Why do equities grow faster than GDP over the long term
7% vs 3% or whatever the numbers are.
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Hi Bill.
Ben Inker is a smarter and more concise guy than me:
https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51I…
in part cuz equities are a levered exposure to gdp, whether that's thru financial leverage or operating leverage
also, companies can make improve their business models or create a moat around their business, thus leading to multiple expansion because the business becomes more valuable - this kind of growth is company specific and independent from gdp growth
And GDP is not levered? Arguably, total leverage in our system could be as much or more than the debt level of traded companies.
GDP simply is the sum of the whole, including the good, the average and the bad. On the other hand, traded equities often represent the best and the fastest growing companies in each industry. These companies armed with a whole swath of operating competitive advantages and better access to the capital markets stand a chance to outperform those without.
Can equities continue to outperform GDP in the long run? In an efficient steady state market, I doubt it. But our system is far from efficient. For one, information is never perfect and information asymmetry in the information age defines competition today. So in theory, equities can outperform GDP in the long run.
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