Dr. Bryan Taylor serves as President and Chief Economist for Global Financial Data. He received his B.A. from Rhodes College, his M.A. from the University of South Carolina in International Relations, and his Ph.D. from Claremont Graduate University in Economics. Dr. Taylor has taught both economics and finance at numerous universities in the southern California area, and even spent time teaching at Franklin University in Switzerland. In 1990, Dr. Taylor began collecting and transcribing financial and economic data from historical archives around the world, which are now collectively known as the GFDatabase.

Dr. Taylor enjoys analyzing financial markets and authoring definitive articles utilizing data derived from all of the GFD Databases. Today, he continues to compile data from numerous books, periodicals and newspapers, author papers on global current events as they relate to financial and economic markets and personally assist GFD clients in all forms of research, projects and data analysis.

Have you ever wondered how financial markets performed centuries ago or how world events impacted stock prices? Today, we sit down with Dr. Bryan Taylor, President and Chief Economist at Global Financial Data, to unpack the world’s fascinating financial history. Dr. Taylor is known for his extensive work in collecting and analyzing historical financial data that spans several centuries and his valuable knowledge of stock, bond, and commodity market trends, which led to the creation of Global Financial Data. In our conversation, Dr. Taylor shares insights from his extensive research, covering stock and bond returns from as far back as the 1600s. From the impact of the French Revolution on financial markets to the performance of commodities, Dr. Taylor provides a rare view of the long-term trends shaping today’s financial decisions. Learn about the value of historical financial data, its importance for investment decision-making, and how long-term trends can provide insights into future market behaviour. We discuss the creation of Global Financial Data's extensive historical financial database, the challenges of gathering centuries-old data, and the long-term performance of stocks versus bonds. Explore the impact of major geopolitical events on financial markets, the importance of studying historical market trends for modern investment decisions, and how his data-driven research has been utilized. Join us as we delve into the world’s financial history and its relevance to today’s investment landscape with Dr. Bryan Taylor. Tune in now!

Key Points From This Episode:

(0:03:41) Background about Global Financial Data, their data sources, and the challenges of collecting historical data.

(0:09:27) What he finds fascinating about historical data, who uses the database, and the role of historical data in financial decision-making.

(0:14:49) How stocks have performed relative to bonds throughout the financial records.

(0:17:34) Uncover the main historical factors that limit returns and increase risk for investors and the five financial eras.

(0:23:18) Explore the trends in stocks and bonds during the five financial eras and the impact of government debt and inflation on returns.

(0:29:04) Common characteristics of countries that have had bad long-term market outcomes and the effect of world events on markets.

(0:35:11) Learn about the best and worst-performing markets and what makes the US market so resilient.

(0:38:36) His outlook for stocks and bonds and how the recent bear market compared to past market upheavals.

(0:41:36) Compare past and current interest rates and the return on commodities versus stocks and bonds.

(0:46:20) Overcoming the lack of historical data for emerging market returns and what defines an emerging market.

(0:52:29) Find out how emerging markets have performed throughout history and how often they make the transition to developed.

(0:59:04) Unpack the historical market concentration in the US and his thoughts on the expected returns of the US stock market.

(1:03:42) Final takeaways and Dr. Bryan Taylor shares his definition of success.

Read The Transcript:

Ben Felix: This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We are hosted by me, Benjamin Felix, Portfolio Manager at PWL Capital, and Mark McGrath, Associate Portfolio Manager at PWL Capital.

Mark McGrath: Welcome to episode 324.

Ben Felix: Another excellent conversation, this time with a serious deep dive into historical data. When I say that, people might think like, “Oh, yeah. We're going back to 1900, or something like that.” But no. I think the furthest back we talked about data was about 1200 for gold, but we talked about stock returns going back to the 1600s. Pretty interesting. We're speaking with Dr. Bryan Taylor. He's the President and Chief Economist at Global Financial Data. Anyone who does financial markets research would be familiar with the GF database. It's a subscription product that has incredible amounts of historical data for stocks, bonds, commodities, individual stocks, as well as stock indexes, and it comes from this guy that we spoke to, Dr. Bryan Taylor.

In 1990, he started hand-collecting and transcribing financial economic data from historical archives. He talks about it in the conversation. He's going into the library, writing down the numbers.

Mark McGrath: If he's in a different city, he goes into that city's library.

Ben Felix: It's crazy. He's hand-collected a bunch of data, then he's augmented that with data that other people have collected doing research in different academic institutions. It comes together in this just incredible resource, where as a user of the product, you can just see how did stocks perform relative to bonds from, I don't know, 1704 to 1820. The fact that the database exists is super cool. We did talk about that a little bit. What makes Bryan very interesting to talk to you for anybody making financial decisions today is that he has done a ton of papers. I mean, he's so familiar with the data, because he's literally hand-assembled it.

He's done these great papers where he just looks at historical time periods and asks questions about what happened when circumstances in the world were like this? How did stocks perform relative to bonds? What is the very long-term history of performance for emerging markets versus developed markets? How have commodities performed over very long periods of time? I don’t know. Just interesting questions, but thousands and thousands of pages of papers, where he's sat down and crunched the numbers on this stuff. That's what we talked about with him today.

Mark McGrath: That was great. Some really interesting insights, and I think my favourite question had to do with what types of events occur that limit returns geographically. Like, in certain countries in the data, what has happened that had stopped countries from getting really high returns? He's put a really interesting framework to that, so that was probably my favourite part.

