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Does economic growth boost stock prices?

There is sense to the current combination of pessimism and high stock prices


The late 1990s is dismissed as a silly era. People left well-paying jobs to join a gold rush in Silicon Valley. Good money was thrown at sketchy business ideas. 

It was, though, a time of hope. Talk of new-era economics was a little feverish, but there was a genuine surge in productivity in America.

Today is quite a contrast. Optimism is thin on the ground. This is not just a matter of the uncertainties stemming from covid-19. 

Real long-term interest rates—rough shorthand for GDP-growth prospects—have rarely if ever been lower. Productivity growth has been dismal.

There is a commonality between then and now: steep share prices. The cyclically adjusted price-to-earnings (cape) ratio, compiled by Robert Shiller of Yale University, stands a shade above 30. 

That is a little higher than its level before the 1929 crash, although lower than the peak of 2000. In the 1990s optimism about growth was part of the justification for pricey shares. 

Now we have pessimism and high prices. Paradoxically, there is more sense to the current combination.

A paper in 2013 by William Bernstein points out that periods of technological change have not been terribly good for stockholders.* 

The booms of the 1920s and 1990s ended badly. The second quarter of the 19th century—the era of the steam engine, the railways and the telegraph—was no better. The fragmentary evidence Mr Bernstein cites suggests that returns on securities were less than spectacular. 

Historians of Britain’s “railway mania” of the 1840s find that the social and economic benefits of railways were huge, but investors did not do well.

The value of a share is in discounted cashflows. If you focus on the “cashflows” part of this equation, the 1990s narrative had some logic. 

Productivity picked up. The speed limit of America’s economy was raised. More growth means more profits. 

But as Mr Bernstein points out, faster growth does not reliably translate into better returns. In periods of rapid growth, shares are issued at an even faster rate than the growth in earnings and dividends. 

Each share has a diminished claim on the larger economy. Such dilution is attributable to technological obsolescence. 

The existing stock of plant and machinery has to be junked more frequently in a fast-growing economy—and fresh assets have to be financed by issuing new capital.

The “discounted” part of the valuation equation must also be reckoned with. As many a buzz-kill noted in the late 1990s, stronger gdp growth often comes with higher real interest rates. 

At one point real long-term rates were 4% in America. That diminished the value of future cashflows.

Consider a particular blend of these influences—GDP growth, dilution and discount rates—and today’s asset prices start to make more sense. The dilution effect has been largely absent. 

Until covid-19, American companies had been buying back shares, not issuing more. 

Discount rates were low, and fell further when the virus struck. People seem as worried about tomorrow’s consumption as about today’s. They are paying handsome prices for vehicles—tech stocks, government bonds, and so on—to carry their spending power into the future.

Over the broad sweep of history, returns have tended to fall as societies become wealthier. A recent Bank of England paper concludes that real interest rates worldwide have fallen over the past five centuries.** 

Mr Bernstein explains this with a thought experiment. In subsistence societies, almost all the harvest is needed to stay alive. Setting aside capital for seed or housing is desirable. But the surplus is scarce so the rewards for doing without today for the sake of tomorrow—the cost of capital—are high. 

As economies grow richer, they generate more surplus capital. People are less impatient. 

If you are well-fed, you can afford to wait. A cheeseburger tomorrow is almost as good as one today. Your discount rate is lower.

There is noise around these trends. At times people suddenly worry a lot more about today’s cheeseburger: the start of recessions, for instance. 

Personal discount rates go up. Risky assets become cheaper—as they did, briefly, earlier this year. There will no doubt be other opportunities to buy stocks more cheaply again. 

But as Mr Bernstein’s study suggests, such episodes are likely to be more fleeting than in the past.


*“The Paradox of Wealth”, by William J Bernstein, Financial Analysts Journal (2013).

** “Eight centuries of global real interest rates, R-G, and the ‘supra-secular’ decline, 1311–2018”, by Paul Schmelzing, Bank of England Working Paper No 845 (2020).

