The Reality of Returns
Real returns vs nominal returns for perspective on the 8 macro assets
Money does not hold its value. This is why we invest, instead of saving.
We are forced to allocate capital into assets which will actually hold value over time, so that this value can be transferred to our future selves or future generations. The growth of our capital must keep up with the debasement of money, otherwise we are letting our savings deteriorate.
It can be misleading to evaluate assets based on nominal returns, since this does not account for any debasement. For an accurate assessment, we must deflate nominal returns by the amount of new money in the financial system.
In this analysis we determine the reality of the returns of macro assets by evaluating their performance against the rate of monetary debasement. This will give us the historical performance of each asset in terms of real returns.
This is accomplished using real net liquidity which tracks the rate at which the USD is being debased. We use it to deflate the nominal returns into real returns, so that we can see which assets are outperforming and underperforming the debasement of money.
The asset’s performance vs. net liquidity will give us an instructive ratio. If the ratio is rising, that means the asset is outperforming. If it is falling, the asset is underperforming.
We assess the performance of each asset in terms of % change from the:
2007 high
2008 low
2020 high
2020 low
2021 high
Below are the charts of everyone’s favorite 8 — SPX, QQQ, Real Estate, Gold, Oil, Bitcoin, AAPL and TSLA deflated by the true liquidity index:
SPX.
SPX’s real return since the:
2007 high is -62%
2008 low is +70%
2020 top is -23%
2020 low is +28%
2021 top is -8%
SPX is down 62%, 23%, and 8% from the highs on 2007, 2020, and 2021 (respectively).
SPX is up 70% and 28% from the 2008 and 2020 lows (respectively).
Only down 8% this year isn’t too bad. Down 62% since 2007 is terrible.
QQQ.
QQQ’s real return since the:
2007 high is -25%
2008 low is +240%
2020 top is -20%
2020 low is +23%
2021 top is -21%
QQQ is down 25%, 20%, and 21% from the highs on 2007, 2020, and 2021 (respectively).
QQQ is still up 240% and 23% from the 2008 and 2020 lows (respectively).
Stuck down around 20-25% since 2007, despite coming back 240% from 2008 lows.
Down 20% since 2007 is, at best: flat.
Real Estate.
Real estate’s real return since the:
2007 high is -79%
2015 low is +28%
2020 top is -16%
2020 low is +33%
2022 top is -5%
(using data from the U. S. Case Shiller Home Price Index, i. e. USCSHPI on TradingView)
Real estate is down 79%, 16%, and 5% from the highs on 2007 and 2020 (respectively).
Note the (real) low in real estate was not in 2008, but in 2015.
Also note the top in 2022, rather than 2021 — that lag.
Real estate is up 28% and 33% from the ‘08 and ‘20 lows (respectively).
Holding it’s ground down only 5% since 2022 highs.
But still down 79% from the 2007 top and only up 28% from the bottom in ‘08 — real estate is looking horrible.
Gold.
Gold’s real return since the:
2007 high is -72%
2008 low is minus 19%
2020 top is -30%
2020 low is +1%
2022 top is -3%
Gold is down 92% and 30% from the highs on 2007 and 2020.
Again note the top in 2022 rather than 2021.
Gold has been fairly stable since 2020, but has similar performance to SPX and oil going back to the ‘07 highs: very bad
Black Gold.
Oil’s real return since the:
2007 high is -92%
2008 low is minus 39% (only asset down since 08 low)
2017 top is -39%
2020 low is +256%
2022 top is -36%
(using data from USOIL i. e. WTI futures)
Oil is down 92%, 39%, and 36% from the highs on 2007, 2017, and 2022 (respectively).
Again note the top in 2022 rather than 2021.
Oil is still down from the 2008 low by 39%. And flat since then.
On par with SPX and real estate being down bad from the 2007 high: we are going to have to call it no good
Bitcoin.
Bitcoin’s real return since the:
2007 high is [error: did not exist]
2011 low is 247588%
2020 top is -5%
2020 low is +106%
2021 top is -69%
Well that’s just not fair. She started from zero, and was built for this.
Down 69% from a high of $69,000 — expecting next cycle top of $420K, I guess
Apple.
Apple’s real return since the:
2007 high is +196%
2008 low is +1577%
2020 top is +16%
2020 low is +82%
2021 top is -10%
Apple sits at about 200% return since 2007, and down 10% since 2021: not bad
Tesla.
Tesla’s real return since the:
2010 high is +2841%
2010 low is +5103%
2020 top is +138%
2020 low is +285%
2021 top is -47%
Note that the lows and highs used here are in 2010 instead of 2007 or 2008.
Tesla at over 2500% since 2010, makes being down 47% since 2021 somewhat negligible. Overall performance: excellent
These charts clearly show which assets (almost all) are failing to protect the value of invested capital, especially while the money printer is on.
We have terrible, horrible, no good, very bad, and flat. (SPX, Real Estate, Gold, and Oil)
This is particularly concerning because the math dictates that the next round of money printing must be exponentially higher that the last. If the asset performed badly in the 2008 and 2020 balance sheet expansions, what hope is there for that asset to outperform during the next balance sheet expansion? (Hint: none)
The best options we have to protect our earned wealth, based on recent history:
QQQ flat and AAPL not bad
TSLA excellent and BTC outstanding
Now that we have perspective on the real returns of each asset class, it becomes clear why we must not lose focus on Bitcoin and the highest grade single stocks, using a top-down approach.
For those would like to see the comparison all in one place:
Please let us know if you are interested in seeing this analysis on any other macro asset class, stock, or commodity.
Hawking Research does not provide investment advice.