December 18, 2012
Profit margins are not high, and I challenge Jeremy Grantham to say why they are high. He said they were high two years ago. That was one year out from the worst recession. Unemployment was high. There were a lot of unsold goods. There was very little pricing power. Now, he’s not telling us why they are unusually high. I can understand them being high at the top of a business cycle. Clearly, where there is a boom in demand, firms can get almost any price that they ask when there are shortages of certain goods, but why would there be artificially high profit margins coming off the worst recession in 75 years?
Unfortunately, the story doesn’t fit with the economic facts on the ground. There is the same problem with Shiller’s P/E ratio. His cyclically adjusted P/E ratio two years ago showed profits too high. Well, again, one year, two years off from the worst recession, they’re not cyclically too high. That doesn’t make sense. Ten years off from the recession you can be cyclically too high. In 1999 you were cyclically too high, but not in 2010, 2011 and 2012.
These stories are not jibing with the economic facts of this cycle. I would not worry about profits being artificially high or margins being artificially high, given the economic data.
Let me ask you about another of Grantham’s positions. In his latest quarterly commentary, titled “On the Road to Zero Growth,” he expanded on research by the economist Robert Gordon, and he argued that the US will no longer enjoy the 3%-or-more economic growth as it has in the post-war era, and that growth will slow to 0.9% for the next two decades and 0.4% through mid-century. What are your thoughts on that forecast?
I completely reject that. I read the Gordon article. It totally ignores one of the basic facts that drives productivity growth and technological change, and that is collaboration among researchers, academics, and those that are working on common problems. If you go back in history – to the introduction of the printing press, the telephone, and even the development of paper in China in the 2nd century – there was a surge of growth because people could communicate with each other in ways that they could not before. All progress is built on the shoulders of others that have done the research.
The Internet revolution, globalization, and China and India joining the world community are driving research with the best minds and smartest people working on common problems and technologies to solve them. We could be in for a golden age of technological growth. I don’t understand why growth should be lower. I understand population growth will be lower, and it’s an older population, and that’s a valid reason for slower growth. More people are retiring. But productivity is output per man-hour; it’s not the total GDP. GDP has a lot of room to expand and very likely offset the other forces of the aging economy and slower growth.
Also, one has to realize that the emerging economies are nowhere near as aged as the developed economies, and they’ve got a lot of young people to drive growth – in India particularly and elsewhere in Asia and the Middle East. Eventually I hope Africa comes on board. It has been sluggish but it is beginning to show signs of growth.
This idea that growth is finished does not look at the broad historical facts about what drives growth in an economy. It’s not just population growth. It’s the development of new technologies that come from common research.
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