WEBVTT - James Montier Explains Why Corporate Profits Keep Going Up 0:00:10.080 --> 0:00:13.280 Hello, and welcome to another episode of the All Thoughts Podcast. 0:00:13.360 --> 0:00:14.720 I'm Tracy Alloway. 0:00:14.480 --> 0:00:15.720 And I'm Joe Wisenthal. 0:00:16.079 --> 0:00:20.599 Joe, you know, it's a hot topic at the moment. Uh, 0:00:20.720 --> 0:00:21.680 don't say AI. 0:00:22.200 --> 0:00:24.480 I mean it is, right, but I guess it is. 0:00:24.960 --> 0:00:27.320 Yeah, Okay, Hey, we're not talking about AI. We're talking 0:00:27.360 --> 0:00:30.960 about another hot button topic, which is corporate profits. 0:00:31.360 --> 0:00:36.040 Yes, but it might kind of be related valuations, stocked, booming, 0:00:37.040 --> 0:00:38.920 profits booming, et cetera. 0:00:39.120 --> 0:00:40.080 Like there might be some. 0:00:40.000 --> 0:00:43.239 Connection, right, Okay, that is fair. But one of the 0:00:43.280 --> 0:00:46.120 reasons everyone's talking about corporate profits at the moment is 0:00:46.159 --> 0:00:50.040 because obviously there is this new idea that maybe there 0:00:50.159 --> 0:00:56.200 is profit led inflation, companies raising their prices a little 0:00:56.280 --> 0:00:58.840 more than they have to given, you know, input costs 0:00:58.880 --> 0:01:02.720 and things like supplying to and that's boosting profits. So 0:01:03.080 --> 0:01:05.520 you see it everywhere now. And one of the things 0:01:05.520 --> 0:01:09.800 that you see is corporate profits have been very, very 0:01:09.920 --> 0:01:12.880 high in recent years. Although it's true they are starting 0:01:12.920 --> 0:01:13.640 to come down. 0:01:13.880 --> 0:01:17.800 Right, And the interesting thing about high corporate profits is 0:01:17.880 --> 0:01:20.320 that there has been this expect it's been for years. 0:01:20.360 --> 0:01:22.760 I mean, they've been very high in recent years. But 0:01:22.840 --> 0:01:26.080 I mean, I remember you know, years ago people talk 0:01:26.120 --> 0:01:29.360 about corporate profits being high and they had to mean revert, right, Yeah, 0:01:29.440 --> 0:01:32.759 there was this assumption that they were at unsustainable levels, 0:01:32.800 --> 0:01:34.399 and people talked about this in the wake of the 0:01:34.400 --> 0:01:37.200 Great Financial Crisis, that corporate profits were very high and 0:01:37.520 --> 0:01:39.559 it was only a matter of time before labor would 0:01:39.640 --> 0:01:42.000 take a greater share out of profits, et cetera. Anyway, 0:01:42.040 --> 0:01:44.800 the point is, though they've been high and they've stayed high. 0:01:45.040 --> 0:01:48.880 I'm glad you mentioned mean reversion because today we have 0:01:49.160 --> 0:01:52.480 really the perfect guest. We have someone who forecast that 0:01:52.600 --> 0:01:56.240 profits were going to mean revert, they were going to fall. 0:01:56.360 --> 0:02:00.240 This was a prognostication that was made back in the 0:02:00.880 --> 0:02:03.520 very early days of twenty twelve, so right after the 0:02:03.560 --> 0:02:06.480 two thousand and eight financial crisis, when everyone was sort 0:02:06.520 --> 0:02:11.200 of scratching their heads about why they recovery. The economic 0:02:11.240 --> 0:02:14.880 recovery was slow and painful, but the recovery in corporate 0:02:14.919 --> 0:02:19.200 profit margins was quite quick, yes, and dramatic. So this 0:02:19.240 --> 0:02:24.120 particular guest made the forecast that eventually profits would mean revert. However, 0:02:24.480 --> 0:02:27.040 it is now more than ten years later they didn't 0:02:27.080 --> 0:02:30.480 mean revert, and our guest has just published a giant 0:02:30.520 --> 0:02:33.320 mea culpa, which is something that you don't see that 0:02:33.480 --> 0:02:37.120 often in the world of financial research. So kudos to 0:02:37.200 --> 0:02:39.400 the guest for doing that. And we are going to 0:02:39.440 --> 0:02:43.880 dig in about why corporate profits remain so high. 0:02:43.960 --> 0:02:46.120 I can't wait. This is a really important topic. And 0:02:46.160 --> 0:02:49.400 again with this sort of new boom in the stock 0:02:49.440 --> 0:02:52.400 market really over the last couple of months again kind 0:02:52.440 --> 0:02:55.040 of you know, we're a bull market again with stocks 0:02:55.120 --> 0:02:58.800 last October, last fall really negative, just absolutely on a 0:02:58.840 --> 0:03:02.359 tear lately recording this June fifteenth. What's driving at how 0:03:02.360 --> 0:03:05.639 sustainable is? These are great questions to dive into now. 0:03:05.800 --> 0:03:08.119 Yeah, and we're going to talk about valuations too, because 0:03:08.160 --> 0:03:11.960 of course profits valuations sort of naturally go together. But 0:03:12.040 --> 0:03:14.080 without further ado, I think I already gave it away, 0:03:14.160 --> 0:03:16.160 but we are speaking with James Montier. He is, of 0:03:16.200 --> 0:03:19.800 course a strategist over at GMO, someone we've wanted to 0:03:19.840 --> 0:03:22.640 talk to for a very long time. So I'm glad 0:03:22.680 --> 0:03:25.160 we could finally have a mom James, thanks so much 0:03:25.200 --> 0:03:26.360 for joining odd Lots. 0:03:26.760 --> 0:03:29.200 Thank you very much for having me. Guys really appreciate it. 0:03:29.520 --> 0:03:32.720 So I want to sound genuine here. I really applaud 0:03:33.000 --> 0:03:37.960 someone revisiting their previous work and thinking about it again 0:03:38.080 --> 0:03:40.760 and saying having the honesty to say I was wrong. 0:03:40.840 --> 0:03:44.160 So talk us through just to begin with, how did 0:03:44.200 --> 0:03:46.920 this sort of maya kulpa come about? 0:03:47.200 --> 0:03:50.760 So? I guess it really stems from just a longevity 0:03:50.760 --> 0:03:52.840 in the business. When you've been in it as long 0:03:52.920 --> 0:03:56.680 as I have, you cannot possibly claim to have anything 0:03:56.920 --> 0:04:00.840 approximating a kind of group track record for forecasting. And 0:04:01.000 --> 0:04:03.320 I've written before, many many years ago, when I was 0:04:03.560 --> 0:04:06.440 back a Dresna on the folly of forecasting and how 0:04:06.480 --> 0:04:09.440 stupid it is to actually attempt to forecast things. And 0:04:09.560 --> 0:04:12.760 yet I still do it. And I think if one's 0:04:12.800 --> 0:04:14.560 going to do that, there's a whole. 0:04:14.320 --> 0:04:16.719 Industry dedicated to doing it, So you're not the only one. 0:04:17.360 --> 0:04:20.919 Absolutely, Yeah, the entire financial industry seems to think it 0:04:20.920 --> 0:04:23.400 can tell the future. We make Gypsies with their crystal 0:04:23.440 --> 0:04:27.560 balls look positively reasonable with our accuracy, and so I've 0:04:27.640 --> 0:04:30.360 long long taken to the view that we really have 0:04:30.480 --> 0:04:33.240 to go back and examine our mistakes. Right. There's this 0:04:33.440 --> 0:04:36.400 concept of the growth mindset that Carol Dweck wrote about 0:04:36.520 --> 0:04:39.080 years ago, and it really is that the only way 0:04:39.080 --> 0:04:41.880 of learning is to embrace your mistakes right. If you 0:04:41.960 --> 0:04:43.480 get it right, fine, you got it right, but you 0:04:43.520 --> 0:04:45.960 don't learn anything. If you get something wrong. There's the 0:04:46.000 --> 0:04:48.360 opportunity to learn something. You know, why did you get 0:04:48.360 --> 0:04:51.040 it wrong? And so for me, as I've gone over 0:04:51.080 --> 0:04:53.560 the years and I guess I've aged and an ego 0:04:53.600 --> 0:04:58.760 has died. You know that kind of enthusiasm of exuberance 0:04:58.800 --> 0:05:01.160 of youth where you're like, yeah, I mean vincible, I'm 0:05:01.200 --> 0:05:03.560 always right, and you're like, no, the market's just wagh, 0:05:03.560 --> 0:05:06.159 you're down. Over time, you've been wrong. And I think 0:05:06.200 --> 0:05:10.120 what's particularly fascinating to me is when you have a 0:05:10.160 --> 0:05:12.440 long term forecast. You know, the short term ones are 0:05:12.480 --> 0:05:15.120 just noised right, any goody would be right tomorrow, who knows. 