Has productivity growth slowed in the U.S. and around the world, as is the conventional wisdom? Or is that just an illusion, caused by the difficulty of measuring the quality improvements (instead of quantity improvements) that constitute the bulk of productivity growth? In a provocative interview, Horace (“Woody”) Brock, an economist, strategist and consultant to many of the world’s leading institutional investors, puts his unique spin on questions like these.

Woody and I discussed issues that he raised in an article, “Rampant Confusion: Monetary policy, yield curve, bond yields,” disseminated by Portfolio Construction Forum (Sydney, Australia), August 10, 2017, (password-protected; free to join). In it, he introduces the topic by recalling,

A client recently called me to ask: “Does any central banker or economist you know of understand what is really going on with respect to inflation, growth, and in turn monetary policy? Those of us who must make decisions about developments in real-world markets feel we are living in a Tower of Babel in which no one seems to know what they are talking about.”

I spoke with Woody on August 30, 2017.

Slow or robust growth?

Larry: What is the source of the “rampant confusion” to which your article refers? As best I understand it, we are in what appears to be a very extended period of slow growth in the real economy, at least in the developed world, but stock prices are high and, thus, do not agree with the verdict of slow growth. To reconcile these two observations, you are looking at factors that suggest maybe growth has been faster than measured, with the discrepancy due to mismeasurement of inflation in a period rapid technological change. Is this an accurate characterization?

Woody: Explaining the fact that the stock market has done very well, with that being a problem because the economy has done less well, is not my motivation at all. The stock market to me is a totally different subject. The stock market, to be rid of this issue, has gone from 775 [on the Dow] in 1982 to 22,000 today, without a huge bubble over the long run, for two reasons that have never happened before: interest rates went from 15% to a little more than 1%, and corporate profits as a share of GDP doubled from 5.2% to 10.3%.

Obviously, these two developments would mean a fantastic market over that period. Moreover, at 22,000 the price/earnings (PE) ratio is 22 or 23, not the 36 we saw back in 2000. So, the stock market has good reasons to do what it has done.