Probably the best way to make money with economics

Macroeconomists don’t like it when I quote a hedge fund manager who once told me that macro data is free because you can’t make money with it. But there is a point to it. It is extremely hard to use economic data to make money. While economics defines the ocean all fish and investors have to swim in, it is how these economic data are interpreted by investors that defines how good or bad an asset will perform.

The classic example in this regard is investing based on economic growth. I have long given up counting the number of analysts and fund managers who tell clients that they should invest in China and other emerging markets because that is where GDP growth is substantially higher than in Europe or the United States. Yet, if you look at the empirical evidence, you find that the correlation between GDP growth and stock market returns or earnings growth is essentially zero, if not negative in developed and emerging markets and across all company sizes from large-cap to small-cap.

But apparently, I have been using economic data all wrong. Instead of using the data and apply it to stocks and bonds, I should have invested in books. To be precise: Rare economics books. Heinrich Ursprung from the University of Konstanz created a hedonic index of auction prices for rare economics books like Adam Smith’s Wealth of Nations to measure what the return on these books was over time. And between 1975 and 2019 he finds that these books have achieved an average annual real return of 2.8% per year. That is not only higher than the returns achieved on art but also higher than in gold or your home.

So there you have it, sell all your gold and art and use your home to store the economics books you buy at auction for forty years. But please, do not use the content of these books to manage your portfolio…

Real returns for rare economics books and other real assets

Source: Urspung (2021)