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The Hale Report
Andrew Smithers: The Economics of the Stock Market

Andrew Smithers: The Economics of the Stock Market

The Hale Report Episode 30 - June 25, 2022

The Hale Report: Episode 30 with Economist Andrew Smithers

Welcome to the Hale Report. My name is Lyric Hughes Hale, editor-in-chief of EconVue and your host today. EconVue, based in Chicago, is a home for independent voices and expert analysis of critical global economic issues. If you’d like to subscribe to our monthly newsletter as well as listen to our podcasts, please visit our website and if you can, support us on Substack.

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My guest for our 30th episode is Andrew Smithers. We got together to talk about his new book which was just released in the US, The Economics of the Stock Market. This is a topic I believe interests just about everybody in the Hale Report audience.

Before you click play, let me tell you a bit about my rather legendary guest. Andrew Smithers studied economics at Cambridge, and ran the fund management business at S G Warburg which became Mercury Asset Management and is now BlackRock.

In 1989 he set up his own economics consultancy, Smithers & Co. Here I quote the Financial Times. “Much of the comments on economics and markets that he read as a fund manager struck him as nonsense and he has had great fun in pointing this out to clients over the years. He now has the opportunity to disseminate his views more widely and hopes that this will amuse and inform readers.”

In this podcast, Andrew Smithers explains that what you think you know about conventional economics and the stock market is wrong.

Some of the questions I asked and topics we covered as we discussed his new book by Oxford Press, with a preface by Andy Haldane:

  • After decades as a market practitioner, what moved you to write this more theoretical book?

  • Your thesis is that macroeconomic theory was formulated prior to the amalgamation of the extensive data that is now generated by financial markets: long-term data on returns from different classes of capital going back to 1801 now proves that conventional economics is broken. What adverse consequences does this have on economic policy?

  • Conventional economic analysis does not take financial markets into account because they are zeroed out by the Efficient Market Theory. How does this affect central bank decisionmaking. Should the Fed be listening to the markets?

  • Back in March, you wrote that economists believe central banks can stabilize economies by altering real interest rates, which the Fed did again earlier this month. Interest rates are thought to decide the cost of capital and levels of investment, which then change levels of economic activity. Why doesn’t this work in your view?

  • How should stocks be valued and are markets overvalued right now?

  • Investment in bonds vs equities is a mix dependent upon time horizons. What does this mean for asset allocations?

  • Life Cycle Savings Hypothesis-Franco Modigliani

  • Role of Companies / ESG

  • China, Japan, and State Capitalism

  • Are headed towards another financial crisis, and if so, why?

  • Download the full transcript here

I particularly enjoyed the discussion we had about other economists who greatly influenced Smithers’ thinking in applied economics. I confess that some of his references, to Brian Reddaway for example, let me down a rabbit hole of additional research. I have shared links to some of their works below.

By the way, Smithers’ book is full of charts and graphs, and a highly useful glossary with a foreword by Andy Haldane of the Bank of England, is available in the United States from June 22nd through Oxford Press and all of the usual places.

Thank you to Andrew Smithers for being my guest, and to the people behind the scenes who make EconVue possible, Managing Editor, Ying Zhan, and our producer, Sam Fu. Please visit our website to sign up for alerts about our next podcast.

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I hope you enjoy the discussion. Download the full transcript here

Lyric Hughes Hale
Twitter: @lyrichues

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