0:05:15.440 --> 0:05:18.120 But the long term views, where you're talked about mean 0:05:18.160 --> 0:05:21.120 reversion in your intro and mean reversion doesn't happen, that 0:05:21.480 --> 0:05:24.560 really gets interesting to me. And I've always kind of 0:05:24.839 --> 0:05:28.400 piken those examples of where I've been wrong now ten 0:05:28.480 --> 0:05:31.599 years after the fact and so, okay, what on earth 0:05:31.640 --> 0:05:35.320 did I miss? Because for me, it's all about learning. 0:05:35.560 --> 0:05:38.720 How do I improve? I'm fifty two years old this year, 0:05:38.839 --> 0:05:41.480 and I'm still stupid enough to think that I can 0:05:41.560 --> 0:05:43.960 learn and maybe get better. I probably won't get better, 0:05:43.960 --> 0:05:44.880 but at least I can learn. 0:05:45.080 --> 0:05:49.240 So why do we go back to start? Why don't 0:05:49.240 --> 0:05:52.080 we go back ten years or a little more? I 0:05:52.080 --> 0:05:54.240 guess to your call in twenty twelve, and at the 0:05:54.279 --> 0:05:57.200 time there's a chart in your newest white paper that's useful. 0:05:57.600 --> 0:05:59.760 It shows that at the time when you sort of 0:06:00.480 --> 0:06:04.279 sort of rain the alarm about corporate profits US NEPA 0:06:04.360 --> 0:06:08.200 profit margins is a share of GNP. They're about ten percent, 0:06:08.600 --> 0:06:11.280 which was well higher than anything we had seen. And 0:06:11.320 --> 0:06:14.040 say the fifty years or I guess seven years prior, 0:06:14.560 --> 0:06:16.919 they've sort of gotten as high as nine percent, but 0:06:16.960 --> 0:06:18.960 they had gotten really high at that point. So what 0:06:19.000 --> 0:06:22.200 do we start there, like talk about the conditions that 0:06:22.320 --> 0:06:26.160 had gotten us in twenty twelve to an extraordinary high 0:06:26.279 --> 0:06:28.360 level of corporate profit margins. 0:06:28.920 --> 0:06:31.600 Sure, So the framework I tend to use to understand 0:06:31.640 --> 0:06:34.760 these things is something called the Kalechi equation. 0:06:35.000 --> 0:06:37.960 Which many of our many odd Logs listeners. We did 0:06:37.960 --> 0:06:41.000 a full episode on Koleetchki and. 0:06:40.800 --> 0:06:41.840 Well Collecki Tribua. 0:06:42.040 --> 0:06:44.800 Yeah, so this is home term for odd logs listeners. 0:06:44.800 --> 0:06:46.080 But yes, keep going exactly. 0:06:46.160 --> 0:06:47.880 Yeah, good old yeah, and it did all the hard 0:06:47.880 --> 0:06:50.159 work for me. And I was fortunate enough when I 0:06:50.279 --> 0:06:52.320 was at university all those years ago to have someone 0:06:52.320 --> 0:06:55.400 who actually taught this stuff and arrogant enough at the 0:06:55.440 --> 0:06:58.960 time to ignore it. Back then, I was a full 0:06:59.000 --> 0:07:01.960 believer in rational ex expectations and I was a mathematical 0:07:01.960 --> 0:07:05.600 and columnist, and the beauty of rational expectations was really 0:07:05.680 --> 0:07:09.200 awesome to me. And then I realized as I began 0:07:09.279 --> 0:07:12.200 my career in finance that actually that was just a terrible, 0:07:12.280 --> 0:07:15.360 terrible framework for thinking. And I fell back on these 0:07:15.400 --> 0:07:17.360 tools that i'd been taught that i'd kind of thrown 0:07:17.400 --> 0:07:19.480 out when I was being taught them. In fact, I 0:07:19.520 --> 0:07:22.440 saw my old lecturer a good few years ago sadly 0:07:22.480 --> 0:07:24.920 at the funeral and had to apologize to him for 0:07:25.000 --> 0:07:27.600 my extreme arrogance when I was a student and tell 0:07:27.640 --> 0:07:29.440 him that the stuff he'd actually taught me was the 0:07:29.440 --> 0:07:32.320 only stuff I actually used these days. And I used 0:07:32.320 --> 0:07:35.400 this equation to kind of frame the world and try 0:07:35.440 --> 0:07:38.560 and understand profits. And it comes down to this view 0:07:38.600 --> 0:07:41.760 that profits can really be decomposed from a macro point 0:07:41.760 --> 0:07:45.240 of view. The beauty of a macro framework is it 0:07:45.280 --> 0:07:49.320 imposes conditions that tend to get missed when you're dealing 0:07:49.360 --> 0:07:53.760 with kind of micro topics. So often you'll hear people say, oh, 0:07:53.840 --> 0:07:57.560 now profit margins are high because