I will post a string of random things, which caught me in the last month or so. Highlighted the topic which attracted my attention.
Fight of fiscal vs monetary continues. It could also be called as massive market manipulation and people misinformation.
Monetary will cause internal (maturity wall?) or external shock (Japan? China?), which will cause easing. Real asset should be in demand in inflationary panic (ht Hugh Hendry), which should follow because of fiscal vulnerability, as in UK. Such thinking is probably impatient as may sound like a trade for next 6 months. It is rather for next 5, maybe more years.
I cannot forget the fact that quarterly non-financial profit after tax in US jumped to $2T in Q1/22 (and stayed there) from roughly $1T in Q4/19 (and many quarters before). Hm, maybe this somehow could be related to the $2-3T US annual fiscal deficit?
After tax and interest profit margins vs. net profit margins. Tax went down, interest also (until 2022). Fiscal problem and higher for longer will be strong headwind to markets even if multiples are sustained. More like a reminder. However, S&P is probably really different now - less leverage, better businesses, which could justify elevated margins. No doubt they benefited from low interest and reduced profit taxes but they will be harmed much less by the reverse (and could be enormously benefiting from 5% interest on cash). Profit tax is the one to watch. In some places it was increased to fund the defense spendings.
John Hussman: There’s no question that innovation should be rewarded enough to preserve incentives. But my impression is that corporate profits and extreme wealth, particularly among mega-cap companies, have become a sort of “capture” or “rent” that reflects network effects, social dynamics, and general technological efficiencies that were no part of that entrepreneur’s invention, and might be better characterized as public goods. End of quote. Another reason to watch the profit taxes. It is easy to imagine e.g. 10% public goods tax and sounds attractively in some circles.
AI: The reduction in the cost of knowledge production will transform information economics.
Bloomberg Economics did a more thorough analysis of data going back to 1969. Economists Eliza Winger and Anna Wong found that aggregate spending showed few signs of slowdown before prior recessions. “Rather, spending slows moderately only when a recession is already underway,” they wrote. And it’s precisely a slowdown in goods — durable goods — which appeared to have some signaling value ahead of downturns. Services was found to be often “insensitive to recessions.”
John Authers: In other words, the bet is on that AI has raised the profit share, or the proportion of revenues that companies can keep as profit, a number that tends to mean-revert, and has underwritten a continuing secular rise in earnings growth. That’s a big assumption. End of quote. Katsenelson had a timely reminder about price of cars in 2022 and situation now. There will always be those who want to grow at the cost of profit (which will come later, after the land grab).
Howard Marks, April 30: What does matter in this department is whether rates will stick in the range of 3.0% to 3.5% for the next 5-10 years, as I think, or return to the 0-2% range that prevailed most of the time from 2009 to 2021. If it’s the former, it should follow that equity returns will be lower than they were in that halcyon period; leveraged investment strategies will be less advantaged; and returns from credit will be markedly better than they were. That’s about all I can say, but it’s a lot. End of quote.
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