After my last post, some social justice minded readers asked about the relationship between unhappiness (as measured by suicide rates) and inequality, as measured by the GINI index (recall that the GINI index ranges from 0 to 100, the former corresponding to communist paradise, and the later to ancient Egypt). Luckily, the World Bank, in its munificence, has the requisite data, and so the results were not long in coming.
The reader can see that the least egalitarian countries have the lowest suicide rates. Before we yield to temptation of using this study to yet again condemn socialism, we should note, as before, that correlation does not imply causation, and the countries with the higher GINI all tend to be in South America, and the ones with the lowest in central Europe, so there are many factors. Still, the numbers are what they are. What is particularly interesting is that the GINI index is negatively correlated with the GDP per capita, since the countries with the highest GINI index are essentially feudal, so what we have here are three quantities which are pairwise negatively correlated (not a mathematical surprise, exactly, but still fairly unusual).
John Maynard Keynes had famously said that in the long run we were all dead. The point of the current note is not to argue with the great man, but to add that, apparently, in the long run, economic policy is, in some ways, irrelevant. Our evidence for this is the observation in I. Rivin’s recent paper.
What is looked at is the (dividend-reinvested) return of the Standard and Poor’s 500 stock index for the last 150 years not adjusted for inflation. Here is the graph:
Now, the graph above looks an awful lot like a straight line. To see how much like a straight line it is, there is a regression analysis in Rivin’s paper, and the trend accounts for 99% of the variance! (for the curious, the annualized slope of the line is 0.1035, in other words the expected gain (again, not adjusted for inflation) is 10.9% a year.
The main question this leads to is the obvious: Why is the trend so strong?
The main takeaways are:
Go long when the curve goes below trend, go short when below.
Since (for the third time) the graph is not inflation adjusted, inflation is the real return killer.
To make the last point clearer, let’s now plot the “deflated” returns of the S&P 500 (also in the referenced paper):
The graph is much less straight now (correlation is now “only” 90%, vs 99.5% before), and one can see long flat sections.