Wealth Effect

來源:Victor Niederhoffer
日期:2010/06/06

A good review of wealth effect to 2002 shows that nothing new was added over 40 years Rip Van Chair was asleep.

Rocky Humbert writes:

I would suggest that any attempt to quantify this relationship based on the history of the past 50 years may be flawed for a wide variety of reasons. Because:

1) Changes in pension plans. An individual's income is allocated between current consumption and investment (where investment is simply deferred consumption.) If an individual relies upon a defined-benefit pension plan, then fluctuations in stock prices will not affect the (perceived) future value of the pension plan. Whereas, if an individual has a defined-contribution pension plan (e.g. 401k), then there is an immediate and visible effect — and short-term price fluctuations may cause an increase/decrease in the allocation of income between consumption and savings. The decline of defined-benefit pension plans over the past fifty years may substantially increase the sensitivity of individuals to asset price changes.

2) Jobs for life. This phenomenon is related to both #1 and #3. The average tenure of employment by a single large corporate employer has declined over the past 50 years. Union and non-union employees at IBM, General Electric and myriad large corporations were accustomed to "jobs for life," and this practice started a secular decline in the 1980's courtesy of Jack Welch at GE, and became the norm when IBM had its first industry-wide layoffs in the 1990's. Even Goldman Sachs never used to fire employees, and this model changed under Steve Friedman and Bob Rubin in the 1990's. The consequences of this strucutral change may have made for a more dynamic/flexible economy, but it should also contribute to a heightened sensitivity by individuals on their job security. I would argue that this phenomenon exacerbates a feedback loop in the economy which was less pronounced 30 years ago.

3) Inflation/wealth effect. There is a measurable (and somewhat illogical) wealth effect when NOMINAL interest rates are extremely low. For example, retiree's hate spending principal, but don't mind spending interest income — even if there is deflation and real interest rates are high. Likewise, I've seen research that show people feel better in a environment of higher nominal returns even if the real, after-tax return is negative. This phenomenon can also be seen in investor preference for high dividend yielding stocks which have a low return-on-equity. (I am guilty of this stock bias too!) I posit that low NOMINAL interest rates were extremely corrosive in Japan, because of this phenomenon, and that contrary to economic theory, had the had BOJ raised short-term rates might have resulted in a counter-logical boost in consumption. Of course, Japan is/was a nation of savers.

4) Changes in expectations. At the end of the 1990's, some surveys showed consensus expected 10-year forward returns on stocks to be 13%. At the depth of March, 2009, similar surveys showed that the expected return was diminimus/negative. I WOULD POSIT THAT CHANGE IN EXPECTATIONS FOR *LONG TERM* FUTURE NOMINAL RETURNS ARE THE CRUX OF THE STOCK MARKET WEALTH EFFECT. If one makes an investment predicated on a 300% return over ten years, and instead realizes a 30% over ten years, it will have a vastly different wealth/consumption effect, than if an investment is predicated on a 30% return over ten years, and realizes a 25% return over ten years. There are two reasons for this: (1) The shift from 30% to 300% (1990's) and then 300% to 30% (2000-2010) requires a one-time huge decrease/increase in the amount of income diverted to savings; (2) There is much less room for disappointment post the reduction in expectations — hence I would argue that there will be less wealth affect with static (low) expectations.

That is, rather than a direct stock price/wealth/consumption effect, one needs to consider the alternative hypothesis that it's really the rise (or fall) in long-term return expectations that we are seeing … and that's both logical, circular and difficult to measure analytically.

Keeping in mind both Keynes and the permanent wealth hypothesis, one needs to accept that much of this is psychological and reflects individuals' long-term confidence.

Just a few thoughts….