Starting in spring 2014 the Bureau of Economic Analysis will release gross output data which is a measure of sales across all stages of production. This new data set, which has been championed by the economist Mark Skousen, will provide a more complete picture of what is happening in the economy. Skousen argued in the Structure of Production back in 1991 that GDP provides an incomplete picture of economic activity as it only measures final output. In an article in Forbes this week Skousen writes that when looked at from a gross output perspective consumers only make up 40% of the economy with business investment at 50%. Using standard GDP measures consumption makes up 70% of the total and business investment only 13%. This different perspective has substantial implications for the way we think about the drivers of growth and the nature of the business cycle.
Without doubt using more appropriate and relevant macroeconomic indicators will become crucial to facilitate our understanding of the economy and for investing successfully. For example, a great deal of future economic growth will come from knowledge intensive companies whose requirement for physical capital investment is substantially less than traditional businesses. Crucially this investment in human capital doesn’t get picked up in Tobin’s Q calculations which Mark Spitznagel uses.
On another note, Mark Skousen has published another highly readable book this year on the application of Austrian economic theory to managing investments: A Viennese Waltz down Wall Street. He rightly questions the doomsday bias of many Austrian economists. In investment there is no point calling for a bear market to find out that you were right a decade later but you didn’t make any money from the call! Using my own system of the Wicksellian Differential, it was quite clear that the tech bubble in the 1990s was waiting to crash. However the best way to deal with these situations is to raise the automatic stop loss by say 75% of the rise in the market every month. That way you can profit from the bubble but protect the investment from the downside with the stop loss trigger to sell. Better to be optimistic and make money than pessimistic and just be right at some point in the future.
Skousen rightly debunks Friedman’s plucking model of business fluctuations that remains very much in vogue with contemporary monetary economists – most of whom do not appear to be active investors. Friedman’s model makes the claim that a stock market can never be overvalued or that the economy can ever be over heated. This clearly does not fit the evidence (Friedman never paid much attention to credit). Indeed, if you’d followed Friedman’s model as the basis for investing you would have earned just above the rate of inflation per annum over the last decade! This highlights the importance of the improving the links between monetary and financial economics – something I have spent the last decade doing which resulted in my book profiting from monetary policy.
Finally, Skousen has a knack of finding wonderful quotes to illustrate his writing. His Jenny Marx comment still has me chuckling. “I do wish Karl would accumulate capital instead of just writing about it.”