Ben Felix: The stuff that you just don't think about. We asked him one question about the French Revolution in 1789. How does something like that affect the stock and bond markets? I don't know who else you could ask that to. He is an economist. He's got a Ph.D in economics. He's taught finance and economics at a bunch of different universities in Southern California. He taught at Franklin University in Switzerland for a period of time. But then he's just got this incredible historical knowledge from spending the time putting these data together and clearly, a passion and an interest in it. I think he says during the conversation, over 1,000 published academic papers have used their data, and he's the source, so I think that's enough for an introduction. Anything else to add, Mark?

Mark McGrath: Very interesting conversation.

Ben Felix: All right, let's go to episode 324 with Dr. Bryan Taylor.

[INTERVIEW]

Ben Felix: Dr. Bryan Taylor, welcome to the Rational Reminder Podcast.

Bryan Taylor: Thank you.

Ben Felix: Super excited to be talking to you. To start and just to give our audience some context, what is Global Financial Data?

Bryan Taylor: Global Financial Data (GDP) is a database of historical financial data. What we have done is we've both used current sources for the data, such as S&P, or the Dow Jones, or government information on GDP, and then what we've done is we've gone back and collected historical data from newspapers and magazines and put them into an electronic format. Then also, a lot of professors and researchers have collected historical data, and then we've combined that with the current data.

Whereas, if you were to use most sources such as Bloomberg or someone else, they might go back a few decades, but our data goes back a few centuries because we have collected data from newspapers, from the 1600s, 1700s, 1800s, and so forth. If you want to look at multiple business cycles, you can come to our database and see how the stock market has performed, or interest rates have performed, or GDP over 20, or 30 different bull and bear markets to get a feel for it. If the current market is doing something different from the previous centre 20 years, you can go back to the 1800s, or the 1700s, or the 1900s and make a comparison to try to understand what could possibly happen in the future.

Mark McGrath: Can you expand a little on where you get the data to build your product?

Bryan Taylor: What we've done is gone to many of the libraries throughout the world. When we started global financial data back in the 1990s, that was our primary source. We would go to all the libraries in California. If we were in London, we'd go to the libraries in London and so forth in order to make xeroxes of the books that were in the library, and then hand enter them into a database in order that was available.

Nowadays, it's more difficult, because a lot of the libraries have put their books out in storage. You actually have to go to the library, request the book, and then get it in there. It's just made it very complicated. Before, you just walk through the stats and find the book that you need. However, in the meantime, a lot of the data has gone up online. If you go to the central banks, or if you go to government statistical agencies, they have either done their own historical research and made that data available, or they put their statistical publications up available online. We're able to combine the best of both worlds because we were able to get statistical magazines and newspapers from the libraries, and then now we can get the same resources online in order that we can obtain the data.

If we're looking at individual stocks, we go to historical newspapers, like the London Times, the New York Times, or perhaps, any other newspaper that's the prominent newspaper of record in that particular country. Or there are statistical publications made by the central banks, or there's research that people have done in which they have gone to the historical sources. We try to find the data from every resource that's available and combine it.

The goal is our customers don't have to spend time doing research. They can just spend their time doing the analysis, and they don't have to worry about, “How do I get that data? Does it go back far enough?” It's just there for them. That's our goal.

Ben Felix: Can you talk about some of the challenges with collecting data on the really distant past?

Bryan Taylor: Well, interestingly enough, it's more the data from the 30s, 40s, and 50s is more difficult to collect because there are copyright laws that anything from the 20s, or before is out of copyright. It can be made freely available. You have had the trust, and you have Google Books, which made an effort to xerox a lot of these books from the 1800s and the early 1900s and make them available. There, we can actually go to have the trust, go to Google Books, search for the books, get information from them, and then copy it down and put it in. It's just a matter of coordinating all the resources or finding the resources. Sometimes there will be a statistical agency which will publish all of the stock data for their particular country. Others won't.

In a way, we're dependent upon what research agencies have done in collecting and making the data available. If they haven't made that available, then it's going to be more difficult. Right now, anything from the 1930s, 40s, 50s is under copyright. You have to go to the library. They can't make it available online.

The challenges are coordinating all of the data resources, getting it, and that's why we relied to a large extent on other researchers who have access to the data in their own particular country and have put it together.

Mark McGrath: What have been some of the most exciting discoveries, event in the data?

Bryan Taylor: All of the stock data that we've been able to collect and the people who've done the research to collect that. For example, we have data from the East India Company, from Amsterdam, from the 1600s. Someone went back and collected that data and made it available. In the 1700s, you had the course of the exchange, which was published in London and recorded all of the prices of stocks that were traded on the London Stock Exchange during the 1700s and into the 1800s. Then you have the London Times. It's just interesting how much data is available, and what we want to concentrate on our different series, so that we can make a long-term analysis of the data, rather than just a little data here and a little data there, we can combine it all together.

Then in the United States, there are just many publications that are available. There's not one thing in particular. It's just the whole compendium of the data that we've been able to put together, that's been really amazing and really interesting.

Ben Felix: Do you have a sense of how many published academic papers have used your data?

Bryan Taylor: Oh, well over a thousand.

Ben Felix: Oh, wow.

Bryan Taylor: We've done research on that. There are ways that you can search on Google Scholar and other resources for people who have used our data. Yeah. I mean, it's well over a thousand. It's not only the research papers, but mutual funds, the pension funds, they all use our data on a regular basis, and that's why people subscribe to our data, because they want to update the data on a monthly basis, but have a long-term series that they can rely upon. It's been used by Nobel Prize winners, by people at all the major Ivy League colleges, all the major universities in the world, they're all subscribers to our database. As well as the central banks and they all use it for their research.

Ben Felix: Incredible.

Mark McGrath: How useful do you think the data from the very distant past is in making investment decisions today?