Store Landlords Face a Battle For a Cut of Online Sales

Commercial landlords are increasingly exposed to the fluctuations in their tenants’ day-to-day business

By Carol Ryan



If retailers want leases that reflect modern shopping habits, should they hand over a cut of online sales to their landlords?

Some property owners think this would be a fair trade off in the clamor for more flexible rent arrangements. So far, though, there is no good way to measure what landlords might be entitled to and tenants have few reasons to play ball.

From global fashion players like Zara and H&M to mom-and-pop stores, most retailers are demanding better terms from landlords as the Covid-19 pandemic slows sales, particularly offline. 

In the U.K., shop owners received only two-thirds of the quarterly rent they were owed in the three months to Sept. 22, according to data by Remit Consulting. 

More tenants now want to hand over a percentage of their sales as rent rather than a fixed monthly or quarterly fee, an arrangement already common in the U.S.

Most retailers are demanding better terms from landlords as the Covid-19 pandemic slows sales. / PHOTO: PETER FOLEY/BLOOMBERG NEWS


Whatever the lease structure, commercial landlords are increasingly exposed to fluctuations in their tenants’ day-to-day business. That is a problem for valuations, among other things. 

“How do you value your assets if they are based on turnover that is constantly going up and down,” said Tom Whittington of global real-estate agent Savills.

Uncertainty about future cash flows and how to service heavy borrowings has weighed heavily on the share prices of big European retail landlords such as Unibail-Rodamco-Westfield and Hammerson. 

Having fallen around 80% since the start of the year, their stocks now trade at a fraction of net asset value, reflecting investor concerns about equity raises as well as where rents and valuations will settle.

To offset some of the new risks, landlords are looking at whether they can include a portion of a retailer’s digital sales in the pot of revenue that is used to calculate the rent. Hammerson, for example, will let U.K. tenants switch to turnover-based leases, provided they pay an “omnichannel topup.”

Retailers, which are already paying rent on e-commerce warehouses and often don’t make strong margins on online sales, will be understandably reluctant to hand over a cut. But there is some evidence that physical stores drive digital purchases. Opening a new shop in an area increases traffic to the retailer’s website by 37%, according to a study by the International Council of Shopping Centres.

Even retailers admit as much with omnichannel strategies that try to break down barriers between store and online purchases. For example, brands increasingly use their shops to take in returns of goods purchased online or to let customers pick up web purchases—so-called click and collect—saving on delivery and collection costs.

Measuring a shop’s halo effect on the online business is the difficult bit. Some landlords are looking at whether they can claim a cut of the e-commerce business done in a store’s catchment area. Hammerson plans to use metrics like a store’s click-and-collect activity to calculate its cut.

However things turn out, new lease arrangements will require retailers to open their books to landlords in a way they are not used to, and to explain how the online and store-based sides of their business interact. 

Rather than passively collecting rent, property owners will more than ever be partners in their tenants’ business. Negotiations between the two sides aren’t going to get easier any time soon.

The Vise Tightens on the Dollar

In the second quarter of this year, the US experienced the sharpest plunge in domestic saving on record, dating back to 1947. Because that will continue, and the current-account balance is following suit, the dollar's real effective exchange rate can head in only one direction.

Stephen S. Roach




NEW HAVEN – The US dollar has now entered the early stages of what looks to be a sharp descent. 

The dollar’s real effective exchange rate (REER) fell 4.3% in the four months ending in August. The decline has been even steeper as measured by other indexes, but the REER is what matters most for trade, competitiveness, inflation, and monetary policy.

To be sure, the recent pullback only partly reverses the nearly 7% surge from February to April. During that period, the dollar benefited from the flight to safety triggered by the “sudden stop” in the global economy and world financial markets arising from the COVID-19 lockdown. 

Even with the recent modest correction, the greenback remains the most overvalued major currency in the world, with the REER still 34% above its July 2011 low.

I continue to expect this broad dollar index to plunge by as much as 35% by the end of 2021. This reflects three considerations: rapid deterioration in US macroeconomic imbalances, the ascendancy of the euro and the renminbi as viable alternatives, and the end of that special aura of American exceptionalism that has given the dollar Teflon-like resilience for most of the post-World War II era.

