I received an e-mail from a reader who brought to my attention the fact that different sectors of the U.S. economy have very, very different records of building wealth for the shareowners, and he shared with me a story of how his father handed him a chart of each sector’s performance as an aid for him as he began making substantial investment decisions in his own life (he disclosed to me that he invested a bit here and there, and then upon seeing his salary go up big time, he was able to start investing $2,500 per month and began to take things more seriously).
In May 2007, the financial sector replaced the energy sector as the largest component of the U.S. economy. Banks, notably Wachovia, Citigroup, Lehman Brothers, Bear Stearns, Bank of America, JP Morgan, and a few others, began employing “high-grade structured credit strategies” in building the real estate portfolios on the bank’s balance sheets.
What that means is this: A bank like, like New Century Financial, would lend $150,000-$200,000 to borrowers with shaky credit histories in order to purchase a $200,000 home. But New Century Financial didn’t just sit on these mortgages and collect the high interest + principal on the payments from the families that had taken out mortgages. Instead, what they would do is bundle these mortgages together—with the thousands of other low-credit quality mortgages in their portfolio—and sell little slices of them to the banks mentioned above. During ordinary and good economic times, and when property values were rising, these loans proved extremely lucrative as these bundled loans would earn returns of 11%, 12%, or 15% per year.
In the 1790s, the Bank of New York and the Bank of the United States issued the first ever stock certificate creations of publicly traded stocks for American banks, water utilities, and railroads. Over 400 businesses were created in America’s first two decades of existence, and eighteen of them had their shares traded on a weekly basis (for the rest, you would have to physically contact the owners and get them to sign over their stock certificates to your own in exchange for cash. This was a massive inconvenience, although it came with the side effect of making people actually understood that buying stock meant ownership, and the inconvenience hopefully led to extra contemplation before buying just any old stock willy nilly).
In 1934, Judge Sutherland of the United States Supreme Court wrote one of the most important opinions in Supreme Court history when he outlined why Americans finding themselves facing unsurmountable debts have a right to a fresh start which naturally includes the discharge of burdensome debt. In the case of Local Loan v. Hunt, 292 U.S. 234 (1934), Judge Sutherland wrote as follows:
“One of the primary purposes of the Bankruptcy Act is to ‘relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunates.’ This purpose of the act has been again and again emphasized by the courts as being of public as well as private interest, in that it gives to the honest but unfortunate debtor who surrenders for distribution the property which he owns at the time of bankruptcy, a new opportunity in life and a clear field for future effort, umhampered by the pressure and discouragement of pre-existing debt…
When someone is first introduced to stock market investing, they will often hear that stocks are supposed to return 10% annually over long periods of time, and this is the reason why it is worth seeing your paper worth fall by 50% at three or four different points over the course of your lifetime. People who are critical of this information say it is misleading because it promotes survivorship bias—the survivorship bias being that the United States is a highly fortuitous country because it spent the past 200+ years transitioning from being a ward of the English empire into becoming a standalone empire with a $17 trillion market of goods. People are right to wonder whether the results of the United States since 1800 are something that the United States can replicate in the future, and/or whether other countries will be able to replicate that success in the future.