Bryan Taylor: Well, I think it's very useful. I mean, a lot of people would say, “Oh, that's old data. We don't need it.” The real drivers of people's investment decisions are greed and fear. Those don't change. People were greedy and full of fear back in the 1600s, same in the 1700s, the 1800s, 1900s, and today. What you want to do is go back and study when this event happened, such as the Napoleonic Wars, or World War I, or World War II. How did people react to that? When the stock market was overvalued, when it was in a bubble, how did they react? When there was a depression, when you had a bear market declining by 90%, how did people react?

What you're doing is you're studying people. You have a large collection of data that you can study. I mean, if you look at the stock market from the 40s until the 2000s, you had what I call the interest rate pyramid because interest rates started at around 2% or 3% back in the 40s. Went up to 15%, 18% in the 1980s, and then have declined since then, until they went down to 1% or 2%. You had a pyramid going up with the interest rates down with the interest rates. That's not going to repeat itself.

If you're saying, “Oh, you just have to look at the most recent past.” No. The most recent past of interest rates is not going to repeat itself. You have to go back to a period of more stable interest rates in the 1800s, study how markets behave then and apply that. That's why it's important to have the long-term histories is that you can look at multiple types of financial markets to understand what were similar to and how the markets reacted, how the fear and greed fed into people's decisions.

Ben Felix: I agree with all that. We've talked about historical data on this podcast in the past, and sometimes we get this objection that the world is just so different, that data from 1900 or earlier just can't be useful. What do you think about that objection?

Bryan Taylor: I disagree. There's a lot of similarities. You can focus on the differences, or you can focus on the similarities. I mean, you can say, okay, we've never had AI before. We're completely different from the past, but what about when the Internet came in? That was something that was similar to the AI and the way that money just has poured into it. Now, people are having second thoughts.

You can look at that for any number of industries, or automobiles, or electricity, or semiconductors. It's your choice. You can focus on the similarities or the differences. I choose to focus on the similarities because you can learn from it. If you want to say, “Oh, things are different. You're not going to learn from the past. You're going to make mistakes.” That's their choice.

Ben Felix: I want to spend some time now on financial market history, which you've done a ton of incredible writing on based on your data. Can you talk about how stocks have performed relative to bonds throughout the full history that you have data for?

Bryan Taylor: What we have done is we've looked at several centuries of data, or the relative performance of stocks and bonds. Now, if you look at what other people have done, Ibbotson was the first to do this. His data went back to 1926. Then Marsh and Dimson, they went back to 1900. What we have done is we've gone back to the 1600s and the 1700s to compare, just so you could have plenty of history. Now, what it's shown is that on average, stocks outperform bonds. There are periods when bonds outperform stocks, but it's the exception, rather than the rule.

I would say that stocks outperform bonds about 80% of the time. What we have done is we have looked at not only the United States but other countries of well to see how they perform. Now, if you look at other countries, the bonds were not always risk-free. There are a lot of periods when countries defaulted on their bonds and you have to take that into consideration. If you look at the long-term returns, in the United States, for example, bonds have returned approximately 4% over time and stocks have returned about 7% over time. If you're looking at the long-term, there's about a 3% difference in the returns.

Now, by having the long histories going over several centuries of data, you can focus on specific time periods. If you just look at over 100 years, what was the return, you'd miss the subtleties of why, in some cases, stocks outperform bonds, or vice versa. We have done decade-by-decade analysis to find exactly under what circumstances stocks outperform bonds and under what circumstances bonds outperform stocks, or the returns were similar. That's the benefit of all of the analysis that we've done. I've written several papers that are up on the SSRN, in which you can explore that and benefit from the analysis that I've done.

Ben Felix: They're incredible. They're dense. There's a ton of information in each one of them, but they're absolutely fascinating to read through. I just want to ask one follow-up question. You mentioned stocks outperform bonds about 80% of the time throughout history. What time period is it over? Is that a rolling 10-year period, or 20-year period?

Bryan Taylor: Over a 10-year period, yes.

Ben Felix: Okay.

Mark McGrath: Interesting. What are the main factors through history that limit returns and increase risk for investors?

Bryan Taylor: I wrote a paper and I called it ‘France and the Four Horsemen.’ You have the Four Horsemen of the Apocalypse. There are the things that can bring doom and gloom to the world. I said, well, what about financial markets? What are the Four Horsemen of the financial markets? What I did was I chose four factors, which affect returns dramatically, reducing returns. Those four factors that I focused on were war, inflation, socialism, and autarky. Whenever you have any of those four factors, returns, both to stocks and bonds decline. If you want a world in which returns are higher, and given the degree to which individual investors are invested in stocks and bonds, I mean, almost everyone has their retirement accounts in stocks and bonds, they want returns to be higher.

What you want to do is look at what are the factors that have caused stocks and bonds to do well and what's caused them to do poorly. Just the opposite of each of those is what causes financial markets to do well. When there's no war, stocks do better. When there's no inflation, both stocks and bonds do better. I mean, the inflation affects the bonds more than the stocks, because high inflation, hyperinflation is just wiped out, fixed income investors in numerous cases.

If the government is intervening in the market, taking over the markets, they eliminate returns. I mean, look at the Soviet Union, and Eastern Europe, after World War II, they just closed down the stock markets. People lost everything. Even the threat of the government intervening, forcing people to sell their assets and convert them into bonds, is going to limit the returns on the stock market.

Then finally, you have autarky, which is the desire of a country to reduce things themselves, rather than relying upon international trade. Periods of autarky have led to lower returns, something which I hope both of the presidential candidates would understand, but they need to do that.

Ben Felix: That's super interesting. How do you describe the five financial eras that we've seen over the last 400 years?

