Robert Arnott: Why I Feel Worse About 2013 Than 2012


Last month I sat down with Robert Arnott, CEO of Research Affiliates and a brilliant and outspoken investor. I asked him a simple question: Do you feel better about 2013 than you felt about 2012? Here's what he had to say (transcript follows):

Morgan Housel: As you look ahead, do you feel better about 2013 than you did 2012?

Robert Arnott: I feel worse about 2013 than about 2012 because we're ignoring some enormous structural problems in the developed-world economy. We have an addiction to debt finance consumption. We've shown no serious appetite -- in Europe, in Japan, in the U.S. -- to rein it in. It's hugely destructive. It creates artificial appearance of prosperity. Think of the family that buys a car they can't afford. Feels great. Drive a BMW around town with an income that can't afford the BMW. Feels great. Then, when the car is repossessed, it feels awful.

GDP is a terrible measure. It measures spending, not prosperity. So the family with the BMW, their GDP -- GFP, "Gross Family Product" -- just soared, because they just spent money they didn't have. To the extent that we're engaged in deficit spending, we're spending money that we don't have. We're creating an illusion of prosperity that has consequences. That debt has to be paid back eventually, and it leads to a lowering of future GDP in order to bolster current GDP and puts us on a trajectory for really disappointing GDP growth in the coming decade. In Europe and in Japan, I would say a trajectory that likely implies negative real GDP growth. Very destructive.

As we come into 2013, we see no signs at all that the policy elite or the immediate punditry gets it. There are parts of the media that get it, but the large majority of the media and, on a bipartisan basis, Washington doesn't get it. Here you have Boehner trying to compromise with a president who wants to spend more and tax more rather than saying, no, we were elected to reign this in, to stop this nonsense. And so it's a very dangerous world that we've got.


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