Why have US stocks outperformed international stocks so dramatically?

One of the mantras of an index fund investor is that you can’t predict which companies or which economies will do best. (Or at least you can’t predict better than other investors, so obviously promising stocks are already priced high to reflect that promise.) Therefore, you should try to invest in a way that mirrors the domestic economy or, if you expect to spend time in other countries, the world economy.

Let’s have a look at the Vanguard all-US fund (“Total Stock Market”) “total returns” (reflects reinvestment of dividends, but not taxes).

12.17 percent return over 10 years. After federal taxes, this is 10.1 percent, says Vanguard. They don’t estimate the effect of state income taxes, but with California at at 13.3 percent on the successful, this could fall to less than 9 percent for a Californian.

How about the Vanguard all-foreign fund (“Total International”)?

In an efficient market, the returns should have been about the same. But the investor enthusiastic about broadening his/her/zir/their investment base got destroyed. The 10-year total return on non-US stocks, in U.S. dollars, has been 4.68 percent. After federal taxes? 3.88 percent. After California state taxes? Perhaps around 3.5 percent. Foreign bonds would have paid better than foreign stocks, I think.

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How many Mega Millions lottery tickets did you buy?

Scanning the headlines, I see the Mega Millions is up to $1.55 billion. That’s a fake number because it is pre-tax and adds up an annual payment without discounting? Let’s assume that it isn’t a fake number. The odds of winning are 1 in 302 million and a ticket costs $2. So we should definitely play! We expect to get $5.13 for every ticket that we buy (ignoring any less-than-jackpot prizes).

But of course, the number is fake. CNBC says that the one-time lump sum payment is $757 million. This analysis says that the lump sum in a state such as Florida with no personal income tax is worth only $477 million after federal income tax. The odds of winning on a $2 ticket are 1 in 302 million. So I think one gets back only about $1.50 in expected value from the big jackpot. But maybe the lesser prizes are what make the expectation positive? This analysis adds up all of the lesser prizes. The expected value of a $2 ticket was only about $1.10 after taxes when the jackpot was $521 million and fell to about 77 cents for players who chose the lump sum option. On a $1.55 billion jackpot if you pick numbers that nobody else picks maybe it would be worth buying tickets? Would it make sense to use a random number generator? Use numbers that the Chinese consider unlucky? Pick the birthday of a 17th century scientist whom nobody cares about?

Who has purchased some tickets for what could now be a rational activity, depending on your level of risk aversion? What are you planning to buy if you win?

(I would use my winnings to buy housing for every currently unhoused resident of the U.S., to pay for immigration lawyers to help migrants prevail in the 10-year asylum process, to finance Democrats running for office (stepping in where Sam Bankman-Fried of FTX has withdrawn), etc. With any leftover money, beyond the obvious aviation items, how about a bus-based RV (about $3 million fully pimped-out). And, of course, a driver. I’d be able to watch Barbie and Oppenheimer over and over while sitting in traffic. And would have a nice place to sleep at Oshkosh!)

Separately, and speaking of Sam Bankman-Fried and crypto glory, how about this Bitcoin criminal who stole $4.5 billion? That’s way more than Mega Millions and he just hung around in New York City for years until he was arrested. From the WSJ:

If you get a lottery-style windfall, but it is illegal, wouldn’t it make sense to move to some country where they won’t extradite?


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How is First Republic Bank different from Silicon Valley Bank?

Readers: Please help me keep these bank failures straight. “First Republic Stock Plunges After Bank Rescue Plan, Dividend Suspension” (WSJ, today):

First Republic Bank shares fell more than 30% Friday after a multibillion-dollar rescue deal orchestrated by the biggest U.S. banks failed to convince investors that the troubled lender is on solid footing.

The move erased the gains that came Thursday, when a group of banks including JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. deposited $30 billion in First Republic in an effort to restore confidence in a banking system badly battered by a pair of bank failures.

“It’s not clear whether it’s viable as a stand-alone entity,” said Julian Wellesley, global banks analyst at Boston-based Loomis Sayles & Co. “So it’s likely, in my view, to be taken over.”

