But what if there is no central bank and no treasury bills? This is the situation that the United States faced between 1836 and 1913 when the Federal Reserve was established and before 1918 when the Federal government began issuing treasury bills to cover its borrowing needs. Unlike most European countries, the United States almost managed to pay off its debt before World War I commenced. The easiest solution would be to use commercial paper as a substitute for Treasury bills. Since the risk of the issuing bank defaulting is low and the bills’ maturity is only a month or two, they would seem to be the best substitute for Treasury Bills. The problem with this solution is that when you calculate the rate of return over time, before 1918, commercial bills provided a higher return than Government bonds! When we put together a risk-free bill series to compare with Government bonds in the United States between 1835 and 2017, we found that the bills outperformed the government bonds until World War I when treasury bills were introduced and bonds outperformed bills between 1918 and 2018. Clearly, this was not a solution. There were periods of time in the nineteenth century when commercial bills paid lower returns than government bonds, and there were periods when they paid higher returns. The solution seemed simple, use the coupon rate on government bonds as the basis for the risk-free rate of return, but during those periods when commercial bills paid a lower yield than government bonds, use commercial bills. This solution worked! Risk-free bills provided a lower rate of return than risk-free government bonds and the balance between bills and bonds was restored.

Data on market tops and bottoms for over 100 world markets is available through our Events-in-Time tool, and the summary numbers for global tops and bottoms are available through our GFD Indices. By our count, there were 47 market bottoms in 2016 and only 2 market tops, giving a net score of -45. This was the lowest score global markets had seen since 2009 which had a score of -53. It didn’t take artificial intelligence to figure out that 2017 was going to be a banner year. 2017 was a year in which all markets moved upward in sync. There wasn’t a single major market in the world that hit a bottom. The S&P 500 was up 19.4%, MSCI’s EAFE index was up 21.8% and MSCI’s Emerging Markets were up 34.3%, and that was before dividends! 2017 was one of the best years in the 21st Century. Part of the problem from American investors’ perspective was that even though many European and Asian markets hit a bottom in 2016, the United States did not since it has been a global market leader since the Great Recession of 2009. US markets did sell off in August 2015 when Brexit was approved by the British electorate, but the market put in a double bottom in January 2016, and the trend has generally been straight up since then. In 2017, five markets hit a bottom and three markets hit a top. None of the markets hitting a top or bottom was a major world markets. The five hitting tops were Bosnia-Herzegovina, Côte d’Ivoire, Nepal, Qatar and Tanzania. The three hitting market tops were Iraq, Mongolia and Pakistan. Only 2018 will tell whether these nine markets bounce back. And the forecast for 2018? High numbers of markets hitting bottoms exceeding the number of markets hitting tops only happens every five to seven years. During this century, this occurred in 2003, 2009 and 2016, so this data generally portends positively for global markets for the rest of the decade. 2018 will probably be more volatile than 2017, but there is little reason to believe that 2018 and 2019 won’t be a great time for investors worldwide. Our advice, ignore volatility and stay in the market for 2018. We’ll let you know how our prediction went in a year.

Many of the French have an aversion to capitalism, and the past performance of stocks in France easily explains why. The contrast between historical returns to investors in France and the United States have about as much in common as the four French candidates. Over the past 150 years, French investors have received some of the worst returns of any country on the planet. We have put together total return numbers for stocks, bond and bills using data from David Le Blis, who extended returns for the CAC-40 index back to 1854 for stocks, and Global Financial Data for bonds and bills. We have taken the French returns, converted them into US Dollars, and then adjusted for inflation. Data for the S&P 500 in the United States is available back to 1871. The table below compares 145 years of returns to stocks, bonds and bills in France and the United States.  

Real Returns in USD in France and the United States, 1871-2016

Country	Stocks	Bonds	Bills
France	0.53	-0.02	-1.50
United States	6.37	2.22	0.60

If someone had invested $1 in France in 1871 and brought the money back to the United States in 2016, after inflation they would have had $2.14 if they had invested in stocks, $0.97 if they invested in bonds and $0.11 if left their money in bills. By contrast, if the money had been invested in America, they would have ended up with $7,758 from an investment in stocks, $24.12 from bonds and $4.30 from bills. If you think France’s poor returns are not one cause of the country’s left-leaning economic policies, you’re only fooling yourself.  

Two Turning Points

To illustrate the impact that French elections and government policy have had on French investors, we can look at two events: the election of the socialist Léon Blum on May 3, 1936 and the “tournant de la rigueur” (austerity turn) instituted by François Mitterand in March 1983. Léon Blum led the Popular Front to victory in the French elections of 1936, which led to a series of leftist reforms that transformed the French economy. World War II began in 1939 and inflation reigned in France both during and after the war. The result was a disaster for French investors. Adjusting for inflation, 1 Franc invested on January 1, 1936 in French stocks, bonds and bills would have produced horrible losses over the next 15 years. After inflation, one franc invested in stocks in 1936 was worth 4.37 centimes in 1951, one franc invested in bonds was worth 3.88 centimes and one franc invested in bills was worth 3.26 centimes. In other words, no matter where you invested your money in France, you would have lost over 95% of your investment after inflation between 1936 and 1951. Although things improved after 1951 as France enjoyed its post-war growth, investors still received relatively lousy returns. In the 100 years before Mitterand introduced his austerity plan in 1983, French investors lost money no matter where they invested their funds. If investors had put 1 Franc in stocks, bonds and bills in 1882, 100 years later they would have been in tears. One franc invested in French stocks in 1882 left investors with 6.65 centimes after inflation 100 years later. If they had put their money in bonds, they would have ended up with 5.59 centimes and in bills 4.11 centimes after inflation. Over a 100-year period, French investors would have lost over 90% of their money after inflation no matter how they invested their money. Contrast this with the returns to American investors between 1882 and 1982. If American investors had put $1 in stocks in 1882, after inflation they would have ended up with $208 by 1982, $2.73 if $1 had been put in bonds and $1.18 if $1 had been put in bills. The graph below illustrates total returns to French investors in US Dollars after inflation. Given the miserable performance of French investments, it is no wonder that the French are often the strongest critics of capitalism in the world. It should come as no surprise that Capital in the Twenty-First Century was written by Thomas Piketty from France. If investors in the rest of the world had suffered the lousy returns of the French, it would be a miracle if capitalism was left in any country. During the past 100 years, French economic policy has been disastrous for investors. But the fact of the matter is that in the past, the French electorate has elected leaders who showed little concern for investors, and they suffered as a result. The 2017 elections offer voters candidates who clearly differ in their economic policies. Let’s hope the French electorate understands that their choices do have consequences, and vote accordingly.