Re: OT How recessions become Great Depressions

On Feb 10, 2:22 pm, Terraholm <terraholmSPAM...@xxxxxxxxx> wrote:
agaxxan wrote:
On Feb 10, 2:13 am, Terraholm <terraholmSPAM...@xxxxxxxxx> wrote:
About every 70- 80 years, in the US... lessons learned and a thrifty
generation generated. Followed by a boom generation followed by a
spoiled one that forgets the lessons and goes on a accumulation spending
spree on borrowed money and bubble investments...

1835, 1895, 1929, 2008...

That's true. A lot of it is simply the cyclical nature of capitalism.

Simply? Ho Hum?

Part of that cycle is war. We never seem to learn...
Every time the crash is followed by a major one.
It goes to about 1790...

This one is a crash based on exactly what the neo-conservatives brought us.

And this one will take a real fix...jobs are not coming back when the
job market is a ponzi set up with no manufacturing base. We are no
longer the industrialized country on top of the developing ones.

Since Reagan and 'free' trade the US has turned from the #1 importer of
raw materials and #1 exporter of finished products to upside down of
that. And we no longer own even the raw materials...mines, mineral
rights, farmland, timber land are bought up by the foreign investors and
governments.

http://www.moneyweb.co.za/mw/view/mw/en/page38?oid=235930&sn=Detail

(fu bu guo san dai) Literally: Wealth does not pass three generations

Meaning: It's rare the wealth of a family can last for three
generations (the 2nd may see the value of hard work, the 3rd, forget
it).
Mark Seymour*
14 November 2008 11:23

It's difficult enough for a family to accumulate wealth in the first
place. If however, the above Chinese proverb is indeed true, we
suspect that in order for the family to remain wealthy past the third
generation mark will require a robust investment plan which would
include the characteristics of discipline, patience and probably a bit
of luck too.

Let's take a look at history (Jan 1960 to present) and we see what the
All Share Index has dished out by way of wealth creation. The
annualised total return has been 17.3% vs an annualised inflation rate
over the same period of 8.8% which means an annualised real return of
8.5%. This translates into any sum of capital which was invested in
the ALSI back then increasing by a multiple of about 50 times in real
terms. Now we're on the right track.
Let's look back to 1960...

Year zero: First generation: Wealth creation

Starting capital: Zero. The family income generators (2 parents) are
hard-working and manage to invest 10% of their after-tax income
equating to R30/month into the South African stock market. (Yes, this
was pre-Union, but we did say "equating to"). Remember this is the
sixties and an income of R300 is a very decent monthly wage.

The family maintains this savings plan, stepping up their savings
amount in-line with inflation. The parents have three lovely kids.
Stepping the combined after-tax family income up in line with
inflation has resulted in a present day monthly debit order of R1,850
into the market via an equity unit trust. The family is now sitting on
R10.5m after the capital reached a high of R17m in previous months.

Year 45: Second generation: Wealth preservation

The parents ensured that their three children didn't have to
experience hard times. The children attended decent enough schools and
were fortunate enough to mix with similarly privileged friends. There
is general unease in the family however, as the second generation gain
independence.

The pressures of wanting to keep up with the lifestyles of their
wealthier friends, coupled with an unfortunate down-turn in the
economy, results in a halt in savings and as a result the R10.5m
family wealth no longer enjoys any debit order increases. In addition,
the capital base is required to maintain an income for the folks who
have now retired.

This is not too much of a problem because the dividends yielded by
their equity investments equate to about R45,000/month which is more
than enough to cover the cost of living for the first generation
despite having to be stepped-up in-line with inflation.

The after-dividends capital base grows very well over time despite the
market volatility, 30 years later amounts to a sum of R330m.

Year 75: Third generation: Wealth destruction

The second generation finally inherit the family wealth and it is
split three ways. By this time the R45,000/month comfortable family
living has ballooned to R600,000/month as a result of inflation. Each
family now only enjoys income from a capital base of R110m and,
because they themselves are approaching retirement they opt to de-risk
their portfolios, which results in the capital invested unfortunately
realising a more sedate 3% real rate of return.

The third generation children are in the throes of getting a higher
education, however the transition to independence has been difficult
and they fail to contribute any income or savings. As a result, each
family unit is having to depend on their R110m capital base to derive
a monthly income of R700,000. Each of the family capital bases grows
in value (at 3% per year) reaching a peak of R155m in year 90, however
the strains of an 11% annual income withdrawal (R1.3m/month) reduces
the capital to zero over the closing years.

Year 97: No Capital


After a torturous revelation later on in life, one of the 3rd
generation children decided to carve out a career as a financial
advisor. She made the following insightful observations:

1. Her grandparents did a fantastic job of consistently placing 10% of
their monthly income into an equity investment over a 45 year period.

2. As they had generated sufficient capital to live off the dividend
income therefrom, her grandparents had stuck with their equity
investment throughout their retirement.

3. Unfortunately, her parents had failed to adopt a savings ethic and
they hadrelied optimistically on their inheritances to generate their
own retirement income.

4. The 3rd generation children (herself included) failed to comprehend
the importance of generating an income and as a result were unable to
adopt a savings plan or meet their own costs.
Time to start again.

The moral of the story: Draw up a savings plan (regardless of how
small) and start saving. Enjoy your weekend.
.

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