The sudden collapse recently of Silicon Valley Bank and Signature Bank—the second- and third-largest bank failures in U.S. history, respectively—have sparked concerns that anxious customers could drain deposits from other small and midsize banks.

What do SVB and First Republic have in common other than both being supervised/regulated by the San Francisco Fed? Was First Republic as devoted to diversity and inclusion as SVB?

As Congress and the D.C. Fed flooded the U.S. with money in 2020, what was First Republic thinking about? “First Republic Expands Commitment To Diversity, Equity and Inclusion” (August 31, 2020):

First Republic has engaged Management Leadership for Tomorrow (“MLT”), a national nonprofit that equips and emboldens high-achieving Black, Latinx and Native American individuals to secure high-trajectory jobs, while partnering with employers to provide access to a new generation of diverse leaders. The organization’s advisory services help institutions to better foster an environment of success for the underrepresented colleague experience.

“A diversity of backgrounds, opinions and perspectives has always been fundamental to our success,” said Jim Herbert, Founder, Chairman, and CEO of First Republic. “Management Leadership for Tomorrow has a proven track record of success in helping companies find and develop leaders from underrepresented communities.”

Individuals who self-identify as members of ethnic minority groups currently total 48% of First Republic’s workforce, with over 55 languages spoken at the company. Building upon First Republic’s long-standing culture of inclusion and diversity, MLT will provide strategic and tactical support to help further diversify the company’s workforce. In addition, the organization will collaborate with First Republic to enhance colleague and culture development programs that drive a sense of belonging and engagement.

If we count employees identifying as “women” as being in a victimhood class and we consider these 48% who were victims via “ethnic minority group” identification, the majority of the bank’s employees were victims and yet the goal was apparently to go bigger in the victimhood department. Here’s the person who was CEO for 37 years, through 2022:

James Herbert was replaced, in the CEO/COO roles, by a diverse duo:

But what exactly did these diverse executives do to cause the meltdown? And why didn’t the San Francisco Fed notice anything amiss? Let’s check a 2018 New York Times article:

The Federal Reserve Bank of San Francisco has installed Mary C. Daly, a labor economist who currently serves as the head of research, as the institution’s new president beginning Oct. 1. … Ms. Daly, who is openly gay, will become the third woman among the 12 presidents of the Fed’s regional banks. As a senior executive at the San Francisco Fed, she has been a leading voice for addressing what she has described as a “diversity crisis” in the economics profession and at the Federal Reserve. At the San Francisco Fed, she pushed successfully to balance the hiring of male and female research assistants.

Dr. Daly attacked the diversity crisis at the San Francisco Fed, but ignored the insolvency crises brewing at SVB and First Republic? If diverse teams are smarter and more capable and the San Francisco Fed had more diversity than other regional Federal Reserve Banks, why are two of the biggest failures in the SF Fed’s territory?


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The wisdom of juries at the Elon Musk trial

A lot of folks, including journalists, love to concoct ex post facto explanations for why the stock market moved as it did on a particular day. The Elon Musk trial has introduced us to a guy who sounds a lot smarter than most pundits and financial reporters. “Jury Rules for Elon Musk and Tesla in Investor Lawsuit Over Tweets” (NYT):

The federal judge in the case, Edward M. Chen, had already ruled that “funding secured” and Mr. Musk’s second statement were untrue, and that Mr. Musk was reckless when posting them.

“I thought he was crazy to try his chances at trial, given the stakes involved,” said Adam C. Pritchard, a law professor at the University of Michigan, noting the judge’s pretrial rulings. “You’re fighting with one hand behind your back in that situation — and yet he won.”

If he had lost, Mr. Musk and Tesla might have had to pay billions of dollars in damages to investors who said they had lost money when the company’s stock surged after his statements on Twitter and then tumbled after his plan fizzled.

One male juror said their arguments were difficult to follow and sometimes seemed disorganized. “There was nothing there to give me an ‘aha’ moment,” he said, later adding, “Elon Musk is a guy who could sneeze and the stock market could react.”

Let’s check in with the superpundits to see how they did compared to this juror. Dow 36,000 was published in October 1999 when the DJIA was at 10,000. The D.C. insiders authors predicted that the DJIA would be at 36,000 no later than 2004. They were proved correct… in November 2021.

