The markets are running and Freeconomics could feed the bull – Michael Jordaan

Much of what happens in financial markets is counterintuitive. For example one would expect that good economic growth would translate into healthy stockmarket returns. Yet the evidence paints nearly the opposite picture. Economic growth and equity returns are not correlated at all. And past economic growth is actually a contrary indicator. Investors are better off investing in slower-growing economies of the past, not the fastest.

The correlation between GDP and global markets will become even fuzzier in future. We are already experiencing a 7-year global bull market in equities that is seemingly divorced from the painfully slow economic growth of the developed world. The conventional explanation is that this is largely due to the unprecedented money-printing activities of central banks. Market watchers now think the US Fed is about to start raising rates to prevent inflation and that this could spell the end of the run.

A possible alternative explanation for what is about to happen is the concept of Freeconomics.

In essence the increasing availability of free goods such as Google Search and Maps, Facebook, Whatsapp messages, Wikipedia or online news cannot be measured by conventional GDP as it requires an input other than zero. Likewise the basket of goods included in the measurement of inflation/CPI cannot incorporate zero-cost goods and services.

By not including valuable but free goods in our measurements we are underestimating GDP and overestimating inflation. And as we use more and more free services the extent of miscalculating the size (and growth) of economies and the reduction in inflation becomes larger and larger.

In short the global economy is probably going to grow faster than we are reporting. For investors, anticipating such future economic growth is positively correlated with outsized equity returns. More importantly, inflation is probably going to be lower than expected, meaning interest rates could/ should be lower for even longer. And that is uncontestably positive for financial markets. All we need to do is adapt our old measurement methods to cater for the abundance of free things made possible by technological advances.

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