Bryan Taylor: The five financial eras are the periods of time in which the financial markets have evolved. The first one is what I call the financial renaissance, which goes up to 1600, in which you really didn't have organized financial markets, but you did have some stocks, you did have some bonds, you had currency exchange rates, and you had commodities. The foundations for markets were late. Then you had the period of mercantilism, which went from around 1600 up until the Napoleonic Wars. That's when you had the first organized stock exchanges in London, Amsterdam, Paris, and you had formal trading of stocks and bonds for the first time in history.

Then after the Napoleonic Wars, you had what I call the period of free trade, in which you had dramatic growth in the financial markets. Because with Great Britain running the financial system through the British pound, they favoured free trade. Each country was able to take advantage of that. You talk about emerging markets today, but during the 1800s, emerging markets were located in London, because the local capital markets were not developed well enough to raise capital, but London was there and they wanted to invest in the rest of the world. Amsterdam was the same way. You had dramatically high returns and growth in both stock and bond markets during the 1800s up until World War I.

Then when World War I hit, everything changed. Instead of having free trade, countries were fighting wars with each other. You had the Great Depression. You had governments trying to run the financial markets, very poorly. If you compare the returns between the period of 1914 to the 1970s, they were much lower than they had been during the period of free trade between 1815 and 1914. That just goes back to what I call the four horsemen of the financial markets. You can see how those factors reduce returns to shareholders and bondholders during most of the 20th century.

Since the 1980s, we've had a period of globalization in which all the world's financial markets have been integrated into a giant world financial market. Computers have contributed to that significantly. Countries, they closed their stock and financial markets, such as Russia and China now have opened them up. It's a different world. What we have to do is just focus on continuing globalization of markets and not pulling back from it and going back to the mistakes that were made during the 20th century.

Mark McGrath: Can you talk a bit more about how the returns on stocks and bonds vary across those eras that you just talked about?

Bryan Taylor: In the period of free trade in the 1800s, the returns to stocks and bonds were fairly similar. At that point in time, people were primarily investing in bonds, rather than stocks. The equity risk premium, which is the difference between the returns on stocks and bonds, was very, very small because money could easily flow from one country into another from stocks into bonds, and so forth.

During the period of the, what I call, Kantianism of the World Wars, there were dramatic differences between countries, because the markets were separated. They were no longer integrated. A lot of the fixed-income investors got wiped out by inflation. They lost everything that they had. Similarly, during the wars, there were a lot of losses. The similarity in returns that you had during the period of free trade in the 1800s was completely eliminated. People were dependent upon what the government's decisions were and that affected the returns.

A lot of people got wiped out when the Communists came in and closed down the stock markets. People were wiped out completely. Now, I hope that governments have learned the lessons of those mistakes, and you have had higher returns since 1980 than you had during most of the 20th century, as a result of freeing up the markets and enabling people to invest in new industries and new technologies.

Ben Felix: Can you map where we are now to one of the past areas? What era does it look like we're in today?

Bryan Taylor: Well, I would compare us more to the period of free trade during the late 1800s and the early 1900s. The reason is simply that if you look at all the financial markets, they've grown dramatically. They have a lot more freedom than they had during most of the 20th century. All of that has increased the returns. If you look at the returns since 1980, they've been dramatic in every country in the world as each country has freed up their financial markets. The fear that I have is that we move more towards autarky of countries producing goods within their own country and putting up barriers to trade, which ultimately, will reduce growth and reduce returns to the stock market.

We had a period between 1980 and 2020 when governments pushed down interest rates. But then, they jumped back up after 2020, causing large losses to fixed-income investors. What we're looking at here is a period of relatively flat on yields and interest rates and not the interest rate pyramid that happened between the 40s and the 2020s.

Mark McGrath: Can you talk more about the relative importance of the stock and the bond markets and how they've changed over time?

Bryan Taylor: The stock markets are much more open. You have global trading to the extent that you never had before. Stock markets really are open 24 hours a day. As you swing around the world, same with bond markets. The primary fear is that with the bond markets, there's too much debt in that some of the countries may overload themselves with debt. With interest rates increasing, that would make it much more difficult to pay the interest and the principal on the debt that's due. Now, I don't think we've reached the point yet where we have to worry about that because if you look at the past, there are several cases where government debt has been twice GDP; Britain during the early 1800s and then Japan currently.

It shows that even though there's a lot of fear of there being too much debt, that we haven't reached the breaking point yet, in my opinion. Same with the stock market. Even though the stock markets have increased in price. Stock markets as a share of GDP have grown dramatically, I still think there's room for expansion.

Ben Felix: What about the effective government debt on country stock returns?

Bryan Taylor: I think that's only relevant when the government is limiting access to the stock market. I don't think they currently, they're doing that. The concern is that if too much money flows into the bond market, the stock market is squeezed out when there's not enough funds available for them. I don't think we reached that point yet, but it is a matter of concern that too much money could ultimately flow into the bond markets. I mean, if you look at the United States right now, our deficit as a share of GDP is 7%. It should only be that during a period of wartime. There's no restraint on the deficits. That is a fear that we have.

Ben Felix: Really interesting. Government debt being high is probably not great, but we're not at levels that people should be super worried about yet. Is that right?

Bryan Taylor: Correct. That's what I would say. I hope I'm correct on that.

Ben Felix: Me too.

Mark McGrath: Same. I think you've probably answered this with your comments about the Four Horsemen, but what are the common characteristics of countries that have had bad long-term market outcomes?

Bryan Taylor: It would go back to the Four Horsemen. I mean, if you look at war, countries when they're involved in wars on their own territory have mass destruction. I mean, look at Germany during the 1940s. The country was just completely decimated, and their stock market at one point declined by 90% as a result. If you look at all of the countries that were involved in World War I directly, their returns were lower than countries where that wasn't true.