Of course, inflation makes every feel smarter. Despite the higher nominal value (3.4X what it was when Dow 36,000 was published), a basket of DJIA stocks has less purchasing power, in terms of real estate in any part of the U.S. where people actually want to live, than it did in 1999. Let’s check Zillow for some houses in our MacArthur Foundation-created development:

  • overlooking a golf course: sold in February 2000 (before the dotcom crash) for $483,900 and now has an estimated value of $2.04 million (4.2X)
  • a simple townhouse: sold in October 1999 for $192,900 and now estimated at $621,500 (3.2X)

Inflation has actually been far worse than the above examples suggest since, of course, these houses are now more 20 years old and aren’t in the pristine condition that they were when new.

How about Jupiter Inlet Colony, where some migrants recently arrived?

(should be easy to find room for non-English-speaking migrants in the Jupiter Inlet Colony, described in this New York Post article!)

Let’s check in with the intersection of Efficient Market Hypothesis and coronapanic:

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The Lost Bank lesson: Make sure you have a lot of friends in Washington, D.C.

I hope that each of you did his/her/zir/their reading assignment from a month ago, i.e., The Lost Bank: The Story of Washington Mutual – The Biggest Bank Failure in American History.

Now that I have finished the book myself and have given folks a chance to avoid spoilers, a brief post about the end of the book.

It turns out that it wasn’t clear that WaMu had actually failed. Even when it was seized by the FDIC, wiping out shareholders and bondholders, and then sold for almost nothing to politically connected and savvy JPMorgan Chase, the bank may well have had sufficient liquidity under Federal rules. A quiet bank run, in which billions of dollars left WaMu daily, was precipitated by the following factors: (1) leaks from Washington, D.C., (2) the FDIC insurance limit of $100,000 per depositor (almost enough to buy a car today!), (3) consumer ignorance regarding the practicalities of FDIC insurance, (4) consumer reluctance to become embroiled in a process of getting money from the FDIC. If not for the leaks about the regulators’ concerns, the bank run probably wouldn’t have happened and the regulators wouldn’t have been able to seize WaMu’s assets.

We may never know the answer to whether the bank actually met the relevant criteria for being shut down. Kirsten Grind, the Wall Street Journal reporter who wrote the book, gives various estimates for the bank’s liquidity on the day of shutdown but is unable to say which one is correct.

Why is it that 5 banks enjoy roughly half of U.S. commercial bank assets?

Partly this is due to the reasons discussed in the previous post regarding this book. But it is also due to the fact that the government treated some of the biggest New York banks differently than WaMu, only slightly smaller. The NY banks, donors to Senator Charles Schumer, had similar liquidity issues to what WaMu suffered. But they were deemed “systemic risks” a.k.a. “too big to fail” and, therefore, were showered with government money (taxed, borrowed, or printed) that was denied to WaMu. A handful of political appointees and government workers at the Fed, the US Treasury, the FDIC, and the OTS had a tremendous amount of discretion regarding which banks would get bigger and which would be seized.

So in addition to the topics mentioned in my previous post, the book serves as a good example of the importance of lobbying and political donations!


  • “A Champion of Wall Street Reaps Benefits” (NYT, 12/13/2008): Senator Schumer plays an unrivaled role in Washington as beneficiary, advocate and overseer of an industry that is his hometown’s most important business. Mr. Schumer led the Democratic Senatorial Campaign Committee for the last four years, raising a record $240 million while increasing donations from Wall Street by 50 percent. That money helped the Democrats gain power in Congress, elevated Mr. Schumer’s standing in his party and increased the industry’s clout in the capital. Calling himself “an almost obsessive defender of New York jobs,” Mr. Schumer has often talked of the need to avoid excessive regulation of an industry that is increasingly threatened by global competition.
  • Is LGBTQIA the most popular social justice cause because it does not require giving money? (includes photos of Seattle from August 2019, including one in which the truth of the Rainbow Flag religion is proven mathematically)
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How is Snowflake stock doing?

