A Relic of a Misguided Age

Posted On Dec 5, 2012 By Addison Wiggin

December 5, 2012

  • Famed money manager’s BIG-DEAL macro call… Why it won’t make you any money… and what to do instead
  • Stock buyers “come out of the woodwork”… Elmerraji on how to seize the moment and the advantage
  • Gold sinks… but another central bank is backing up the truck
  • Absurdity abounds: a new spike in hay thefts… $11.5 million in gold purloined from a rusty fishing boat… the $50,000 “pill purse”
  • How $50,000 in taxes could have been put to better use… a late lament for the middle class… Doug Casey on “an empire in decline”… and more!

  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.

100  “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…”

That’s how Chris’ premium readers have this year had the chance to rack up gains of 67%… 111%… and 137%. For more where those came from, look here. (If you’re interested in making money, regardless of what’s happening in Washington or with respect to the broader stock market, you could do a lot worse than take advice from our resident managing editor, market historian and world traveler.

  Blue chips are rallying this morning, the Dow up nearly 100 points. Small caps are lagging, with the Russell 2000 actually down a bit right now. The S&P sits at 1,410.

“Even though it doesn’t feel like it,” says Jonas Elmerraji of our technical team, “buyers are coming out of the woodwork for stocks right now.

“The S&P’s ability to bounce hard off of support at 1,350 tells us that there’s a contingent of buyers of equities at lower levels in the big indexes, and zooming out, the fact that the S&P is still making higher lows helps to verify that we just witnessed a correction, rather than a change in trend.

“The market outlook that we’ve been piecing together over the last few months is coming together nicely — from the medium-term bottom we called back in late May up through now.”

  “Even though traders have been plagued by challenging market conditions this year,” Jonas adds, “we’re starting to see a ‘return to normal’ of sorts. That’s a big part of why we were able to book 30% gains last week on our RIMM trade, and why we’re already up more than 6% on the new trade we recommended yesterday.

“With a long list of Watch List opportunities on hand, 2013 is shaping up to be a banner year for stock trading. We’ll be ready to take advantage.”

[Ed. note: Jonas and Greg Guenthner are still accepting new entrants for their 21-Day Trading Challenge through midnight tomorrow. You can bag gains like the 30% they generated last week on Research In Motion — in only 21 days. Take advantage while you still can.]

  Gold reclaimed $1,700 overnight, only to give it up this morning. At last check, the spot price had sunk to $1,685. Silver’s down to $32.55.

  The Bank of Korea grew its gold stash 20% last month — the fourth time it’s done so since June 2011, according to Bloomberg.

“Gold is a physical, safe asset,” said a statement from the central bank, “and allows [the country] to deal with changes in the international financial environment more effectively.”

There’s ample room to add more: Gold still amounts to only 1.2% of the Bank of Korea’s total reserves.

  More than a year after The 5 took note of hay as an unlikely, but favored target of commodity thieves… we see demand hasn’t let up.

(As fond as we are of the outlandish and absurd, rarely do we have so many items to comment on in one day. Count ’em… one, two, three…)

“With winter approaching and grass dying out,” reports KMOX radio in St. Louis, “the price for fresh hay to feed livestock is on the rise.”

Enter the thieves: “No one brands their hay,” explains Blake Hurst of the Missouri Farm Bureau, “so if you hook onto it with your tractor or your pickup and make it out the gate, then it’s impossible to prove where the hay came from.”

The drought this year has made the phenomenon more widespread than it was when we took note last year. At that time, round bales that once sold for $20 in Texas were topping $175. Now NPR is noting theft reports from Oklahoma, California and Kansas… in addition to Missouri.

  Of course, thieves still demand more traditional commodities — hence the theft of 70 gold bars worth $11.5 million from a fishing boat in Curacao.

Six masked men wearing jackets marked “Police” boarded the vessel last Friday shortly after it docked at the end of a trip from Guyana.

