Even worse when you hear the robot say it.
Have profit margins risen to a permanently higher plateau? Are average Americans better off than they were a generation ago? I had the opportunity to discuss those questions, which are centrally important to investing and economic policy, with Jeremy Grantham a couple of weeks ago.
The discussion took place as part of a larger interview about climate-change investing. Grantham is the co-founder and chief investment strategist of Boston-based Grantham Mayo Van Otterloo (GMO).
It’s been widely reported that over the last 20 years the number of publicly traded companies has decreased by about 50%. The common explanations center on the fact that the number of de-listings, mergers, acquisitions and bankruptcies have outstripped the initial public offerings (IPOs).
But I wanted to know if there was a deeper explanation related to the fact that corporate profit margins are at historical highs. Over the last dozen years, with the exception of the financial crisis, profit margins have been between 9% and 11% of GDP. Prior to that, the last time they were above 9% was in 1951.
The U.S. economy has become more concentrated in the service and technology sectors, which are inherently more profitable than the manufacturing businesses that dominated 50 years ago. Those business, like Amazon, Apple and Google have built incredibly strong, near-monopolistic franchises that should translate to higher margins.
If the market has become dominated with highly profitable, monopolistic franchises, then maybe that is why there are fewer companies and profit markets are no longer “the most mean-reverting series in finance,” as Grantham once claimed.
GMO has looked at this issue extensively. As Grantham noted, “profit margins and return on sales will vary much depending on whether you are in the supermarket business or whether you are in some software company. There is no average to which it moves.”
But that doesn’t necessarily mean that returns for equities will be greater going forward. As Grantham explained, higher margins will attract more capital and reduce the returns relative to other asset classes. “If your capital is returning more in this area than the other area then capital will flow and balance it out,” he said.
Higher margins have been offered as an explanation, by Grantham and others, for why the cyclically adjusted price-earnings (CAPE) ratio is higher than its historical average. But CAPE ratios depend on other factors, such as real interest rates, so margins only tell part of the story.
Grantham said that the monopoly factor has increased margins “a bit.” “Corporate power as exercised through Congress, particularly in the U.S., has clearly increased the total domination of regulatory boards by the industries. Regulations have gone from being concerning to laughable, and totally run by those guys for their own interests,” he said.
Grantham is far more concerned about the societal impacts of unchecked capitalism than he is with its effect on margins. “We are seeing a flowering of corporatism where government is designed to maximize the opportunities of giant influential companies and industries that spend a lot of money lobbying,” he said. “We continue down that primrose path today with yet another cycle of deregulating designed to help corporations.”
Grantham spoke about the “punishing consequences” that tax cuts and deregulation will have on the general public. He said that “maximizing the returns and the share of the pie going to corporations and the superrich is deplorable and has terrible effects on the economy in the long run. The average person in the street doesn’t have the buying power increments that they used to have.”
But is the average American really losing buying power? On this point, Grantham and I disagreed. Whether you go back 10, 20 or 40 years, I contend the standard of living for Americans has increased enormously.
Grantham, however, said that in terms of general well-being and happiness, Americans are worse off.`
“If you do your best to control for everything and measure happiness, this is not a particularly happy country,” Grantham said. “It is not entirely dependent on income by any means, and we have not improved.”
He acknowledged a couple areas where Americans are better off – entertainment, such as high-tech computer games, and medicine, where he said progress in drugs and technology are keeping people alive longer. To those I would add food, in light of the advances in the quality and variety of choices in cuisine, and transportation, considering the speed and safety at which we can travel by car, plane and other means.
But Grantham said that the average worker has not been paid more since 1974 for an hour’s work. “Does he feel more content, or does he feel extremely frustrated by his relative lack of progress compared to others?” he asked, rhetorically. “There is no doubt that he is more frustrated. The suicide rate in that group has gone way up. The drug addiction has gone way up.”
Indeed, he said there are all the indications of a “thoroughly miserable middle America.”
A little more than a week ago it was announced that Whole Foods was bought by Amazon.com for just under $14 billion. One of the major problems with this is that Jeff Bezos, the head of Amazon has deep ties with the CIA and the Federal government. Wal-Mart being fully in the government’s pocket and now Whole Foods brought under thumb as well, how much longer before Kissinger’s “Food as a Weapon” principle is brought to bear? A good article was just released by Jon Rappaport entitled Buy your food from the CIA: Amazon buys Whole Foods, that is worth reading.
As if that connection is not nefarious enough, there is more: it appears a new cloud technology is being produced for the CIA from…you guessed it…none other than the CIA, as is excerpted here:
The intelligence community is about to get the equivalent of an adrenaline shot to the chest. This summer, a $600 million computing cloud developed by Amazon Web Services for the Central Intelligence Agency over the past year will begin servicing all 17 agencies that make up the intelligence community. If the technology plays out as officials envision, it will usher in a new era of cooperation and coordination, allowing agencies to share information and services much more easily and avoid the kind of intelligence gaps that preceded the Sept. 11, 2001, terrorist attacks.
“The Details About the CIA’s Deal with Amazon,”
Guess the data center that ran taxpayers billions that is in Utah is not enough, nor the fusion centers in every state. Did you like “…a new era of cooperation and coordination…” between the friendly agencies? And all to “avoid intelligence gaps,” just for your protection, right?
They are tightening the screws, little by little, while they refine all the control mechanisms and place that security web over their number one target: the American people. They are taking control of the food supply incrementally. Water? Yes, here in Montana, the state just sent out a form for property owners to declare their water rights…as the CKST (Confederated Kootenai &Salish Tribes) Water Compact was passed into law in Montana in 2014. Actions will be taken within the next two years.