This is making the rounds today. He has two main arguments:
Central banks will have difficulty stimulating growth in developed and “highly levered” economies, due to interest rates near zero.
As interest rates approach zero, risky debt yields will be comparable to cash or high quality yields. This will cause deleveraging as investors sell risky debt, which fails to provide sufficiently attractive yields.
I think the points are plausible, but the main assumption is that growth will not just pick up by itself. So, who knows.
Well, I would couple that witih the fact that with this story highlighting the fact that nearly 95% of US corporations earnings were used for share repurchases this year:
Essentially firms are returning capital to shareholders en masse, presumably because of lack of opportunities for deployment, while fixed asset investment has fallen off a cliff. We always just assume things grow, but it makes you wonder where that growth will source from.
^Grantham has been discussing this in detail for some time now. He has been saying investors need to get used to lower growth rates and change their investment strategies. From 2012:
The U.S. GDP growth rate that we have become accustomed to for over a hundred years – in excess of 3% a year – is not just hiding behind temporary setbacks. It is gone forever. Yet most business people (and the Fed) assume that economic growth will recover to its old rates.
Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%. … The bottom line for U.S. real growth, according to our forecast, is 0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050 (see table on Page 16). This is all done presuming no unexpected disasters, but also no heroics, just normal “muddling through.
Growth can come from unexpected sources that no pundits can predict - who thought in 1980 that Internet companies like Google will be so huge? That Viagra will exist and be a blockbuster? To be fair, if you could predict it exists, you might have been smart enough to predict it would be more important in economic impact than most drugs, at least for the drug company.
War (even cold war) is a perennial source of growth. Too bad some people have to die, but we don’t see their faces so they don’t really exist. And you can start a war at will, witness Iraq in 2003 and Viet Nam in 1960s.
Dividends are returning capital to shareholders. Share repurchases are financial engineering to artificially boost demand for shares and increases diluted EPS thereby justifying huge bonuses to management. What’s more, they’re exercising options at the same time, basically selling their shares to the company. It’s especially great when you can fund this with cheap debt…management can’t lose.
Why create actual growth if the incentives are align so that you can earn huge money by moving capital from left pocket to right pocket? If 95% of corporate profits are being used for share repurchases…hmmmm, I wonder where this extended bull market is coming from. And, gee, I wonder if there’s any way zero interest rates create a bubble…
I’ve said it before, when borrow rates start to rise we’ll see demand for shares fall off a cliff and that is the next recession.
This is pretty dumb. Google =/= economic growth. It’s just money moving around, an ad firm, it doesn’t drive economic fundamentals. Viagra doesn’t create economic growth either. These are just individual companies moving money from one pocket of the economy to the other. Iraq and Vietnam both destroyed massive amounts of global value, as did the cold war. It may have drove short term production into non-preductive assets, but long term was growth negative. Particularly when you look at Russia’s economy afterwards. Literally too dumb for words.
Also, Gross’s FI funds consistantly outperform the market whether he talks his book or not.
Agree that naren’s post was silly (no need to create wars to create value), but the above is really not right IMO either. Saying Google does not drive economic fundamentals is like saying that internet search does not add economic value. Clearly it does. They generate revenue through ads but the benefit to society of being able to find so much information is a relatively efficient way is enormous. Much faster than going to the library, where I am typing this from.
And, I’m just old enough to remember going to the library to learn stuff.
Google, by facilitating information transfer, increases efficiency and reduces trade barriers between everyone in the economy. Businesses benefit because people can find their products easily. This drives higher demand and higher production. People are willing to pay for Google because it provides a productivity benefit.
Without search engines, other online businesses would have difficulty surviving as well. If you can think of any online function that increases productivity - maybe Walmart selling products online, farmers being able to coordinate delivery with wholesalers, or people being able to process payments online - then, it is not hard to imagine how coordination and sorting of these functions could be very valuable. The value of the world’s businesses with Google (or similar services) is greater than it would be without Google.
I would refrain from calling people “dumb”, especially since naren is not dumb and in fact, made a valid comment. It is just disrespectful.
BlackSwan. I get that share repurchases can be seen as quasi-dividends, but just because dividends is “returning cash to shareholders because internal growth opportunities don’t deliver market-beating (risk-adjusted) ROI,” doesn’t mean that buying back shares means the same thing.
Companies are supposed to back shares if they think the shares are undervalued (which would suggest additional growth opportunities that the market isn’t seeing). If, suddenly, buying back shares means that there are no growth opportunities because it’s just like a dividend, then a share repurchase simultaneously means something (no growth opportunities) and its opposite (growth opportunities).
I agree that there could be contexutal issues that determine whether a buyback is more dividend-like or more a statement of perceived undervaluation of growth opportunities (and would presumably need to be adjusted for employee option dilution), but I don’t think we can really get that from economy-wide aggregated data.
