Addison Wiggin

The economy is not the stock market.

“Repeat this over and over,” suggests Chris Mayer by way of helping you get through this episode of The 5: “The economy is not the stock market. The economy is not the stock market. The economy is not the stock market.”

OK, feeling calm and centered?

Here we go…

 “Jeremy Grantham is a highly regarded investor,” Mayer begins. “His accurate forecast of returns for various asset classes in the first decade of the 21st century cemented his fame, and today his firm manages billions of dollars of investor money.

“Maybe that’s why so many people turn off their brains when they read what he writes…”

Uh-oh.

Barron’s, BusinessWeek and Forbes all stand in awe of Grantham’s quarterly letter this month, titled “On the Road to Zero Growth.”

“The bottom line for U.S. real growth, according to our forecast,” Grantham writes, “is 0.9% a year through 2030, decreasing to 0.4% from 2030-2050.”

At the root of Grantham’s forecast is the inscrutable notion of “gross domestic product” (GDP), one we take great latitude in abusing in The Demise of the Dollar. At best, GDP is a mathematical formula:

At worst, it fosters the illusion that economists practice a science.

“The concept of GDP is so deeply flawed,” Mr. Mayer helps us get to today’s point, “that it should be discarded entirely as a relic from a misguided age.

“Consider this example from Bill Bonner: If you mow your own lawn and your neighbor mows his own lawn, there is no addition to GDP. But if you hire your neighbor to mow his lawn and he hires you to mow his lawn, GDP rises!

“Gross domestic product also includes government spending as a positive. So if the government spends lots of money, GDP goes up. The government could hire lots of people to dig holes and refill them again. Well, GDP would go up and economists would cheer.

“The fundamental problem with GDP is that it is an abstraction. It doesn’t mean anything. You can’t eat GDP. You can’t wear it. You can’t spend it. It doesn’t change your life or your job. A rising GDP doesn’t mean you get any wealthier. It’s just a number that economists can play with.”

Fact is, “Grantham doesn’t know what’s going to happen next year,” Mayer shirks. “Forget about 2030. He’s guessing, like the rest of us. I love the false precision of 0.9% and 0.4%.”

Heh.

“Even if GDP were an accurate measure of something meaningful,” says Mayer getting to today’s pedantic assertion, “should we use it to decide how and when to invest?

“Buffett once pointed out that during the years 1964-1982, the stock market went nowhere, even though GDP quintupled. But from 1982-1998, the stock market went up twentyfold, while GDP barely tripled. There are lots of reasons to explain market moves. GDP isn’t one of them.

[Say it again: “The economy is not the stock market.”]

“For me, growth is what it is,” Chris concludes. “Some parts of the economy will grow. Some parts will shrink. I ignore GDP forecasts — and all such forecasts. Instead, I focus on learning more about the details of the opportunities at hand.”

Chris is fond of citing John Train, the octogenarian investment adviser and author: “You should not worry about the economy or the direction of the market. Instead, buy a share of a company the way you would buy a house, because you know all about it…”

Addison Wiggin

Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He's the creator and editorial director of Agora Financial's daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar, and Why it's Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.

  • Rob

    I’m not real fond of “GDP” as it is currently calculated either. However I think the .4%-.9% growth is probably not too far off…but more due to demographic reasons than anything else. Too many boomers passing along too much debt to too few children.

  • Pingback: Trackback()

  • Pingback: Trackback()

  • Pingback: Trackback()

  • Pingback: Trackback()

  • Pingback: Trackback()

Recent Articles

Can Money Printing Cause Deflation?

Marc Faber

"There has been an issue that has preoccupied my mind for a long time," writes Dr. Marc Faber. "In economics, it is generally accepted that if the quantity of money and credit is increased, prices will rise… However, since economics is so complex… I question whether the expansion of central banks' balance sheets and policies of zero interest rates could have a deflationary impact…" The good doctor wrestles with the question, in today's essay...


Forget the Oil Crash – Crush the Market With Biotech Stocks

Greg Guenthner

The Biotech iShares ETF is up 23% since the Oct. 15th bottom. No, that is not a typo. Biotechs have torched the S&P over the past two months--more than doubling the returns of the big index. And biotechs as a group are up more than 38% year-to-date. In fact, since we first highlighted the June comeback, the Biotech iShares have gone nowhere but up.


How Low Will Oil Go – And What Can You Do?

Matt Insley

The oil market has been under siege for six months. From service providers to producers this downturn has been painful. Of course, we’ve known all along that oil prices were a little toppy over the summer. In fact, when asked just how low oil prices could go I usually answered with a simple “lower than you’d expect…”


Cuba’s Berlin Wall Moment

Peter Coyne

Our forecast that Cuba would be open and integrated within 5-10 years is on track after yesterday's big announcement. Ahead of schedule, even. Click here to see how some investors have profited and what the island's likely future is...


The $4 LED Trend You Don’t Want to Miss

Chris Mayer

The opportunity to sell and install LEDs is enormous. We’re talking about over a billion lighting fixtures. And the areas with the largest potential -- like parking lots -- have barely begun to change. Banker to the presidents Chris Mayer says you could triple your money in this new tech trend. Here's what you need to know.


How to Make the Casinos Pay You for a Change

Greg Guenthner

It's a theme we've shared with you since April. And it's only gotten worse. The gaming industry has come under all sorts of pressure--a situation I first noticed in the charts. The powerful, multi-year uptrends started showing cracks. And it wasn't long before those cracks turned into gaping holes you could drive a friggin' truck through. That's where things stand today.