How the Grinch stole returns | Esget & Careaga

By Ben Esget & Aaron Careaga
Contributing Writers 

When Ben was younger, his family always gathered around the fire and enjoyed Christmas movies together.

Ben’s favorite was “How the Grinch Stole Christmas.”

They didn’t have cable (and DVDs didn’t exist), so the film was watched on VHS. After finishing the tape, if Ben was really lucky, another holiday flick would air on one of the three TV channels the family did receive.

Much like the Grinch’s attempts to steal Christmas from Whoville, it seems he has shifted focus to the economy and is stealing investor sentiment.

Lately, there have been several economic papers forecasting dismal growth with the possibility of little-to-no return on investment. Most academic and professional theories surrounding productivity are based on the Solow Growth Model, which is predicated on the fact that economic growth is infinitely continuous.

In a recent white paper, economist Robert Gordon argued that prior to 1750, the growth that we’ve become accustomed to today was nonexistent, and recent productivity is likely an outlier in overall economic history.

Jeremy Grantham, a well-known investor, wrote one of the more influential papers on the subject, called, “On the Road to Zero Growth.” The paper’s foundation is built off Gordon’s research and the fact that U.S. GDP growth has remained above 3 percent in recent history.

He contends that growth rates near 3 percent are unsustainable and exhibit only a small blip in history, fueled by population growth and industrialization.

As resources dwindle and populations peak, Grantham forecasts U.S. real growth of 0.9 percent through 2030, dropping to 0.4 precent from 2030 to 2050. Most valuation models use annual growth rates around 5 percent.

How do you invest for retirement in a 0.9 percent real-growth economy?

As investors lose hope on U.S. stock returns, assets will become heavily discounted and be relatively cheaper. A recent article in the Wall Street Journal explained why investors who have the wherewithal to hold U.S. stocks would likely outperform those invested in more promising markets.

As an example, it explains that “the Chinese economy has expanded far faster than those of Latin America. Meanwhile, Latin stocks earned an average of 8.2 percent annually, while Chinese stocks averaged less than a 1 percent annual return.”

More investors will retreat to safer assets and more promising markets on fears the economy is on the road to zero growth, lowering valuations and creating opportunity for higher returns. If this research is correct, we may find ourselves in a place like Whoville, celebrating with the Grinch of slow growth instead of letting him steal our joy.

Ben Esget is president of WealthMark LLC, an investment firm in Bellingham. Contact him at 360-734-1323 or ben@wealthmarkllc.com. Columns from Esget and other members of the WealthMark team appear on BBJToday.com every other Wednesday.

Aaron Careaga is a research analyst with the company. He also is the editor of  Outsider-Trading.com, a finance blog created by members of the WealthMark team to level the playing field between Wall Street and Main Street. 

Authors’ note: The information in this column should not be construed as investment advice. Everyone’s goals and investment portfolios are unique. Please contact a financial adviser or an accountant for your particular needs.

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