200 Years of Markets in 60 Minutes (Deutsche Bank’s Jim Reid) | #618

What It Covers

Jim Reid, Deutsche Bank's global head of macro research, presents findings from his annual report analyzing 200+ years of market data across 56 countries. The discussion examines real versus nominal returns, valuation's predictive power for future performance, the impact of fiat currency systems on inflation, and why cash represents the riskiest long-term investment despite feeling safe.

Key Questions Answered

• •Cash destroys wealth: Over 200 years globally, cash delivers minus 2% real annual returns while bills return 1.9%, government bonds 2.6%, sixty-forty portfolios 4.2%, and equities 4.9%. A 35-year period from 1945-1980 saw most global government bonds lose 45-90% of value in real terms, demonstrating that holding cash or low-yielding bonds erodes purchasing power faster than most investors realize.
• •Valuation predicts returns: Across 200 years and 56 countries, buying low-valuation markets consistently outperforms expensive ones. High dividend yield portfolios returned 12.8% annually versus 9.3% for low dividend portfolios. Low PE portfolios beat high PE portfolios by 3-4 percentage points annually. The US Shiller CAPE ratio currently sits at its second-highest level ever, exceeded only by 1999, suggesting below-average forward returns.
• •Fiat currency drives inflation: Since 1971 when currencies decoupled from gold, no country has maintained below 2% average annual inflation. Two-thirds of 160 countries studied experienced above 5% annual inflation in the fiat era. Authorities respond to crises by expanding money supply, making higher-than-forecast inflation more likely than lower, particularly as debt burdens require nominal GDP growth to remain serviceable.
• •Equal weighting reduces concentration risk: The S&P 500 took 13 years to surpass its 2000 peak nominally, 17 years inflation-adjusted. During that same period, an equal-weighted index doubled, returning approximately 5.5% annually. Current global ETFs allocate 65% to US markets, with the Magnificent Seven comprising 35-37% of the S&P, meaning investors hold 20-25% exposure to just seven companies.
• •Starting yield determines bond returns: The initial yield at purchase proves the most reliable predictor of long-term bond performance across all markets and timeframes. Credit and non-government bonds provide superior returns because default rates never erode the extra spread earned over government securities. Converting 3-4% government bond yields to 5-6% credit yields offers better inflation protection for long-term portfolios.
• •Distribution skews positive: US stock returns cluster in the 15-20% bucket most frequently, followed by 30-35% and 20-25% ranges, not the 8-10% average most investors expect. However, three distinct periods saw decade-plus sideways markets: post-1929 crash, mid-1960s through early 1980s, and 2000-2013. All three periods shared one characteristic: high starting valuations, suggesting current elevated multiples increase sideways market risk.

Key Topics