“The boat, by its appearance, would seem an unlikely place to stash that amount of gold,” reports the London Telegraph.Uh, yeah…

Police say they’re chasing down several leads — including the license plate number from one of three getaway cars.

Back in Guyana, the government is suspicious: “Environment Minister Robert Persaud told The Associated Press that they have requested details about the gold bars, adding that such shipments are usually flown directly to the buyer and involve heavy security. The ship’s crew members have said they weren’t armed.”

Seems about half of Guyana’s annual gold production is smuggled out of the country to avoid taxes…

  For sheer absurdity, though, this story takes the day: handbags designed by child stars Mary-Kate and Ashley Olsen.

“The sisters collaborated with designer Damien Hirst to create nine unique, one-of-a-kind crocodile skin bags,” reports The Examiner. “Some of the purses are decorated with colorful prescription pills.”

Uh… yeah. Pill bag. Yours for only $50,000!

The twins, who made their name in infancy on the sitcom Full House, are now 26. Forbes estimates their net worth at some $100 million. Go figure.

  “I paid nearly $50,000 in federal taxes last year,” a reader writes by coincidence. “I consider myself far from rich. I employ 10 people and am involved in one ongoing business and two startups. All of my current employees have been hired since 2010.

“If I had but half of that $50,000 back in the form of lower taxes each year, I would currently have two paid interns or perhaps one recent college graduate on my payroll. Alas, I sent the paychecks for these potential employees to Washington. So there are currently one or two unemployed people out there not acquiring skills or on the job training, courtesy of our already too-high tax rates.

“Throughout my 18 years owning businesses, I have actually done most of my hiring during a downturn because labor rates are more attractive — at least they used to be before extended government unemployment. I am able to do this hiring during these times precisely because I have accumulated what little wealth the government allowed me to keep during the ‘good times.'”

  “I am a faithful reader of The 5,” a reader prefaces his remarks.

[Ah, yes, we know where this is going…]

“I usually agree with most of what you write.


“However, I am sick of hearing your cry ‘Don’t pick on the poor wealthy people!’

[Huh? Didn’t see that coming.]

“The Jobs, Gates, etc., do not bother me — more power to them. It is the banksters, Wall Street crooks and CEOs earning 400 times the average wage of their workers, and special tax cuts to Big Oil, agribusiness and defense contractors, ad nauseum.

“I was watching a special report on the downfall of great civilizations like Rome. Rome went from a republic to an oligarchical dictatorship where the few took all the land and wealth to support themselves — to hell with the people.

“Answer this question: How can a country prosper when it destroys its middle class? When there is no money left with the masses, how can they support the corporations, businesses, and commerce? Report after report shows that the middle-class income, adjusted for inflation, has been flat and now declining for three decades.

“When the top 5% of the population controls 80% of the wealth, something needs to be done! I can only surmise that those supporting the wealthy are in that top tier just trying to protect their position on the top of the money pyramid.”

The 5: You don’t say. Trouble is, it’s even worse than you suspect: Empire of Debt. Our only question is this: When you say “something needs to be done,” who gets to decide what gets done? And who, then, does “it”?

The devil lies in the details, mi amigo.


Addison Wiggin
The 5 Min. Forecast

P.S. “America is an empire in decline, getting old and tired,” says Doug Casey, picking up on the theme.

“What makes this particularly dangerous is that it’s not only becoming corrupt… but worse, it’s got this huge and fairly efficient enforcement mechanism few other countries have. The Nazis would have loved the situation in the U.S. It’s become the worst of both worlds: Nordic efficiency and American neopuritanism. A deadly combination.”

That’s one of countless bon mots to be found in Totally Incorrect — a new collection of Mr. Casey’s incomparable musings on investing, money, government and life, published by Laissez Faire Books.

The paperback will retail for $27.95 when it’s published next week… but as a loyal 5 reader, you can get your own copy for nearly half off. Just follow this link.

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