I mean, if you want to say which countries have had the highest returns, well, the highest returns have actually gone to countries that were not directly involved in wars. The United States, Australia, and Sweden, Switzerland, those countries that stayed out of the wars, or the war didn't take place on their territory, they were the countries that have provided the highest returns. Low returns have gone to countries that were directly involved in wars. Japan, for example, during the 1940s, Germany during the 40s, and so forth.

It wasn't just the destruction that came from the war, it was the limitations on investment which occurred as a result. Because during a war, the government wants to throw all their resources at the war. They issue huge amounts of debt and they place restrictions on the stock market, so money cannot flow into the stock market, but flows into the bonds that they're issuing. That naturally is going to limit the returns. Then after the wars, you had inflation, hyperinflation, and that wiped out the bondholders in each country.

Similarly, if you look at the communist countries and how they destroyed their stock markets, that obviously hurt investors. Then countries that pursue autarky. I mean, most of Latin America has tried to produce things themselves and they haven't succeeded. Just go back to the Four Horsemen of the financial markets and you can determine exactly what are the factors that cause returns to be lower, or to be greater.

Mark McGrath: Just to follow up on that with respect to your comments on war, you mentioned some of the best-performing markets in the world. Australia has been largely absent from global wars, but you also mentioned the US and I think a lot of people consider the US to be very much involved in historically many of the wars, but they've also had exceptional performance as far as the stock market goes. Can you maybe just delineate there?

Bryan Taylor: Well, the difference is the wars didn't occur on our territory.

Mark McGrath: That's really the main differentiator.

Bryan Taylor: That's the main difference. The wars were fought outside of the United States. It pulled us out of the Great Depression, because we basically took tens of millions of people, put them in effort to fight the war, and so we had high returns as a result. Also, you want to look at technology. I mean, if you want to understand emerging markets versus developed markets, I think that during the past 30 years, the United States has been the technological centre of the world. People back in the 80s and 90s thought, “Oh, emerging markets have large opportunities for growth, simply because they have lower incomes.”

It's in the United States that you've had these global companies that stretch throughout the world, Google, Facebook, Apple, and Amazon, they're all global companies that can take advantage, not only of developed markets but emerging markets. That's why if you compare the rest of the world with the United States during the past 20 years, US has far outperformed all the other countries. Emerging markets haven’t really budged during the past 10 or 20 years while the US has grown dramatically.

It's both a combination of the fact that war was not on our territory. We're able to make technological advances as a result of the wars and other factors, and then exploit that to increase the rate of growth in the United States.

Ben Felix: You talk about examples, like Japan and Germany. I've seen those data. Big losses. It's pretty crazy. How does something like the French Revolution in 1789, how does that affect stock prices?

Bryan Taylor: What happened during the French Revolution was that the revolutionaries closed down the stock market, and then they completely reorganized the bond markets. If you were holding a bond, first off, during the French Revolution, they went through hyperinflation with the assignats, which they issued. That wiped out the bondholders. When Napoleon came in to reorganize the markets, people got one-third of a bond, basically, for their old bonds. That creates a 67% loss.

Similarly, all of the corporations were closed down and they had to reopen. Basically, they had to start from scratch. In fact, if you look at all of the countries in Europe during the Napoleonic Wars, the only country which did not default on their bonds was Great Britain. Every other country failed to make interest payments or reorganize their debt causing large losses. Again, if you look at the performance of the French stock market, you can see when Napoleon was captured when he lost Waterloo, the French stock market declined dramatically. Whereas, the British stock market rose in value and you can keep track of those particular changes. To the extent that the French Revolution hurt the economy of France, it provided lower returns to the investors.

Mark McGrath: Can you tell me what the best-performing stock market has been? Which countries, stock market rather, has been the best performing through history?

Bryan Taylor: The United States.

Mark McGrath: What about the worst?

Bryan Taylor: Just looking at the developed markets, it's generally been the southern European countries. Italy, for example, has done very, very poorly. I think that if you had invested in Italy during World War I, you would have ended up basically, losing money. Spain and Portugal have done poorly. Greece has done poorly. It's interesting that the countries along the Mediterranean have not done that well. Then, of course, the countries that got wiped out in Eastern Europe did poorly.

Mark McGrath: Just going back to the best-performing market being the US. I don't know if you can answer this. Is it recent that the US overtook another country as the best performing? Because I've seen data, I think, this is maybe in 2022 I was looking at this, but the US, I think, was second or third in local currency in terms of the best-performing stock markets in the world. Has that been true, or was I looking at incorrect data as far as you know?

Bryan Taylor: No. If you're looking at long-term returns, the United States has consistently provided higher returns than any other country.

Ben Felix: How special is the US market? I understand, as you just said, that it's been the best-performing market, but is it close? You mentioned Australia earlier. How far off is a country like that?

Bryan Taylor: The Australian returns are a little bit below the US returns. If you're comparing, for example, the United States and Europe, I believe that the average return to US markets per annum are around 7%. Whereas in Europe, it's around 5%. Now, if you come path over 100 years, that's a tremendous difference.

Mark McGrath: What's the longest bear market been for US stocks?

Bryan Taylor: Well, the longest bear market actually occurred in the early 1800s. The reason for that was that at that point in time, most of the investments were banks and insurance companies. They simply paid out all of their dividends to the shareholders, and they weren't focusing on increasing the price. You look at a company like Berkshire Hathaway, they don't pay out any dividends, so naturally, their stock price is going to increase. As a result of that, there was a declining bear market from the 1790s to the 1830s, but only measured in price of the stocks.

If you measure total returns, then they had a positive bull market. It was mainly differences in the types of stocks that did that. Once the railroads came into existence in the 1830s and 1840s, then the prices of the stocks would start to increase and they increase ever after. Even though that's the longest bear market, it was as a result of the way that the dividends were paid and the money was reinvested more than anything else. If you're looking at what was the steepest bear market, it was definitely the Great Depression, for 1929 until 1932 when stocks declined by over 80% in the United States.