they crushed their suppliers. Well, 0:07:57.600 --> 0:07:59.320 the problem is from an aggregate point of view, that 0:07:59.320 --> 0:08:01.640 doesn't make any sense lens. Right, it might be true 0:08:01.640 --> 0:08:04.080 for that one individual company, but it can't be true 0:08:04.080 --> 0:08:09.640 in aggregate because those suppliers profits are also companies, right, yeah, exactly, 0:08:09.760 --> 0:08:13.440 they get their inputs, So everybody's output is somebody else's 0:08:13.480 --> 0:08:16.320 input kind of thing. Right, So you can't get higher 0:08:16.360 --> 0:08:19.760 profits by squshing in aggregate, by squashing your your suppliers, 0:08:19.800 --> 0:08:21.520 because they just end up with a lot of profits. 0:08:21.960 --> 0:08:24.080 So when you take a macro lens, it gives you 0:08:24.120 --> 0:08:29.880 a kind of framework that is coherent and consistent, and 0:08:29.920 --> 0:08:33.400 that's a really powerful style. So the collect equation says, hey, look, 0:08:33.640 --> 0:08:36.800 there's a few drivers of profits. There's net investment. If 0:08:36.800 --> 0:08:38.640 you go out and you buy stuff that's going to 0:08:38.640 --> 0:08:41.520 add to productive capacity, that's going to be good for profits. 0:08:41.600 --> 0:08:45.320 It makes sense as a corporate you're investing in your future, 0:08:45.320 --> 0:08:48.440 but you are providing profits to somebody else. Again, we 0:08:48.520 --> 0:08:51.720 get that kind of no firm can bootstrap itself out 0:08:51.720 --> 0:08:55.960 of that situation, but it does in aggregate create profits. 0:08:56.440 --> 0:08:59.880 Dividends are another source of profits. Now it sounds weird 0:09:00.000 --> 0:09:03.000 because we always think about dividends being paid out of profits, 0:09:03.400 --> 0:09:05.800 but dividends, of course are an income flow to a 0:09:05.840 --> 0:09:10.080 household somewhere, and ultimately they are therefore a form of 0:09:10.200 --> 0:09:13.240 spending or potential spending. Then you get the kind of 0:09:13.280 --> 0:09:17.400 negatives that drag on profits. So if households choose to save, 0:09:17.840 --> 0:09:19.840 that's obviously a drag. You know, I'm not spending all 0:09:19.880 --> 0:09:22.280 of their income they're saving. That's going to drag profits 0:09:22.280 --> 0:09:25.840 down if governments are saving it, And that turns out 0:09:25.840 --> 0:09:28.560 to be kind of the opposite of what governments do. 0:09:28.640 --> 0:09:31.080 But if governments were saving, that too would be a drag. 0:09:31.480 --> 0:09:35.280 And if the foreign sector is saving, that too drags 0:09:35.280 --> 0:09:39.440 down profits. And so when I was looking back in 0:09:39.440 --> 0:09:43.760 twenty twelve, we had pretty big fiscal deficits. Investment had 0:09:43.760 --> 0:09:50.160 fallen dramatically and effectively the government deficits had expanded to 0:09:50.200 --> 0:09:53.240 fill some of that gap, and I foolishly made the 0:09:53.280 --> 0:09:56.360 forecast that it was really the government deficits that were 0:09:56.360 --> 0:09:58.640 going to have to come down, and that was going 0:09:58.679 --> 0:10:02.560 to be the macro driver of the profit margin mean 0:10:02.600 --> 0:10:04.760 reversion that we kind of all expected. 0:10:05.400 --> 0:10:09.200 So, just on that note, why did you think that 0:10:09.520 --> 0:10:13.080 government spending would come down? Because nowadays, I mean, we've had, 0:10:13.160 --> 0:10:17.520 you know, successive years of the US deficit getting bigger 0:10:17.559 --> 0:10:19.959 and bigger and bigger, and it's almost taken for granted 0:10:20.000 --> 0:10:22.720 at this point that it's just going to keep growing. 0:10:22.880 --> 0:10:26.480 But why did you think that spending would actually reduce 0:10:26.640 --> 0:10:27.760 back in twenty twelve. 