What if everything economists think they know about economic growth is wrong?
The problem may be the data, according to a CNBC report. Federal Reserve Chairman Jerome Powell raised the possibility that economist may be dramatically understating the value of the free internet.
It would be a gamechanger for stock market valuations.
Professional money managers make stock investments based on what they think they know about the economy. Their optimism swells when the data is strong.
Confidence matters. Valuations expand and indexes rise.
Since 1934, American economists have been tracking growth using Gross Domestic Product. GDP measures the value of all goods and services bought and sold.
However, GDP growth has been lackluster since the mid-2000s. Even when consumers were upbeat, growth rarely cracked above 3%.
For economists, this paradox has been hard to explain.
Federal Reserve chairpersons, from Bernanke to Powell, have targeted inflation as though it’s some sort of silver bullet. Their goal has been to have just enough GDP expansion so that there is moderate, manageable inflation.
Now Powell is beginning to open question the data. While GDP measures the value of goods and services bought and sold, many of the products central to modern life are not bought and sold at all. These include the free turn-by-turn navigation from Google Maps and almost every song ever recorded, just a swipe away on free YouTube.
It may seem simple, but in the past, their analog predecessors were measured in GDP. People used buy physical road maps and books to plan trips. Listening to music involved the purchase of records and a decent stereo for playback.
CNBC noted that, in his speech last week, Chairman Powell asked about the economic value of never needing to ask for directions. He also referenced a study by Erik Brynjolfsson, a MIT economist and one of the leading academic voices on the intersection of technology and the economy.
Brynjolfsson conducted a huge survey to determine what monetary value users placed on the most popular internet services.
Facebook (FB) users, for example, wanted $48 per month to give up the social media platform. Alphabet (GOOGL) services YouTube and Google Search were even more dear, commanding an annual fee of $1,173 and a whopping $17,530, respectively. Keep in mind, these are platforms have hundreds of millions of users inside the United States.
Powell is not the first economist to cite Brynjolfsson and wax philosophically about the true value of digital freebies.
Stanley Druckenmiller is one of the most successful money managers of the past 40 years. He told an audience at the Economic Club of New York in June that 300 billion pictures were taken globally in 2010. That number rose to 2.5 trillion photographs in 2018. Given digital platforms, the marginal cost of these photos is nothing.
The pictures offer better quality than snaps taken on the best camera a decade ago. Yet no film was purchased. The pictures will probably never get developed or printed on paper. They won’t be stored in a photo album bought at Walmart (WMT). They live only on the smartphone in your pocket.
They’re valuable … but none of them are being reflected in the GDP.
Druckenmiller makes a cogent argument that digital photos actually subtract from current GDP metrics because turning snapshots into physical pictures used to create a measurable good.
The chairman of the Federal Reserve appears to be coming around to the same point of view. Focusing on the data missed by the GDP is a big deal. It means the central bank can worry less about inflation.
A Fed that is less concerned with inflation means more dovish policies, creating greater clarity for business leaders. In the long run, this should lead to better economic growth, renewed confidence among professional money managers and higher valuations.
Nasdaq Inc. (NDAQ) is the holding company for the Nasdaq stock exchange, a global electronic marketplace for buying and selling securities. The platform is transparent, efficient and infinitely scalable. It’s also the logical beneficiary of more confidence among active investors.
Nasdaq gets a fee for every transaction, and its trading business is already booming.
Part of this is organic. The robust nature of its infrastructure has made the Nasdaq a haven for high frequency trading. This algorithmic, automated trading approach is characterized by fast-paced, rapid turnover rates, often in the range of milliseconds.
And last week, Fidelity Investments, Charles Schwab (SCHW), TD Ameritrade (AMTD), E-Trade (ETFC) and Interactive Brokers (IBKR) have all announced commission-free trading to individual investors.
In the second quarter of 2019, Nasdaq reported revenues of $623 million, with an increase in net revenues by 4%.
Even better times lie ahead. The Federal Reserve is laying the groundwork for new metrics to value stocks. Nasdaq is in the right place at the right time.
Best wishes,
Jon D. Markman