The first factor – America’s mounting imbalances – is now playing out in real time with a vengeance. The confluence of an unprecedented erosion of domestic saving and the current-account deficit – joined at the hip through arithmetic accounting identities – is nothing short of staggering.

The net national saving rate, which measures the combined depreciation-adjusted saving of businesses, households, and the government sector, plunged into negative territory at -1% in the second quarter of 2020. 

That had not happened since the global financial crisis of 2008-09, when net national saving fell into negative territory for nine consecutive quarters, averaging -1.7% from the second quarter of 2008 to the second quarter of 2010.

But the most important aspect of this development was the speed of the collapse. At -1% in the second quarter, the net saving rate fell fully 3.9 percentage points from the pre-COVID 2.9% reading in the first quarter. This is, by far, the sharpest one-quarter plunge in domestic saving on record, dating back to 1947.

What has triggered this unprecedented collapse in net domestic saving is no secret. COVID-19 sparked a temporary surge in personal saving that has been more than outweighed by a record expansion in the federal budget deficit. The Coronavirus Aid, Relief, and Economic Security (CARES) Act featured $1,200 relief checks to most Americans, as well as a sharp expansion of unemployment insurance benefits, both of which boosted the personal saving rate to an unheard of 33.7% in April. 

Absent these one-off injections, the personal saving rate quickly receded to a still-lofty 17.8% in July and is set to fall even more sharply with the recent expiration of expanded unemployment benefits.

Offsetting this was a $4.5 trillion annualized widening of the federal deficit in the second quarter of 2020 (on a net saving basis), to $5.7 trillion, which swamped the $3.1 trillion surge in net personal saving in the same period. 

With personal saving likely to recede sharply in the months ahead and the federal budget deficit exploding toward 16% of GDP in the current fiscal year, according to the Congressional Budget Office, the plunge in net domestic saving in the second quarter of 2020 is only a hint of what lies ahead.

This will trigger a collapse in the US current-account deficit. Lacking in saving and wanting to invest and grow, the US must import surplus saving from abroad and run massive external deficits to attract foreign capital. Again, this is not esoteric economic theory – just a simple balance-of-payments accounting identity.

The validity of this linkage was, in fact, confirmed by the recent release of US international transactions statistics for the second quarter of 2020. Reflecting the plunge in domestic saving, the current-account deficit widened to 3.5% of GDP – the worst since the 4.3% deficit in the fourth quarter of 2008 during the global financial crisis.

Like the saving collapse, the current-account dynamic is unfolding in an equally ferocious fashion. Relative to the 2.1%-of-GDP current-account deficit in the first period of 2020, the 1.4-percentage-point widening in the second quarter was the largest quarterly deterioration on record (dating back to 1960).

With the net domestic saving rate likely headed into record depths of between -5% and -10% of national income, I fully expect the current-account deficit to break its previous record of 6.3% of GDP, recorded in the fourth quarter of 2005. Driven by the explosive surge in the federal budget deficit this year and next, the collapse of domestic saving and the current-account implosion should unfold at near-lightning speed.

It is not just rapidly destabilizing saving and current-account imbalances that are putting downward pressure on the dollar. A shift in the Federal Reserve’s policy strategy is a new and important ingredient in the mix. By moving to an approach that now targets average inflation, the Fed is sending an important message: zero-interest rates are likely to persist for longer than previously thought, regardless of any temporary overshoots of the 2% price stability target.

This new bias toward monetary accommodation effectively closes off an important option – upward adjustments to interest rates – that has long tempered currency declines in most economies. By default, that puts even more pressure on the falling dollar as the escape valve from America’s rapidly deteriorating macroeconomic imbalances.

In short, the vise is tightening on a still-overvalued dollar. Domestic saving is now plunging as never before, and the current-account balance is following suit. Don’t expect the Fed, focused more on supporting equity and bond markets than on leaning against inflation, to save the day. The dollar’s decline has only just begun.


Stephen S. Roach, a faculty member at Yale University and former Chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China.