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Financial Times: Take the very long view on asset prices

Financial Times, December 21, 2017, by Gillian Tett.

“The authors of “The Rate of Return on Everything, 1870-2015” — Oscar Jorda, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick and Alan Taylor — have not done this for narrow investment purposes. Instead, they hope to contribute to the academic debates which are now raging about whether secular stagnation — the long-term structural decline in aggregate demand identified by former US Treasury secretary Lawrence Summers and others — really exists, and whether the French economist Thomas Piketty is correct to argue that returns on capital always outstrip growth.”

“First, equities and housing have very different levels of correlation. From a (very) long-term perspective, both asset classes have produced similar returns since 1870, averaging out at about 7 per cent per annum across these 16 countries. But equity markets around the world have become tightly interlinked with each other: country co-movements rose from 0.4 in the middle of the previous century to 0.8 this decade. Property markets, by contrast, are not correlated: country co-movements have stayed between zero and 0.2 in the past 50 years. Moreover, property is also only lightly correlated to business cycles and other asset classes. This suggests that if an investor wants truly to diversify their portfolio, they should look beyond securities; buying real estate everywhere from Manhattan to Mongolia was a better hedge in the 20th century.”

“A second fascinating implication is that today’s ultra-low interest rate world only looks bizarre if you take an edited vision of history. Yes, real rates are very low today compared with the peacetime years in the 20th century. But real returns on bonds and bills were much lower during the first and second world wars, tumbling to about minus 4 per cent (compared with 3 per cent for bonds in 2015, and zero for bills).”


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