Ben Felix: What are the lessons from studying history suggest about expected stock and bond returns today, the way the world looks today?

Bryan Taylor: Obviously, it depends upon a lot of factors. But I would say, that the returns to stocks and bonds are relatively safe at this point. Stocks will probably outperform bonds. You had a dramatic decline in the bond market in the early 2020s. But now the yield on bonds is around 4%. I think it's going to stay at that particular level. The Fed has made a real effort here to control inflation. Looks like they've been successful. Then in the stock market, you have a lot of opportunities for growth. During the rest of the 2020s, stocks will outperform bonds. Assuming that we don't close up foreign trade, I think there will be a lot of opportunities for growth, but that would be the fear that whoever's elected president in November would try to restrict trade with the rest of the world and hurt the economy. Arring that, I think you're going to have barely steady returns for the rest of the decade.

Ben Felix: How bad was the recent bond bear market relative to historical bond bear markets?

Bryan Taylor: It was the worst in history. If you're looking at successive years, there were three years where the bond market declined, and that had never happened before. More like two and a half years. It was the civil war in which there was a similar decline, but it wasn't even close, because bonds lost basically 20%, because interest rates went from on the 10-year bond, one-half percent up to almost 5%. The yield on bonds and the price on bonds are universally related. If the yields go up, price of bonds go down. Yields go down, price of bonds go up.

Since the yield on bonds had declined from 1981 to 2020, it was golden years for fixed-income investors. You had the worst bear market in bond history in those two years of 2021 and 2022. There's no getting that back. If you look at any chart of total returns, you can see that you've had a decline, so that people were pushed back to where they had made no profits in bonds in 10, or 15 years. It just wiped it out completely. It was the worst in history. But I don't think that a similar bond bear will occur, simply because the only thing that can cause a bear market in the bond market is rising interest rates. Barring rising interest rates, that won't repeat itself. It's done. It's history. Move on.

Mark McGrath: How low were interest rates in recent history relative to the longer-term history of rates?

Bryan Taylor: They were the lowest they'd ever been in history, absolutely. I mean, in Europe, you had negative interest rates for bonds in Germany, Switzerland, and some of the other countries. In the US, the low point was about one-half of one percent. That was an anomaly when it went below 1%. But interest rates, if you look at them over the long term, over a period of several centuries, have been on a downtrend, and that's because the riskiness of bonds has declined over time.

Consequently, even though bonds in the United States paid for 5% back in the 1800s, they came down to 2% or 3% more recently. But they were the lowest in history. Will they ever get back to negative rates? I doubt it. I certainly hope not. I hope we can maintain a more steady interest rate and bond yield environment. I think that was an anomaly because the central banks were trying to fight unemployment by keeping interest rates low, but they found the cost of it. At some point, markets have to adjust to their natural levels, and the bond bear market was the cost of doing that.

Mark McGrath: What about commodities? How have commodity returns compared to stock and bond returns throughout history?

Bryan Taylor: Commodity returns have been lower. I mean, if you look at something like gold and other commodities, they basically kept up with inflation. But have they provided a superior return? No. There are periods when commodities have done well. But for the most part, if you look at stocks, bonds, bills, and commodities, commodities and bills keep you up with inflation. Bonds provide a higher return of about 2% over inflation, and then stocks provide a return of about 5% over inflation. That's just a general rule of thumb. Not going to occur all the time. But if you're looking at the long-term histories, that's going to be the general rules of thumb that you can use.

Ben Felix: How far back have you looked at commodity returns? Gold, for example, when you say, it's kept up with inflation since when?

Bryan Taylor: Well, our data on gold goes back to the 1200s. Up until the 20th century, gold was the standard for the financial markets. If the financial markets were suffering inflation, the price of gold would have to adjust to that. If you want to look at gold, for example, it was the standard up until the 20th century. Then the price of gold was repressed during most of the 20th century. It was released in the 1970s when free trade in gold was allowed to recur. Since then, gold has bounced back. It's a hedge against inflation, but it's not a perfect hedge against inflation. Sometimes it moves up faster than inflation. Sometimes it doesn’t.

Ben Felix: I find gold to be really interesting. I've seen the super long-term data, too, and the comments you just made have always made it hard for me to interpret it in terms of expectations because, say, it's been inflation returns since 1200, but a lot of that's because the price was controlled. Do you think on expectation, is gold expected to give inflation returns?

Bryan Taylor: I think so. I mean, if you look back over the long term, you really did not have any inflation up until the 1500s. Then you had the inflation that occurred when a lot of the silver from the new world flowed into Europe. You had inflation there. After that, most of the inflation occurred because of war. You had inflation during the Napoleonic Wars. You had inflation between World War I and World War II, and then after that, primarily because of the central banks. I would say, gold is a hedge against inflation. I think, if you want to look at investing, you're going to do better putting your money in stocks and bonds rather than your gold.

Ben Felix: It's a hedge against inflation over long periods. But like you mentioned before, it can be pretty volatile over short periods.

Bryan Taylor: Yes, definitely.

Ben Felix: Your paper on emerging markets, it's so good. It's so cool how you were able to construct the data series. How did you address the lack of historical data for emerging market returns?

Bryan Taylor: Like I mentioned earlier, the emerging markets really existed in London during the 1800s, early 1900s. I mean, the emerging markets didn't really come into existence until the 1980s. No one talked about them until then. If you want to look at the markets back in the 1800s, they were colonial markets. England had its own colonies and invested in them, as well as South America. Then France invested in Eastern Europe and in Africa and other countries. There weren't really emerging markets. There were colonial markets. Anyone who wanted to raise money for investment in South America, Australia, any of the countries where England was, especially India, they would go to London and they'd raise the money in London, then they would take it back.