0:10:28.640 --> 0:10:30.439 So I think it was it was a product of 0:10:30.480 --> 0:10:32.439 two things. So I was standing there on twenty twelve 0:10:32.520 --> 0:10:36.480 looking at the fiscal deficit and we're, you know, POSTGFC, 0:10:36.840 --> 0:10:40.480 and during the GFC, of course, the fiscal deficit exploded 0:10:40.640 --> 0:10:43.480 to levels that frankly, we hadn't ever seen before, which 0:10:43.480 --> 0:10:46.200 are now dwarfed by what we experienced in COVID, but 0:10:46.240 --> 0:10:49.760 back then were really exceptional. And it was that kind 0:10:49.800 --> 0:10:54.400 of extremely high level of fiscal deficit over the post 0:10:54.440 --> 0:10:57.480 GFC or the GFC, and it's kind of hangover if 0:10:57.480 --> 0:11:00.320 you like. That really had me thinking, right, it's got 0:11:00.360 --> 0:11:04.440 to come down, right, governments can't continue spending at this rate. 0:11:04.960 --> 0:11:07.600 And that's that was undoubtedly the thing I got wrong. 0:11:07.800 --> 0:11:10.920 Because it's simply never seen, at least in the US 0:11:11.160 --> 0:11:14.400 fiscal deficits of such magnitude for such a period of time. 0:11:14.760 --> 0:11:17.560 I should, of course have learned from my experiences with 0:11:17.679 --> 0:11:20.520 regard to Japan, where they'd already been running very large 0:11:20.520 --> 0:11:24.280 fiscal deficits. But at that time I hadn't really figured 0:11:24.320 --> 0:11:27.600 out that kind of secular stagnation and the kind of 0:11:27.880 --> 0:11:29.839 is the US turning Japanese was going to be the 0:11:30.240 --> 0:11:32.560 road path? It took me a little bit longer. I 0:11:32.600 --> 0:11:34.800 began to write about that towards the end of twenty twelve. 0:11:34.880 --> 0:11:37.520 Actually I began to figure out that actually that was 0:11:37.559 --> 0:11:40.400 probably a more likely template. I should have actually listened 0:11:40.400 --> 0:11:44.839 my old colleague out Albert Edwards from and he'd been 0:11:44.840 --> 0:11:47.160 telling me this for years, the US was turning Japanese, 0:11:47.160 --> 0:11:50.880 and I was like, yeah, whatever, its a great line, 0:11:50.920 --> 0:11:53.560 and it's the sun by the vapors. It's all cool. 0:11:54.559 --> 0:11:58.040 But I kind of just ignored him, and I really 0:11:58.080 --> 0:12:10.840 shouldn't have done, because it turns out he was spot off. 0:12:17.240 --> 0:12:19.960 We start to move over the course of that next decade, 0:12:19.960 --> 0:12:23.760 we didn't see the big contraction in the deficit as 0:12:23.920 --> 0:12:26.960 many people expected, and then, of course with COVID deficits 0:12:27.280 --> 0:12:30.640 blew out again and are significantly wider than you know. 0:12:31.280 --> 0:12:33.800 Twenty twelve was obviously a great time in retrospect to 0:12:33.800 --> 0:12:35.760 buy stocks. And if you just bought the sort of 0:12:35.760 --> 0:12:37.840 broad stock market in the US and twenty twelve and 0:12:37.840 --> 0:12:40.600 held to it today, you would have done quite well. 0:12:41.200 --> 0:12:45.440 If we decompose the returns over that last ten or 0:12:45.480 --> 0:12:50.360 eleven years, how much can we attribute to corporate profitability 0:12:50.360 --> 0:12:53.160 from the from those years to those stock returns. 0:12:53.760 --> 0:12:55.400 So yeah, I said, this is a really good way 0:12:55.480 --> 0:12:58.839 of framing it, and I think the way I tend 0:12:58.880 --> 0:13:02.240 to look at it don't have the decon right to hand. 0:13:02.240 --> 0:13:04.120 I have done it before, actually looking at the kind 0:13:04.160 --> 0:13:07.000 of drivers. But what I found is, by far and 0:13:07.000 --> 0:13:10.360 away the most important factor turned out to be valuation 0:13:10.640 --> 0:13:13.680 rather than profits. Profits were good, you know, they stayed high, 0:13:13.920 --> 0:13:16.600 but they did come down compared to the kind of 0:13:16.880 --> 0:13:20.280 absolute peak that we reached in twenty twelve. So profit 0:13:20.360 --> 0:13:23.520 margins and that kind of new levels of corporate profitability, 0:13:23.559 --> 0:13:27.280 although they didn't mean revert, they didn't continue to go up. 0:13:27.559 --> 0:13:31.400 And therefore the key driver of the performance that we've 0:13:31.400 --> 0:13:34.720 witnessed is actually been valuation and that I think is 0:13:35.240 --> 0:13:37.640 as Ever, here's the progostfication