A Relic of a Misguided Age
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…”
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%.”
“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…”