If the gdp deflator is off, which financial investments should you make?

Many people suggest that we are under-measuring the benefits of innovation, and thus real rates of economic growth are much higher than we think.  That in turn means the gdp deflator is off and real rates of interest are considerably higher than we think.  Someday we will all realize the truth and asset prices will adjust.

Let’s say that view is correct (not my view, by the way), how should that change your investment decisions?

One implication, it seems to me, is that you should short the goods and services which are being produced so rapidly under this regime.  If that is hard to do, short their substitutes.  Say the new innovative growth is coming from the internet sector, and internet activity is a good substitute for collecting stamps (which seems to be true), well short stamps if you can.  At least get them out of your diversified portfolio.

Similarly, you may wish to invest in companies which produce goods not easily substituted for over the internet.  One observer has mentioned “perfume” to me in this connection, though I do not have the expertise to render a judgment.

More generally, if real rates of return are high, but not perceived as high by most investors (who are still victims of fallacious “great stagnation” arguments and the like), at some point those investors will learn.  With more rapid growth enriching the future, and with the realization of such, there will be a sudden demand to shift funds into the present, so as to equalize marginal utilities.  So bond prices will fall and that means you should short bonds and buy puts on bonds.

Don’t load up on land and public utilities.  Incumbent firms also may fall in value.

You also might fear this new technological progress will bring some fantastic but hard-to-afford new goods and services.  How about life extension or immortality but priced at $10 million?  The way to hedge that risk is to invest in life extension companies, but even more than their earnings prospects might dictate.  That is the best way to insure against life extension being too costly to afford.  Note that poorer investors should do this, but the very wealthy do not need to.

What else?

I thank B. and S. and Alex T. for relevant discussions connected to this post.


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