for you, of course, for 0:13:37.760 --> 0:13:40.840 concern right as a value based investor, when I see 0:13:40.840 --> 0:13:44.160 a market that is essentially being driven by multiple expansion, 0:13:44.559 --> 0:13:47.640 that makes me kind of nervous. And so yeah, the 0:13:47.679 --> 0:13:50.360 fact that margins didn't come down, but they didn't go 0:13:50.520 --> 0:13:52.839 up from twenty twelve actually kind of they came down 0:13:52.840 --> 0:13:55.160 a little bit, and they've stayed over that decade higher 0:13:55.160 --> 0:13:58.640 than they were historically, but they didn't rise from twenty twelve. 0:13:59.040 --> 0:14:03.280 They average. That I think tells you that the evaluations 0:14:03.320 --> 0:14:06.240 have been a massive part of this problem. 0:14:06.280 --> 0:14:09.600 Just setting aside valuations for a second, I mean, if 0:14:09.640 --> 0:14:12.600 we look at some of the fundamentals in the macro 0:14:12.720 --> 0:14:16.800 economy that might have boosted profits, one of the things 0:14:16.800 --> 0:14:20.640 in your equation is dividends, as you've laid out previously, 0:14:21.200 --> 0:14:23.000 And I think there are people out there who would 0:14:23.080 --> 0:14:27.280 argue that companies have gotten bigger, they've gotten more pricing power, 0:14:27.640 --> 0:14:35.640 maybe with monopolistic tendencies. Could that be genuinely boosting profitability. 0:14:36.360 --> 0:14:39.800 It's really fascinating. I think that the increasing dividends is 0:14:39.840 --> 0:14:44.360 certainly a noteworthy feature, right, Dividends in the last decade 0:14:44.400 --> 0:14:48.400 have indeed been significantly higher than they were over most 0:14:48.440 --> 0:14:51.440 of history. The causes of that, I think are also 0:14:51.520 --> 0:14:56.080 interesting to me. The fact that dividends have increased is 0:14:56.200 --> 0:14:59.040 really has to be combined with what happened to investment, 0:14:59.240 --> 0:15:02.560 because I think investment and dividends, as com buying, is 0:15:02.600 --> 0:15:05.280 a corporate payout decision. Right, you can either invest or 0:15:05.280 --> 0:15:08.800 you can pay dividends. Those are at a very crude level, 0:15:08.840 --> 0:15:12.120 those are your two options. And what we've seen over 0:15:12.640 --> 0:15:16.080 the last decade, compared to let's say the nineteen fifties onwards, 0:15:16.400 --> 0:15:21.160 investment roughly halved and dividends roughly doubled. And so you 0:15:21.520 --> 0:15:25.000 saw this switch in payout from a world in which 0:15:25.000 --> 0:15:27.640 corporates wanted to invest to a world in which corporates 0:15:27.720 --> 0:15:32.520 chose to distribute. Now to what extent that is driven 0:15:32.680 --> 0:15:37.560 by increasing concentration and monopolistic power, I think is a 0:15:37.880 --> 0:15:40.400 open question, and it's certainly one that I intend to 0:15:40.440 --> 0:15:43.600 return to. I did some work internally which I haven't 0:15:43.640 --> 0:15:46.120 published yet, but it's the next one in the or 0:15:46.120 --> 0:15:49.920 maybe sneak pre y later. Yeah, exactly. Yeah. Three, I've 0:15:49.960 --> 0:15:52.280 written like three papers that are now in the works. 0:15:52.280 --> 0:15:54.200 There's one more after that, which is going to be 0:15:54.200 --> 0:15:57.560 the one on monopoly, I think, and what I showed 0:15:57.720 --> 0:16:03.200 was monopoly can redistribute profits between corporates, but doesn't actually 0:16:03.280 --> 0:16:07.200 raise the absolute level of profits terribly much because what 0:16:07.280 --> 0:16:10.480 tends to happen is there are other offsetting factors. So 0:16:10.600 --> 0:16:14.520 I think these shift in the corporate payout policy is 0:16:14.640 --> 0:16:18.800 probably a function of monopoly. But it's not hugely surprising 0:16:18.800 --> 0:16:21.640 to me that when I combine investment and dividends and 0:16:21.680 --> 0:16:25.160 compare them over history, they haven't really as a pair 0:16:25.640 --> 0:16:29.120 driven this expansion of margins that we've seen, And so 0:16:29.240 --> 0:16:31.600 that fits very nicely