#204 How low real interest rates contribute to low returns for stocks and other risk assets. How real interest rates are determined. More information, including show notes, can be found here. Episode Summary Low investment returns are never the best news for financial investors. On this episode of Money For the Rest of Us, David examines the relationships between real interest rates and investment return, who or what is driving real rates, and offers historical information on previous periods of low rates. His insights will shed light on this concerning issue, so be sure to give this episode your full attention. The US and the world are in a period of low real interest rates and real returns University endowments, retirement funds, and individual portfolios are currently affected by low-interest rates and low investment rates. If this continues, overall portfolio values could decrease after adjusting for inflation and spending. In the United States, we have seen an average 6.5% real return on stocks since 1900. The global average for real return rates has been hovering around 5.2%. However, these rates have been lower in the past 2 decades than they have been in the previous 80 years. There’s a linkage between real interest rates and subsequent asset class returns David delves into research on the relationship between real interest rates and subsequent investment returns on this episode of Money For the Rest of Us. He explains that when real rates were higher, the returns were much higher. For example, when real rates reached 9%, real returns on stocks were as high as 10.8%. Today, the real rates hover around 0% or even dip into the negative percentages. The real return for stocks at these rates have historically been just over 4%. What drives these low real rates? After hearing all of this information, listeners may be asking, “So who or what is driving these low real rates? And can they be manipulated to be higher to produce higher returns?” David quotes Former Federal Reserve Chairman Ben Bernanke who explains, “But what matters most for the economy is the real, or inflation-adjusted, interest rate. The real interest rate is most relevant for capital investment decisions, for example. The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. Except in the short run, real interest rates are determined by a wide range of economic factors, including prospects for economic growth—not by the Fed.” Essentially, no group or institution can manipulate these rates. What DOES influence these rates is the balance between those who save and those who borrow. Currently, the world is in a period of high savings and less borrowing, resulting in lower interest rates and lower returns. The tides for these rates will change, in time. Very long periods of time are required to balance out the good and bad luck for investment returns Keep in mind that all of the data discussed in this episode of Money For the Rest of Us are for relatively short periods of time. A recent historical analysis shows that countries have seen periods of negative real returns for as long as 16, 54, and 55 years in the US, France, and Germany, respectively. Still, the long-term historical record shows positive real returns for stocks. It just takes patience. Episode Chronology [1:00] Why are investment returns so low? [11:00] The correlating relationship between real interest rates and subsequent returns [15:40] Who or what exactly drives real rates? [27:17] Returns can deviate from these low interest rates See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

#202 What are the impediments to the mass adoption of electric vehicles. More information, including show notes, can be found here. Episode Summary Over the past few months David has been traveling across the country and throughout the trip, he’s covered thousands of highway miles and seen countless vehicles. This inspired him to ask the question, “Will my next car be electric?” On this episode of Money For the Rest of Us he outlines how the vehicle market is changing, the benefits of electric vehicles over gasoline-powered vehicles, main factors prohibiting widespread adoption of electric vehicles, and the impact governments can have on consumer buying decisions. Conversations behind renewable energy and reliable transportation abound, and you’ll want to listen to this episode for the latest information on this heated debate. Cars are changing: they’re safer, but we’re purchasing less of them In 2017 there were 40,109 reported motor vehicle deaths, down 1% from 2016 figures. The number of deaths per 100 million vehicle miles traveled has been on a downward trend for decades. This is due in part to enhanced motor vehicle safety laws but also refined manufacturing techniques. Cars are getting safer! However, consumers are purchasing fewer vehicles than in years past. Vehicle sales peaked at 17.9 million for the year ending in March 2018, compared to 18 million in the prior year. In 2017 electric vehicles surpassed 1% of the entire market – a nominal figure compared to future projections of 25% of the market being comprised of electric vehicles by 2040. Electric cars are extremely efficient compared to gasoline-powered vehicles Perhaps the most common argument in support of electric vehicles is their efficiency. Popular models such as the Ford Focus Electric and Chevy Volt top the list of efficiency on a kilowatt-hour (kWh) to miles per gallon (MPG) scale comparison. These two models boast 19-20 kWh used per 100 kilometers driven. Conversely, a traditional gasoline-powered vehicle that achieves 20 MPG efficiency requires 131 kWh of energy to travel 100 kilometers. As the world moves towards cleaner, greener, and more renewable sources of energy, efficiency will become an even more important factor in the debate. What’s preventing electric vehicles from being widely adopted? Since electric vehicles are far more efficient than their fossil-fuel powered counterparts, what’s preventing their widespread adoption? David outlines 4 main reasons on this episode of Money For the Rest of Us: High upfront cost Cost of battery Production limitations Limited infrastructure for charging stations New electric vehicles start at around $30,000 and only go up from there. While battery costs are down from $1,000 per kWh of storage to $200, the cost is still prohibitive for many consumers. Battery replacement (while extremely uncommon) could have a price tag of over $5,000. Production lines are currently unable to mass produce electric vehicles at scale, which is an issue that must be corrected if the vehicles are to have a mainstream place on our highways. Finally, drivers must have reliable and widespread charging stations at home, work, and travel destinations in order for electric vehicles to be convenient. How governments can encourage consumers to focus on electric vehicles for their next car purchase Putting data and costs aside, one of the biggest questions David poses on this episode is, “Do consumers want electric cars?” There are many differences between traditional and electric vehicles that consumers will have to adjust to, such as the lack of engine noise, differences in braking, charging routines, etc. For example, David explains that even though the Chinese government offers financial incentives to purchase electric vehicles, consumers are still more interested in gasoline-powered SUV-style vehicles. Countries such as Norway, India, France, and the UK are all making progress towards mandating electric vehicles, and legislation can encourage manufacturers to pursue cheaper and faster production methods. Electric vehicles are here to stay, now it’s a matter of determining how many of them and for how much. Episode Chronology [0:35] David asks the question, “Will your next car be electric?” [4:18] Why are cars safer? [6:44] Cars are changing [7:39] What’s preventing electric vehicles from becoming widely adopted? [22:43] Do consumers want electric cars? [26:58] Government policy can encourage or prohibit adoption of electric vehicles See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.