An Investing Legend on the Global Market Woes
WHY YOU SHOULD CARE
Because stocks in Japan and Europe have entered bear market territory, which could spell trouble for North America.
By Simon Constable
Simonomics: A regular look at the global economy from a former staff columnist at The Wall Street Journal.
The bears are coming. Bear markets, that is. Already, stocks in the U.K., France and Japan have plummeted more than 20 percent from their highs in 2015, which is traditionally seen as bear market territory, while U.S. equities have had their worst start to a year on record.
But you don’t see investing legend and Princeton University economist Burton Malkiel hitting the panic button. In a recent sit-down with OZY, the author of the best-selling investment classic A Random Walk Down Wall Street remained calm as he discussed global stock swings, China’s slowdown and positive prospects for the future of the U.S. economy — as evidenced by what we’ll call the Chewbacca or C-3PO effect.
OZY: Are you concerned about the market sell-off?
Burton Malkiel: No one can predict what the market will do over the short term. If you think the stock market is high based on valuation metrics, and it seems to be, it is natural that there could be a downward correction. Could it be that the Shanghai stock market crashing is the signal for that? Is it surprising that markets are volatile? Certainly, all those things seem to be happening. Is it unusual? No, not at all.
OZY: Should we be worried about China’s economic slowdown?
B.M.: No! China is the only country in the world where growth can slow from 7 to 10 percent a year down to 5 to 6 percent and people are saying it is crashing and burning. Arithmetically it is slowing down because it has to do so. It is slowing, but still growing. The Chinese economy is going through tough change. There was overbuilding in the construction sector, but now the consumer and service sectors are growing quite fast.
OZY: Is there anything about the U.S. economy that keeps you awake at night?
B.M.: Actually, the economy is in better shape than people say. This idea that we have not had productivity growth is a measurement problem. A $20,000 car you buy now is better quality than you bought 10 years ago; your iPhone is now better as well. We are basically in much better shape than people assume.
OZY: Meaning that these quality differences improve over time but don’t get picked up in economic metrics such as gross domestic product. Is there a solution to this productivity measurement problem?
B.M.: I think that is a very hard thing to do. A lot of colleagues have various measures of economic output. But I don’t think there has been an answer to it yet.
OZY: Do you see any other economic measurement problems?
B.M.: Another good example is the Star Wars franchise. If you were measuring the economic contribution of the current Star Wars movie and use current sales [more than $1 billion], I think that is probably a fraction of the value that was actually produced in 2015. I’m someone who thinks that when something is produced, its true value is the present value of future earnings. For Star Wars, there clearly has been an understatement.