with the work I've done, which 0:16:31.760 --> 0:16:36.400 again actually follows from Kleetski. It is such an amazing 0:16:36.480 --> 0:16:39.240 man and so important, and yet so few people know 0:16:39.320 --> 0:16:42.280 of him, Thank goodness. The odd lots listeners are a 0:16:42.320 --> 0:16:45.400 different breed. But you know, you walk around and there, 0:16:45.560 --> 0:16:50.160 why are you quoting some long dead Polish economists? And yeah, 0:16:50.400 --> 0:16:52.360 even worse from an American point of view, Yeah, he 0:16:52.440 --> 0:16:55.920 was associated with Marx. It's oh no, the end of 0:16:55.960 --> 0:16:59.480 the world is nigh. He talked to Rosa Luxembourg, this 0:16:59.560 --> 0:17:02.400 kind of thing. But he did a whole load of 0:17:02.400 --> 0:17:06.280 work on what he called the monopoly power and it's 0:17:06.359 --> 0:17:09.280 using some of his insights that I can now demonstrate 0:17:09.320 --> 0:17:12.760 in a very simple little model that actually monopolies do 0:17:12.840 --> 0:17:15.280 not rise the aggregate level of profits. 0:17:15.840 --> 0:17:18.680 Well, let me ask you another question, and it's sort 0:17:18.720 --> 0:17:22.439 of it's another thing that I remember we and by me, 0:17:22.800 --> 0:17:25.080 we I mean like sort of like you know, people 0:17:25.119 --> 0:17:27.480 who are like blogging ten years ago and trying to 0:17:27.480 --> 0:17:32.240 figure this stuff out. But another story that people told 0:17:32.280 --> 0:17:34.840 and maybe tell is that, Okay, you see these profit 0:17:34.920 --> 0:17:38.880 margins at extremely high levels, and that it represents some 0:17:38.960 --> 0:17:42.480 tilting of the balance between capital and labor. The labor's 0:17:42.520 --> 0:17:46.960 share of GDP has declined, or unionization or labor bargaining 0:17:47.000 --> 0:17:49.880 power has weakened steadily over the years. And you could 0:17:49.920 --> 0:17:51.920 put two lines on a chart, and unions are going 0:17:51.960 --> 0:17:54.879 down and profit margins are going up. Is there a 0:17:55.000 --> 0:17:58.720 zero sumness in this in terms of like how much 0:17:59.000 --> 0:18:01.960 is how much on your cruise to corporate province versus say, 0:18:01.960 --> 0:18:04.000 how much workers can get? 0:18:04.960 --> 0:18:08.400 Yeah, absolutely there is. And this was really what let's 0:18:08.400 --> 0:18:11.000 get again was talking about with his monopoly power theory, right, 0:18:11.119 --> 0:18:15.120 He was talking about exactly this issue, the distribution of 0:18:15.440 --> 0:18:18.560 the economic pie, if you like. He wrote a wonderful 0:18:18.600 --> 0:18:22.080 paper on the political aspects of full employment, all about 0:18:22.119 --> 0:18:25.440 why corporates don't actually want full employment, despite the fact 0:18:25.480 --> 0:18:27.600 that it would seem like a good idea because obviously 0:18:27.640 --> 0:18:30.320 the economy would be booming, everybody be spending, that would 0:18:30.320 --> 0:18:34.600 be trendous. But actually his argument was that corporates would 0:18:34.640 --> 0:18:37.560 really not like that because it would give exactly the 0:18:37.600 --> 0:18:40.959 point you raise their labor too much bargaining power. And 0:18:41.000 --> 0:18:43.240 I think one of the things that people have got 0:18:43.280 --> 0:18:47.280 wrong in the whole kind of inflation story that we've 0:18:47.280 --> 0:18:50.159 heard over the last few years is the kind of 0:18:50.200 --> 0:18:53.840 permanence and that whole team transitory versus team permanent and 0:18:53.840 --> 0:18:56.800 all this kind of thing. Yeah, to me, the big 0:18:56.800 --> 0:18:59.520 thing that really drives all of this is exactly the 0:18:59.600 --> 0:19:02.000 dynamic you're talking about, which is, do you have the 0:19:02.000 --> 0:19:07.120 conditions for a wage price spiral? And I have been 0:19:07.280 --> 0:19:13.679 unable to see any evidence of really significant, prolonged recapturing 0:19:14.000 --> 0:19:17.560 of labour's bargaining power. I think that that's absolutely true. 0:19:17.760 --> 0:19:22.040 This whole dynamic