnings
for it. You pay 12 times. So those companies are being kind of affixed
near the top of the S&P 500. They are crowding out smaller companies that
might be growth companies that can’t get up. But their growth is slow now. That’s one aspect of the S&P 500. The other aspect are companies that are really
growing fast, like the FANG stocks we talked about, the Facebook and Amazon and so forth. And they’re priced at white hot bubble kinds
of valuations, where there actually is growth. And they have their own problem. But that’s what you have now. So the challenge is to think that the statistical
history of the stock market suggests that stocks will generate 10%, 9%, 10%, 11% annualized
returns, ad nauseum. A reversion to the mean is the basic economics
behind a GDP growth and so forth and so on. And we think that we’re in a special time
now. It’s not going to happen. And without belaboring too much the various
reasons why, there are a few observations you can make. First of all, the notion that, statistically
speaking, there’s a powerful argument over almost 100 years, from the Ibbotson Sinquefield
study started in 1924 onward, that stocks tend to give you 10% over time. Just hold on to them. First of all, does it really make sense it
doesn’t matter what price you pay? Exactly right. Of course, it always is. It does. And there are lots of nice charts one can
make about that it does matter. But I’ll make it even simpler than that. I’ll say, I’ll accept it. I don’t, but argue and I’ll accept that
100 years of statistics is just a powerful, powerful argument for a certain return. You say 10% a year. I’m sorry I’m making it you, but you’re sitting
here. And I’ll say, I accept it. But now I’ll say, ask the question, which
100 years? Yeah. Because now there’s another 100 years. So that Ibbotson and Sinquefield study, which
modern portfolio management asset allocation theory, the pie charts, all that, really couldn’t
have developed without that study that was developed in the 1970s, where they went back
and got the monthly returns and prices for large cap stocks, and small cap stocks, and
treasury bills, and treasury bonds, and corporate bonds, and inflation, right? And gave you all this raw data by which to
develop all these correlation statistics and return statistics. They made it possible. That’s what feeds into all these pie charts
and planning models OK, now, this year, the 2017 edition, for the first time– it was
published only a few months ago– they did the prior 100 years. And that was only made possible by advances
in technology and software where they could– yeah, some people might argue with exactly
how valid is it. But they could go through any kind of source
now. And you have optical recognition software,
journals, books, magazines, and so forth, and collated and treated and so forth. And it turns out that the prior century didn’t
look– Quite so good. –quite so good. Looked very different, in fact. So it might interest you to know that for
the prior 100 years– we’ll start with this. From 1824 to 1924, the annualized return from
stocks– and this doesn’t sound terrible– was 7.3% a year. But only 1.1% of it was from appreciation. The rest was from dividends. OK. OK? So if we were to have a repeat of that, 1.1%
a year, going forward for the next 100 years, but we’re really starting with a 2% dividend
yield, that is going to throw a monkey wrench into a lot of pension plan and retirement
assumptions. Essentially, all of them that are already
in existence. Essentially all of them. But if you take it for 100 years– 117 years–
we extend it from 1824 to 1941, the annualized appreciation was only 0.8% a year. And let’s take two 50-plus year periods where
it’s even more stark. From 1824 to 1876, this was obviously affected
by the post-Civil War reconstruction costs, the annualized rate of return, including dividends,
was 0.06%, being 0. Take another 55-year period, 1865 to 1920,
from the end of the Civil War to the emergence of the United States as a great power, the
annualized return was 0.48% a year. And there are other numbers. You can even look and play with these numbers. But the point is that there certainly is precedent
for generation, or more, of really very poor returns.

21 thoughts on “Are ETFs the Result of the 2008 Financial Crisis? (w/ Grant Williams and Steve Bregman)

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  2. I remember Andrew Lowe at MIT waxing modern physics and claiming negative interest rates were comparable to travelling back in time, i.e. OBVIOUSLY IMPOSSIBLE. Wow! Was genius wrong.

  3. InB4 people complaining that a channel which charges for content is releasing old content for free. Like they will start releasing their most recent videos for free also and people will keep paying them…

  4. Okay so I guess the takeaway from this is to just buy the biggest ETF:s and hope everyone else does the same like theyve been doing for the last 5 years.

  5. Don’t spend too much time on what was the reason for 2008,

    It’s important for focus on 2020 rather!

  6. Steve Bregman makes a lot of sense out of things I've always had questions about but no one ever seems to explain it or they just don't know. I'm looking forward to part III which will conclude that there is too much shenanigans and too many moving parts with a ridiculous amount of risk that I'm looking to sell all my stocks, get out of the paper asset market all together and start my own business. I'm so sick and tired of listening to hours upon hours of other peoples opinions and just wasting time and money.

  7. “ETF” after 2008, this was planned long before, digital currency, Ai algorithms, human chipping, next is global currency skynet

  8. The link in the description under "Are ETFs the Result of the 2008 Financial Crisis? (w/ Grant Williams and Steve Bregman)" does not work 🙁

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