If you want to know how we put together data on emerging markets, we relied upon the investments that were made in London during the 1800s and the early 1900s. At one point, Egypt was a major market, but that was primarily because of the Suez Canal and the money that flowed into it. You can look at almost any country in the world and see how money was invested in that particular country through London, Paris, Berlin, New York, and other countries, and we're able to put that together.

After World War II, again, you didn't think of emerging markets. You thought of the first world, which was the capitalist countries, the second world, which was the communist countries, and the third world, which were all of the non-European countries, which were emerging away from being colonies and becoming independent countries. A lot of them closed down their markets, and going back to Egypt as an example, they completely closed down their stock markets in the 1960s, because of nationalists. You had the same thing in India. India nationalized. There was a very large degree of nationalization during that period of time, not only in the emerging markets but in the US as well.

It was only in the 1980s, like I said, that people thought of emerging markets as an alternative to the developed markets. A lot of the good data is available since then because that's when a lot of the countries introduced stock markets in those particular countries. And so, you have much better data on them. That's basically how we put together the long-term emerging market data, as we relied upon the information for investments in London and other stock markets.

Ben Felix: The countries that didn't have stock markets, people were raising capital in those countries on foreign stock markets. You're able to take that data and use it to construct a return series.

Bryan Taylor: Exactly.

Ben Felix: Super interesting.

Mark McGrath: You touched on this a little bit, but how do you classify an emerging market in your data?

Bryan Taylor: I mean, it's really MSCI, S&P. They're the ones who make the decisions about what's an emerging market and what is a developed market. They do it basically, dependent upon GDP of the country. You have had some countries that have graduated from being an emerging market to being a developed market because their GDP has grown dramatically. Israel is an example. Korea currently has a per capita GDP that's similar to Japan’s. They would have graduated. I think, you would want to look at GDP of the country as the primary factor, but then how do you take the Arab countries which have a lot of oil and have a high per capita income as a result of that? Is Saudi Arabia an emerging market, or is it a developed market?

What about the Czech Republic? The Czech Republic is typically called an emerging market, but its per capita income is greater than that of Portugal, which is typically considered a developed market. When you have the Austro-Hungarian Empire, both Hungary and Czechoslovakia were part of the Austro-Hungarian Empire and they were listed in the Vienna stock market, then both of them had their markets closed down when the communists took over and then they re-emerged.

I guess, if you had to have one factor, it would probably be GDP. But there's a lot of history that determines which are developed and which are emerging, as well as just a lot of personal opinion.

Ben Felix: How far back does your emerging markets index go?

Bryan Taylor: Since we included India, it goes back to the 1700s. For most of the emerging markets, such as Brazil, Argentina, and other countries, they actually started issuing stocks in the early 1800s in London. You can go to the stocks that were traded in London and create an emerging market index based upon that. The real problem that you have in putting it together is that even though you have the price data, which you're able to put together, the dividend data is more difficult to come by. We have long-term price indices. The total return indices are much more difficult to obtain.

Mark McGrath: With that in mind, how have emerging markets performed compared to developed markets for the full period you have data for? I guess, respecting that maybe the dividend component of that is harder to ascertain.

Bryan Taylor: They have definitely underperformed. That's why they're emerging markets because they've underperformed. If you look at Brazil, Argentina, India, any of those particular countries, their performance is below that of developed markets. If they had superior returns, they would be a developed market. I mean, Japan's a good example. Japan would probably have been considered an emerging market in the early 1900s. They developed quite dramatically after World War II. They're considered a developed market.

It's the rate of return and the rate of return on emerging markets is lower. That's why they're still considered emerging markets. In addition to that, a number of the countries had their stock markets closed down, China, Russia, Eastern Europe. That prevented them from growing. If you look at the world before World War I, Russia was one of the main stock markets in the world. Before World War I, it would have been considered a developed market. Today, it would not be considered a developed market. It would be considered an emerging market.

China never really had a well-developed stock market, even before it was closed down in the 1940s. It would probably have been considered an emerging market all along. It's simply their size that makes a difference. India would be the other country. They've actually had a well-developed stock market during most of its history. However, the Indian government, especially after it became independent, placed a lot of restrictions on the stock market, restrictions which did not occur in developed countries. It's only during the past 30 years that a lot of those restrictions have been lifted. As a result, India has been one of the best-performing markets in the world.

Mark McGrath: How often do emerging markets transition to become developed markets?

Bryan Taylor: Obviously, it depends upon the country. It occurs. Japan, Korea. If you want to look at Singapore and Hong Kong, of course, they’ve grown. It does happen. But there are also countries that can't get their politics in order and can't promote growth in the way that they need to to join the world economy. They remain emerging markets as a result.

Ben Felix: It is interesting, because emerging markets implies that they will emerge, but in a lot of cases, they don't. I noticed this in your paper on emerging markets and also, reading some of the older Dimson, Marsh, and Staunton stuff that a lot of the emerging markets stay emerging for very, very long periods of time.

Bryan Taylor: Part of the concern I read about this in The Economist was that some of the countries have reached a level of income, which is middle of the road. They run up against ceilings for growth, because now they're trying to provide all the services that developed countries are providing. Consequently, they're not growing at the rate that they were before. I mean, people were almost certain that China was going to overtake the United States in the next decade. Very few people are saying that nowadays. Of course, Khrushchev said that Russia was going to overtake the United States, but it's not even close.

Unfortunately, some countries are getting caught in an emerging market trap, and they're providing too many services. They're not promoting foreign trade. They'll pay the price as a result, in my opinion.