is really fascinating and massively integral to 0:19:22.160 --> 0:19:25.160 understanding what we are going through, what we've been through, 0:19:25.320 --> 0:19:29.080 and potentially the danger of forecasting in where we will 0:19:29.119 --> 0:19:32.480 be going. But it's to me that that distribution between 0:19:32.520 --> 0:19:35.760 labor and capital is really important, and it's tied in 0:19:35.760 --> 0:19:38.720 with monopoly, it's tied in with these kinds of issues 0:19:38.720 --> 0:19:41.600 we're talking about the profit margins. But the really nice 0:19:41.640 --> 0:19:44.960 thing about the Kalechi equation is that it sits above 0:19:44.960 --> 0:19:47.240 all of that and it frames it all. So I've 0:19:47.280 --> 0:19:49.960 described it as like Lord of the Rings. I'm a nerd. 0:19:50.359 --> 0:19:52.159 I love the Lord of the rings, and the Kaleki 0:19:52.240 --> 0:19:55.240 equation is kind of the one ring, right. It can 0:19:55.240 --> 0:19:57.719 bring all the others and bind them in the darkness. 0:19:57.840 --> 0:20:01.399 And so having that overarching framework is really useful. It 0:20:01.440 --> 0:20:05.440 allows us to understand what's been going on with profits 0:20:05.560 --> 0:20:07.680 and therefore think about what may happen with him in 0:20:07.680 --> 0:20:11.960 the future. And what you have really is if you'd 0:20:12.000 --> 0:20:17.440 seen a huge amount of corporate power relative to labor normally, 0:20:17.480 --> 0:20:20.760 that would lead to wage suppression, which indeed we have seen. 0:20:20.880 --> 0:20:23.680 You know, wages have certainly not kept up with productivity. 0:20:24.680 --> 0:20:27.399 And here I go being wrong again. In twenty eighteen 0:20:27.440 --> 0:20:30.480 I wrote a note called late cycle Lament, and here 0:20:30.520 --> 0:20:33.400 we are still in a late cycle and I use 0:20:33.480 --> 0:20:37.280 some work by another very very insightful economist, Launce Taylor, 0:20:37.320 --> 0:20:39.560 who sadly died a couple of years ago. 0:20:39.600 --> 0:20:39.800 Now. 0:20:40.000 --> 0:20:43.800 He showed how we could look at wage repression and 0:20:43.920 --> 0:20:48.200 the corporates had effectively been holding wages down relative to productivity, 0:20:48.600 --> 0:20:51.159 which I thought was a very interesting take on the 0:20:51.200 --> 0:20:54.600 kind of monopoly theme because it was to me less 0:20:54.640 --> 0:20:57.879 about monopoly power and the way we normally think about it, 0:20:57.920 --> 0:21:01.919 and that perhaps is more associated with the degreed flation 0:21:02.040 --> 0:21:05.240 story that we've heard more recently, which is corporates using 0:21:05.280 --> 0:21:08.080 their pricing power, but much more about what one would 0:21:08.119 --> 0:21:11.359 call monopsony, where it was more like you had a 0:21:11.359 --> 0:21:14.560 single buyer rather than a single seller of a product. 0:21:14.600 --> 0:21:17.119 In this case was the corporates were acting like a 0:21:17.160 --> 0:21:21.160 single buyer of labor and had squashed labor down. Now, 0:21:21.200 --> 0:21:24.840 it doesn't actually explain why over the last decade we've 0:21:24.880 --> 0:21:28.840 had high profit margins, because had they been squishing labor down, 0:21:29.160 --> 0:21:32.800 I would have expected household savings to have to decline, 0:21:33.040 --> 0:21:36.919 But by freak of accident, in the sample that I 0:21:37.000 --> 0:21:39.520 looked at, it turned out that household savings had been 0:21:39.800 --> 0:21:42.840 exactly the same. Now, some of that is driven by COVID, 0:21:42.880 --> 0:21:45.320 because obviously it was a huge spike in household savings 0:21:45.400 --> 0:21:49.480 during COVID, but some of it is not quite adequately 0:21:49.520 --> 0:21:52.360 represented by the average of the floor of averages, if 0:21:52.359 --> 0:21:55.320 you like. But in between these two samples, at least 0:21:55.359 --> 0:21:58.480 the nineteen fifties to twenty twelve and then twenty twelve 0:21:58.520 --> 0:22:01.840 and afterwards, we know that household savings haven't been the 0:22:01.840 --> 0:22:05.040