1.5 years ago: Short Snowflake? Looking at SNOW versus the S&P 500 over that period:

SNOW is down nearly 30 percent while the S&P 500, thanks to Joe Biden’s careful stewardship of the U.S. economy, is down 10 percent (but actually that 10 percent over 1.5 years is more like 25 percent once inflation is factored in, a stunning loss of wealth for Americans).

In April 2021, SNOW was valued at roughly 30 percent of the value of Oracle (ORCL), the backbone of business data processing. What is the company’s market cap today, as a percentage of Oracle’s market cap? SNOW is worth $54 billion. Oracle is worth $165 billion. So I think the philip.greenspun.com fact checking department must rate my April 2021 claim as #False. SNOW turned out to be a loser for an investor, but not because 30 percent of Oracle’s valuation was absurd.


  • How did SNOW do versus the S&P 500? (April 1, 2022): “Despite SNOW having gone down a bit, I continue to be mystified by its market cap. … Why is a money-losing company, albeit one with growing revenue, worth $70+ billion?”
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Today’s stock market drama

From May 9, 2022, S&P 500 down at least 6 percent since Joe Biden took office:

Who wants to get bragging rights by calling the bottom on this market slide? I’m going to say that the correct value is 3,200 (pre-coronapanic value) plus 0 percent growth for 2020 when Americans cowered in place and 8 percent growth for 2021. Then add 20 percent for the inflation rate that is experienced by people with enough money to buy stock. So today’s correct nominal value is 4,096. Markets tend to overshoot, though, so let’s take 5 percent off that for the bottom: 3,891.

Today the S&P 500 closed at 3,932, down 4.3 percent after the government released inflation numbers.

Let’s look at the chart:

Not a huge change compared to May 9, 2022, at least in nominal dollars, but the index is down in real terms given the inflation that continues to eat away at savings.

My prediction that the stock market would bottom out at 3,891 was wrong. 3,667 on June 16 was the local minimum. But some of the folks who commented were off by even more, e.g., with a prediction of 2,700 (but on the third hand, I didn’t specify a time interval so it is possible that we will yet reach 2,700).

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The Case-Shiller housing bubble isn’t so bubbly if we adjust for rising rents

“Rising Home Prices Are Mostly from Rising Rents” (Kevin Erdmann) was sent to me by a retired bond fund manager. He starts by noting that the Case-Shiller real estate index, when adjusted for CPI (“real”), shows dramatic apparently irrational price swings. We go in and out of housing bubbles based on sentiment.

The problem with that theory is that rent inflation has definitely risen faster than general inflation for the past 40 years or so. So, instead of adjusting for inflation based on a reasonable theory that has stopped reflecting reality, why not adjust home prices with rent inflation instead of general inflation? When you do, it turns out that prices have become more volatile, but the deceptively compelling long-term flat pattern that suddenly jumps to a higher range isn’t so clear any more. Persistently high rent inflation is driving the rise in the “real” Case-Shiller index.

When the adjust-by-rent system is applied to individual cities, the purchase price of housing looks even flatter. Here the author generates smooth curves fit to data points from 50 metro areas. 2007 does look like irrational exuberance, but primarily in the higher-cost cities (even in 2007, in cities where rent was low, the buy/rent ratio was about the same as in 1991, 2012, 2015, and 2018).

Thanks to the miracle of population growth and the inability of Americans to come up with a cheaper way of building housing…

In Figure 8, we can see that prices are now rising in every city like they were in Los Angeles before. Low rates of building, with constrained lending, means that residents with low incomes are suffering from our policy choices now everywhere.

[Blaming “policy choices” is where I part company with this author, who talks about “systematic, persistent lack of housing production” as though that could be changed with the wave of a central planner’s wand. As I noted in City rebuilding costs from the Halifax explosion, even when land is free and there are no zoning restrictions, the basic cost of building an apartment now exceeds what a couple with two median incomes can afford (maybe the answer is that Americans need to live in throuples?). A simpler explanation is that we’re simply not wealthy enough, on average, to afford the things that we believe we deserve, including high quality housing for 333+ million people. We’re a medium-skill country, trending toward low-skill via our immigration system, demanding all of the stuff that properly belongs to a high-skill country.]

