“Steadily increasing corporate power over the last 40 years has been, I think it’s fair to say, the defining feature of the US government and politics in general. This has probably been a slight but growing negative for GDP growth and job creation, but has been good for corporate profit margins….Corporate power, however, really hinges on other things, especially the ease with which money can influence policy. In this, management was blessed by the Supreme Court, whose majority in the Citizens United decision put the seal of approval on corporate privilege and power over ordinary people. Maybe corporate power will weaken one day if it stimulates a broad pushback from the general public as Schumpeter predicted. But will it be quick enough to drag corporate margins back toward normal in the next 10 or 15 years? I suggest you don’t hold your breath.” ~ Jeremy Grantham
In 2011, Catherine had a series of disagreements with colleagues. Rather than writing down unsupportable debt, the central banks would print money and “crash up” the equity. The “crash up” scenario was laughed at – considered next to impossible.
Sure enough, this is what has happened. The extent of government interventions this required had been unimaginable to many members of the financial community. However, as the documents are analyzed at what is happening, attitudes are changing.
Global stock markets soared during 2017 – the S&P returned 20%+, Europe returned 25%+ and China and the Emerging Markets returned 35%+. As the markets continued to rise, investment experts were coming to grips with the highly political nature of financial “markets” in the 21st century.
Dr. Ben Hunt wrote a marvelous piece on the power of rigging stock markets as a highly profitable method of political control.
The dean of investment advisors, Jeremy Grantham came to terms in a series of reports that underscored the ability of corporations and government to engineer profits in a manner that could create new valuation levels on a long-term basis.
- This Time Seems Very, Very Different (Part 2 of Not with a Bang but a Whimper – A Thought Experiment) by Jeremy Grantham
- Career Risk and Stalin’s Pension Fund: Investing in a World of Overpriced Assets (With a Single Reasonably-Priced Asset) by Jeremy Grantham
- Bracing Yourself for a Possible Near-Term Melt-Up (A Very Personal View) by Jeremy Grantham
Grantham’s colleagues, Matt Kadnar and James Montier rightly pointed out that given the outperformance and valuation levels of the US markets, foreign stock markets remained more attractive.
A long-time favorite piece at Gurufocus.com was updated after the end of the year to underscore relative future performance of emerging versus developed markets.
One of the most memorable publications was a paper from the BIS summarizing the necessity of moving to an equity-based model!
“Between the 1980s and the 2000s, the largest ever positive labor supply shock occurred, resulting from demographic trends and from the inclusion of China and eastern Europe into the World Trade Organization. This led to a shift in manufacturing to Asia, especially China; a stagnation in real wages; a collapse in the power of private sector trade unions; increasing inequality within countries, but less inequality between countries; deflationary pressures; and falling interest rates. This shock is now reversing. As the world ages, real interest rates will rise, inflation and wage growth will pick up and inequality will fall. What is the biggest challenge to our thesis? The hardest prior trend to reverse will be that of low interest rates, which have resulted in a huge and persistent debt overhang, apart from some deleveraging in advanced economy banks. Future problems may now intensify as the demographic structure worsens, growth slows, and there is little stomach for major inflation. Are we in a trap where the debt overhang enforces continuing low interest rates, and those low interest rates encourage yet more debt finance? There is no silver bullet, but we recommend policy measures to switch from debt to equity finance.
Still doing its best to defend the official reality, McKinsey Global Institute tried to minimize the dawning realization that corporations and their stocks are outperforming the GNP at frightening rates.
As always, McKinsey makes some excellent points. However, we continue to emphasize that rigging high profits and low cost of capital for large enterprises combined with force to access cheap natural resources was not a winning system when Stalin, Hitler, and Mussolini tried it, and there is no reason to believe it will work better this time around. In the long run, we think investors will be better off if companies and the general economy are aligned with each other and with GNP growth and a healthy environment.
Nevertheless, 2017 was a year of “crashup” in the global equity markets. Early 2018 looks like a “melt up.” The question on investors mind is, “how long can this last?”