Bloomberg is arguably the best source of financial/economic journalism today (and free too!). However, this week they wrote up a story that seems to be an irresponsible analysis. Technically, they replicated an analysis from Goldman Sachs to cover Goldman’s insight, but they also did little in the way of challenging it.
The eye-catcher from the story was the following graphic:
The Bloomberg analysis then jumps to conclusions that advanced nation central banks’ quantitative easing (QE) stimulus measures have excessively stoked financial asset prices relative to price/wage growth and output growth in the real economy in the advanced world, as these latter figures have been consistently mediocre.
However, financial asset prices are significantly less sticky (i.e. more flexible/readily-volatile) than than wages and goods prices:
This serves Goldman’s preemptive conclusion in a couple ways. The first is that financial asset markets dropped much more considerably than wages and prices in the real economy in 2008 due to the run on financial markets. Thus, the first picture (from the Bloomberg analysis) benefits from indexing its price growth calculations based on data from the very end of 2008, when financial assets had crashed significantly but wages, prices, and output in the real economy had fallen to a much lesser degree.
To illustrate why this is misleading, I replicate the Bloomberg/Goldman analysis below for some of the U.S. data. I use the total returns for the S&P 500 stock index, an index of U.S. high-yield corporate bonds (US HY), and US nominal GDP (USNGDP) which combines growth in prices (wages) and output in the U.S. The blue bars show the same information as in the Bloomberg picture above, by indexing the data to their values as of 12/31/2008 (i.e. calculating the percentage growth of the values since then). Then, I have shown in the orange outlines what the returns to stocks, HY bonds, and NGDP are when indexed to a pre-crisis date—9/30/2007—before any significant run on financial markets. Notice that the growth in the USNGDP level is about the same while the asset price returns appear much less exaggerated.
The second way failing to more seriously consider the relative flexibility of financial asset prices (the article only mentions it briefly and offhand) serves Goldman’s preemptive conclusion of excessive growth in financial asset prices relative to the real economy is that financial assets’ pricing flexibility can allow them to be useful leading indicators for the U.S. economy. That is, the relatively high price growth of financial assets can indicate that economic growth (US NGDP) is expected to remain strong and/or accelerate in the coming future, which would naturally make the ownership of stocks and corporate bonds more appealing and thus would bring higher asset prices. (Too, it is worth noting that these assets are also very risky assets; it is reasonable to expect some of the riskiest financial assets’ returns to, over time, exceed overall economy returns by a notable margin due to their risk/reward profile.)
While Bloomberg is an incredibly excellent source of financial journalism and more than distant from the “fake news” phenomenon, it appears in this instance that its story was more hype than news.