I’m not sure what we should take away from this as investors. The residential real estate market isn’t as irrational as previously portrayed. House prices, like apartment building prices, track rents. But how do we make money unless we have a crystal ball to forecast future rents? The friend who forwarded this to me said that historically real estate provides lower returns than investing in the stock market (but maybe this isn’t true if you consider leverage and the ability to stick lenders with the downside risk while keeping the upside benefit) and real estate ownership carries idiosyncratic risks, such as litigation risk (the owners of a hotel were hit for $26 million because a jury found that a clerk employed by the owners allowed a pervert to check in next to a sports journalist and film her naked (and that she suffered $55 million in damages from this, more than if she had been killed)).

As taxpayers one take-away is that we’re going to be paying the rent for a high percentage of our brothers, sisters, and binary-resisters who either don’t want to work or whose skills don’t yield a sufficient income for housing that we consider suitable for a resident of the U.S.

Speaking of real estate investing, you can’t go wrong by doing the opposite of whatever I suggest. My theory was that Cambridge, Maskachusetts real estate would go up in value once the Followers of Science abandoned their fears, masks, school closures, lockdowns, and vaccine papers checks. When everyone was back at his/her/zir/their desk in the office towers of Kendall Square or the academic buildings of Harvard Square, real estate in Cambridge would catch up to real estate in South Florida. The brilliant minds of the AI software within Zillow disagree, forecasting a down round for Harvard Square:

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Zillow’s inflation forecasts

From February 2022, when we were dumb enough to sign a contract to buy a house:

The market will go up 23%.

In April, when we were dumb enough to close on a house:

The market has gone up a little and will go up 18.3 percent more.

In June, Zillow is busy celebrating Pride Month (from 2020: “They’re bold, bright and one-of-a-kind — they’re the homes we love, Pride-month style. We may not be celebrating together in person, but we’ll never stop celebrating what’s beautiful.”), but the company’s robot still has time to say that the forecast is 14.6 percent:

August 5, 2022, the “typical home value” is up by a staggering amount and the forecast is 7.8 percent more:

August 14, 2022, the “typical home value” is still up (yet houses have seemingly been slow to sell for a few months now and there have been many price cuts) and, with the Inflation Reduction Act nearly signed by the vigorous Vanquisher of Corn Pop, the inflation forecast is down to 5.3 percent:

These forecasts aren’t mutually inconsistent. If we take the starting “typical home value” and inflate it by the forecast 23.1 percent increase we get $647,098 for the expected typical home value in February 2023. If, indeed, the current value is already $627,655, the forecast 5.3 percent inflation rate (to August 2023) will make that happen.

Do we believes these precise forecasts? If so, should Joe Biden ask Zillow to come in and take over the Fed?

Separately, speaking of house price inflation, it occurs to me that the capital gains tax applied to homeowners does not make any sense. Suppose that Dana Dentist, a gender-neutral driller of teeth, purchased a 4BR house for $500,000 fifteen years ago. Dana falls in love with someone he/she/ze/they met at a Pride March in another city. Dana sells his/her/zir/their house for $1.5 million (in 2022 mini-dollars) and buys an identical size/quality house in the new sweetheart’s city, which just so happens to cost $1.5 million. Dana is no better off. He/she/ze/they has exactly the same size and quality of house. Yet the IRS now hits him/her/zir/them for capital gains and Obamacare investment income tax on $750,000 (the first $250,000 of gain on a primary residence is exempt). There may be state capital gains taxes to pay as well if Dana did not live in Texas, Florida, or a similar state.

Note that this wouldn’t happen to a commercial property owner. If he/she/ze/they sold House 1, which had been rented out, and bought House 2 in order to rent it out, the sale/purchase would be done in a 1031 exchange and there would be no tax on the fictitious capital gain until, perhaps, House 2 was sold and not replaced.

What’s the downside of the Feds and states taxing fictitious capital gains? By making moving more expensive, the policy discourages people from moving for better career opportunities and, thus, reduces the overall growth rate of the U.S. economy (not as much as our family law system does, but at least to some extent).

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