The world has seen radical changes in the past 15 years; the advent of the internet, the social domination of the meme, but most importantly, the creation of an information based world. Namely, that our new paradigm for the economy has become to ignore raw demand, and instead favor perceived demand.
Consider basic investment opportunities; in the past, there was a relative expectation that capital investment followed growth. This is no longer true; according to a recently published paper by the National Bureau of Economic Research, investment capital no longer follows high yield, high growth industries. The paper, however, does admit that this correlation doesn’t necessarily suggest there is a direct link between growth and investment. It may just be coincidence.
Empirical research has begun to confirm these suspicions that have arisen from such correlations. A paper released in 2016 took a poll in 68 different job areas, and found that 40% of applicants would not take a job if the schedule fluctuated at an employers will, even if the job was paid 25% more than a traditional 9-5 job. Another 82% of applicants reported they would give up $1 per hour to choose hours, and 52% responded they would give an additional $1 an hour to work from home. Workers in general are beginning to demand more rights and leeway, and the business community is beginning to account for such.
Yet another paper released in 2016 showed the impact these cultural trends have had on business. The paper randomly selected 2800 firms, and randomly assigned them into groups. The report compared groups with monthly management meetings, and a control group, which had no meetings. Statistically, the paper found that firm revenue in groups that held meetings increased by an average of 8.1%, and groups with meetings had a positive correlation to increased networking, and significantly increased growth over groups that did not interact. Out of this research it is clear to conclude that businesses that have been able to access and connect to more people, more enterprises, and more networking have had an empirically higher rate of success.
Why? Well, as the researchers themselves have largely noted, it’s ‘networking.’ And the world of networking is always value oriented, i.e. it’s personal. It's not based on the actual numbers or empirics; its perception. Thus, my argument is that our economy, both in the trends of investments and the industrial standards for employees, is causing an empirical decline in economic growth, and replacing it with perceived value. To say the least, companies fear bad PR. Companies want to be liked. But our cultural inclinations are creating an economic bubble; at the two month mark of 2016, the stage is now set for value investing to overcome growth investment. Eventually, everyone is going to figure out we’ve built a house with no interior.
Value stocks are not bad. In fact, in the past, growth stock has faced similar problems in terms of overvaluation, with investors overestimating the potential of a company. But that’s the point. Investors knew when they were wrong, and when they were right. With enough complicated words, mathematical models, and spit and grit, the market has been largely fooled into valuing the nonexistent.
Let’s look at the empirical red flags. The Shiller ratio calculates the annual earnings of the S&P 500 companies over the past 10 years, adjusts the past earnings with inflation, and averages the adjusted values. The ratio currently shows the market at 60% over the century average, which stands at 26.2 times the average earnings. The DOW Jones almost reached 20,000. Thus, history, and its congruent models, predict that investors will be earning less. In layman’s terms, how could an average company be valued at 26 times it’s worth, if the US’s GDP is not moving at any pace near to that? It simply doesn’t make sense.
As other reports have indicated, low interest rates, government subsidies, and financial manipulation have played us all into believing there is an immensely powerful US economy where there simply isn’t one.
Hopefully, Trump can keep the glory days chugging. We can only pray.
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