Ben Felix: It's also interesting that emerging markets in your long-term data have underperformed developed markets. It's the same thing back to 1900 in the Dimson, Marsh, Staunton data. When Mark asked about that, you replied like it was obvious. I don't know if it is. A lot of people think that emerging markets, because they're risky, or something like that, that they're going to perform better, but historically, they just haven't.

Bryan Taylor: No, they haven't. The idea back in the 80s and 90s was they're going to catch up. We have a higher level of income. They're down here. They're going to apply our technologies and everything. They'll have a higher level of education, and consequently, they're going to grow at a faster rate. But if you look at the emerging market indices, they're the same place they were at in 2000. They haven't benefited from growth during the 21st century. In my opinion, they need to follow in the footsteps of countries like Israel and Korea and promote trade, promote growth in order that they can catch up. If they don't do that, then they're going to pay the price. If you look at South America, those countries simply are not pursuing growth policies and it's unfortunate.

Ben Felix: Other than underperforming over long periods of time, how do the characteristics of emerging markets return compared to developed markets, volatility or drawdowns, that kind of stuff?

Bryan Taylor: First off, emerging markets are much more volatile than the developed markets. If you look at a country such as Brazil, you can see that there would be, or Argentina, there'd be a decade of dramatic growth in which their returns outperformed most developed markets. Then you'd have a decade of absolutely no growth. That's why their returns are so poor, is that you don't have the steady growth.

I mean, if you look at Australia, it's been one of the most steady growing countries returning to investors in the world. If you look at Argentina and Brazil, it's a roller coaster ride. You'll have years where they do extremely well, beat the developed markets. Then you have years when their economies just collapse and they have declines in output. I mean, Argentina is a perfect example of that. I hope that with Milei in power now that he can turn things around, but history is against him. All you can do is hope.

Mark McGrath: You've produced a lot of data on market concentration. How does the current level of concentration in the US stock market look relative to history?

Bryan Taylor: What I did was I went back over 150 years. We have data on all of the companies that are listed in the United States back to the 1790s. We can rank all the companies by their capitalization to find out which were the largest companies at any point in time and then what was the total market cap at any point in time. It was only in the 1870s that you actually had more than 500 companies in the United States. We really couldn't look at concentration before then. But we did an analysis over the past 150 years looking at the concentration. What we found was that today, it's the most concentrated stock market in history.

Right now, the top 10 companies represent about 35% of the total stock market capitalization. It was only back in the late 50s and early 60s that another magnificent seven of companies represented such a large portion of the stock market. The fear is that since there's such a high concentration in the stock market, that will be a prelude to a collapse of the stock market as these companies lose value. If you look back at the 1950s and 1960s, the previous period when you had such a high concentration, the stock market continued to grow for at least another decade.

What we found was that it's mainly a bear market in which the concentration declines. Concentration increases during bull markets, decreases during bear markets. Unless we're going to have a large bear market, I don't think there's much of a worry about the concentration creating problems in the stock market.

Ben Felix: Interesting. Okay. The US stock market is currently concentrated relative to history, but not necessarily unprecedented and probably nothing to worry about?

Bryan Taylor: If you look back at the 1960s, you continue to have a bull market and then growth spread out side of what I call the Magnificent Seven back then, which were companies like IBM, General Motors, AT&T, the super large companies, multinationals existed. I think it's a matter of concern. But I think the concentration again reflects the fact that today with the Internet, companies can go global very easily. You can have a company such as Facebook, Meta, Amazon, or any other company, or Google, which in a matter of 10 or 20 years have reached out to the entire globe to become a trillion-dollar company. I think it just reflects the changing environment that we have today, rather than any problems in the stock market.

Ben Felix: What are your thoughts on the expected returns of the US stock market, just with valuations being as high as they are?

Bryan Taylor: I think that they will continue along the path of the past. We've had very high returns during the past 10 years. I think the returns will moderate over the rest of the decade. But I'm not worried about there being a large bear market in which we give back a large portion of returns as occurred in the 1970s and the 1920s, because I just think there are still a lot of opportunities for growth, not only in the United States but in the rest of the world. We just have to keep global markets open, so that those can be taken advantage of.

Mark McGrath: Before we get into our last question, I just have to ask, as somebody who spends a lot of time, obviously, in data and looking at the history of markets, do you ever just like, wake up in the middle of the night and think that all of it is totally completely noise and that no important inferences can be made whatsoever, and we only have one universe and one Earth of data to look at?

Bryan Taylor: I've learned a lot from the data. I've been able to bring a lot of conclusions, which I feel are beneficial as a result of looking at all the data. Obviously, they're diminishing marginal returns, but I think the whole project of collecting the data and making it available has helped those people who use the data to improve their investment returns.

Mark McGrath: Absolutely. Our final question, how do you define success in your life?

Bryan Taylor: I would say, learning. Learning more, understanding the past, increasing by perception of what's going on and not overreacting to things that occur in the present, because I have studied the past and I do know what opportunities are out there and what can happen. I would say, just learning more about the past in order to understand the present and the future.

Ben Felix: Great answer. Bryan, this has been a fantastic conversation. We really appreciate you coming on the podcast.

Bryan Taylor: Thank you very much.

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Papers From Today’s Episode:

‘France and the Four Horsemen of the Market’ — https://globalfinancialdata.com/france-and-the-four-horsemen-of-the-market

‘The Financial History of Emerging Markets: New Indices’ — https://dx.doi.org/10.2139/ssrn.4193062

Dr. Bryan Taylor on SSRN — https://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=4320002

Links From Today’s Episode:

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Dr. Bryan Taylor — https://www.linkedin.com/in/bryan-taylor-46a92032/