My issue came more with the comments around war (whether silly or not) than anything. It’s funny that calling an internet poster an idiot becaues of childish statements about wars that caused tens of thousands of deaths is disrespectful, but the original statement was not.
That being said, probably less than 10% of Google’s scale has anything to do with its actual search engine function. I am also old enough to remember going to a library but I also remember Google as a search engine in 2002 and the difference between that company valued at maybe a percentage of its value and this one is simply one of marketing “value”.
As such, Google’s ability to fuel raw economic growth is not even a blip on the radar so I do believe its a silly point when weighed against the broader factors being discussed.
Well, we can look at the fact that share valuations are at highs throughout this year and weigh that against pricing over the past 5 years and pretty much rule out its being a valuation issue. Also, what growing company ever with viable investment opportunities has performed buybacks on this scale (95% of earnings)?
The challenge with things like Google and the internet in general is that it reinforces the winner-take all economy by making the playing field so exceedingly flat that access to capital becomes nearly the only bargaining power that matters. As a result, skills, intelligence, and work ethic don’t have dominant impacts on one’s bargaining power in the labor market, since you are competing globally (though it is important at the margins). Instead, capital is scarce (or more accurately, the number of capital gatekeepers is scarce), and so being a gatekeeper to capital is what determines your bargaining power and the remuneration for your services.
So we also have the problem that in a plutocracy (or plutonomy), the have-nots see no growth and cannot drive consumption sufficiently to create growth, meanwhile the haves can only consume so much, and that consumption will tend to switch towards luxury goods.
One could argue that the haves don’t consume, but instead invest, but if there is no ultimate consumer for the products the investments back, then those investments will not generate returns.
As a result the economy is like a battery that’s run down. Once all the assets are in the hands of a few haves, there is nowhere the assets can migrate, except a small amount of swapping between already-rich. This generates some activity, but nowhere nearly as much as when economic production and consumption is diversified broadly across the economy.
I am not sure I understand this point. Most of the economy is nothing but money moving around. You pay the grocer, who pays the supplier, who pays the farmer, who pays the bank, who pays the shareholders and so on. Nobody except the central bank prints money. GDP grows when there is more activity i.e. more circulation of more money (increased velocity and/or supply.) Google employs people who spend, invest and pay taxes, increasing the total pie. Google itself makes a profit and one day it will pay the shareholders who will do the same. Even now, because of the wealth effect, Google shareholders think they have more money and possibly go out and spend more. I am oversimplifying the economic argument but I believe it is pretty solid.
War spurs spending. The money goes from taxpayers (or lenders) to the government to private firms to their suppliers and so on. As long as we don’t bomb ourselves, the net effect is growth in production of goods and services.
Russian example doesn’t apply, it is not a market economy.
Simpler example: Buffett has famously said that he could increase GDP just by employing a 100 artists to do nothing but paint his picture every day. By every definition including yours, this is non-productive. Do you think Buffett is dumb as well?
Well, I do disagree that wars tend to create economic value. While there is probably a temporary increase in GDP in some countries (like the US making tanks to invade Iraq), ultimately, war hardware will just depreciate. Instead, the money could have been invested in capital that produces long term benefits. Furthermore, wars tend to destroy infrastructure and cause deaths of people who would otherwise be able to work.
Some people will cite the contribution of wars to technological advancement - for instance, the Cold War or even WW2 might have accelerated the development of rocket technology or space travel. However, this should be weighed against the negative economic effects.
War itself is tremendously expensive, since it’s one of the few human activities where the goal is to destroy things of value (the enemy’s stuff, people, and will to resist), so you’re taking resources away from growth-oriented endeavors and - in addition - using them to reduce the productivity of assets and people already in place, while someone else may be trying to do the same to you. Risk-adjusted, war is an even more costly activity.
But that doesn’t mean that nothing useful can come out of war, at least for the winner, and sometimes for the loser too. For the loser (and the winner, if it’s destructive enough to the winner) war can help press the reset button and break asclerotic social structures. The question is what arises in the aftermath and whether the baby gets thrown out with the bathwater. There’s also technological innovations, but they are also highly costly on a risk-adusted basis.
War can solidify a competitive advantage by taking out a competitor. For the winner, that can be an advantage, at least in the short run, but generally not an advantage to the global economy.
Also, if your adversary was genuinely destructive in some way, stopping them from destroying things can be a positive economic outcome from war.
In general, the costs outweigh the benefits, but that doesn’t mean there aren’t sometimes benefits. There are also the political dynamics to consider too.
Back in the day, war was the equivalent of a hostile takeover for the victor and could be a quick way to generate economic growth for the victor as the defeated’s growth is absorbed. Now, there is not much value from taking over other territories because there are
a) so many more people in the world.
b) you are not allowed to slaughter or enslave those people
c) because of (a) and (b) you need to actually govern the territory rather than simply add its GDP to your existing GDP. Not worth it. Better to get them really deep into debt.