Jeremy Grantham Exposes The Corporatocracy: America's "Run By Those Guys For Their Own Interests"

Authored by Robert Huebscher via AdvisorPerspectives.com,

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 margins 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.”

American prosperity

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.”

That is obvious from the suicide rate and the addiction rate, according to Grantham. He sympathizes with those who came from a world where one’s parents increased their annual wages by 3% or 4% real per year. Inflation-adjusted salaries have gone “dead flat” since the early 1970s, he said.

“This has been a bitter disappointment,” Grantham said.

I asked whether this could be the result of rhetoric from politicians and commentators who seek to amplify the fears of disadvantaged Americans. Grantham agreed that there has been a political background that encouraged – or even whipped up – disappointment.

“But it is also clear that the reasons for being frustrated have not come out of thin air,” he said. “This is not the postwar boom where blue-collar workers make enough money to feel very pleased with themselves, and have their kids one way or the other go to college. This is not by any means as successful a society.”

He pointed to some statistics that illustrate the lack of progress among Americans relative to other developed countries – more children are born to 16-year old girls, a higher murder rate, more people in prison (by a factor of three or four, he said), a higher rate of gun violence and lower life expectancies.

But the data on life expectancy is not conclusive. Life expectancy at birth is less for Americans than for most developed countries, but after approximately age 35, U.S. life expectancy is indistinguishable from the others. The reason is that the murder rate in the U.S. is so high and most victims are younger than 35.

Grantham countered that our infant mortality is 19th or 20th out of 20 developed counties and mothers who die in childbirth are very high compared to the others. He said that those rates have improved steadily, but that America pays the most for health care as a percentage of GDP, and we have worse outcomes than everyone except a couple of countries.

But you can’t use life expectancy to claim that medical outcomes in the U.S. are worse than for other countries, unless you carefully adjust for our murder rate.

I acknowledged that Americans pay more for medical care, but I contended that a better question to ask is whether all health-related government spending, including social services, is greater in the U.S. than for other developed countries. Those social services, including welfare, food stamps, and subsidized housing, contribute to better health outcomes in the same way as does healthcare. When you look at all health-related spending, the data for the U.S. is not that different than our peers (The major OECD countries on average spend about $1.70 on social services for each $1 on health services. But the US spends just 56 cents per health dollar – see here).

The question of whether Americans get better outcomes for our healthcare dollars is significant, yet for most of us its relevance will be limited to cocktail-party conversations. But the larger question of how fast our standard of living is advancing has profound implications for economic policymakers. If our standard of living is improving faster than the published data indicates, then it means that inflation has been overstated. If inflation is overstated, then real growth rates and productivity are understated.

Most importantly, this runs contrary to the claims by politicians and others about stagnating real wages.

This is where Grantham and I had the sharpest difference. He said, “There is no question that GDP growth has slowed way down. Productivity has slowed way down and we have entered a low-growth world.” In his view, this has led to extreme income inequality and favoring of corporations.

“Where it goes and how long it lasts, nobody knows. You would hope for a swinging back of the pendulum, and I would certainly hope, and to some extent I expect that that will occur in the not too distant future.”

I agree that that income inequality has risen and corporations are more favored by government policy. But I am not persuaded that real growth rates in the U.S. are as low as Grantham fears, nor am I convinced that Americans are as bad off as he claims.

Comments

any_mouse nmewn Sat, 01/20/2018 - 20:05 Permalink

"He pointed to some statistics that illustrate the lack of progress among Americans relative to other developed countries – more children are born to 16-year old girls, a higher murder rate, more people in prison (by a factor of three or four, he said), a higher rate of gun violence and lower life expectancies."

This is whole paragraph is caused by one minority race.

First sentence should say "lack of progress among African Americans".

In reply to by nmewn

helloimjohnnycat any_mouse Sat, 01/20/2018 - 20:42 Permalink

Hence, the commonly uttered phrase heard : " those fuckkin' niggers need their muh coochies cut off, cut out respective to da' wuthless apes' monkey maker moochinery ! "

God damn, why * God * had to make those niggah parts so well-greased is beyond my comprehension.

Whoever said there's no perpetual motion on Planet Earth never knew any niggers.... da' Lucky Mofo'er !

Niggers, aka joo-tools,  suck the life from the human experience.  

While addressing the black hole topic, we can't neglect the need to apply similar medical procedures to whitey-faced coon-coddling bleeding hearts.  Jaysus, we're doomed I tell ya' !

Before any asshole-thinkers accuse me of being a " nazi ", please get thumb-fuckked.

Hitler was a joo, an actor, and part of a scheme HE didn't fully understand. Not that the multi-millions who lined-up to play extras had a clue. Boy, did they pay for the braggin' rights ! 

Follow the money.  Truth will come and shall set you free.

 

In reply to by any_mouse

MEFOBILLS helloimjohnnycat Sun, 01/21/2018 - 15:31 Permalink

Hitler was not a Jooo.  There is that meme going around, and it is bull shit.

In the first years 33 to 34, Hitler was desperate to get his people back to work, so he had German patriots working on the problem.  Just about everything they did was inimical to Jewish interests.  Germany even de-linked their economy from international finance to a large degree, similar to what is happening to Russia today.

Removing jews from power, removing them from sensitive positions in the economy, burning their books, physcially removing them from the country, marking jewish establishments to make them obvious, are NOT the act of a Jew.

Honestly, it is a bit "tarded" to believe the Hitler was a Jew meme.  Even Henry Makow has gone off the deep end on this subject and is spinning tales not in alignment with actual economic data, land data, or real history.

As late as 38 a significant part of Germany was still under Jewish control, some say as much as 1/3.  So, the selling off of German Jewish property to fund Havarra is NOT as significant as people think.  Jews were complaining about not getting a High enough price for their properties ...typical of a Jew.

Hitler did fall into the trap in Poland.  Poles were executing random Germans, which enraged Hitler.  Again, Hitler's response is not the act of Jew.  Do you think a Jew would be enraged by the killing of ethnic Germans?

We have to go back to traditional education, which uses the ancient Greek Trivium method.  A lot of this method is debate and critical thinking.

Public schools, and to a large degree colleges, are just didactic teaching, posited from above. And woe betide those who go against the professor. An entire generation believes in things that can be easily debunked.

Think for yourself, if something sounds like bullshit, smells like bullshit, it probably is bullshit. 

In reply to by helloimjohnnycat

TradingTroll The Alarmist Sun, 01/21/2018 - 10:31 Permalink

Yeah, I understand, Grantham has a unique sense of valuing standards of living. For example...We have computers so people don’t write letters by hand or calculate math in their head. The standard of living outside the body rises, but inside we are getting dumber. Standards haven’t risen by as much then.

Grantham is a typical materialistic person who only values the human experience by materialistic means.

 

Good luck with that...

In reply to by The Alarmist

Endgame Napoleon earleflorida Sun, 01/21/2018 - 09:23 Permalink

In this crappy service sector economy, which has set per-capita income in many states at between $18k and $20k, rent takes more than half of earned-only income. Americans, in general, do not have more purchasing power from earned income. Dual, high-earner couples, specifically parents who dominate most jobs, concentrate wealth from the few high-paying jobs with benefits in fewer households. They — the top 20% — have an avalanche of purchasing power, much more than previous generations of professionals, and far more time off to enjoy spending it on a multitude of excused babyvacations due to automation and family-friendly workplaces. These workplaces offer massive amounts of excused absenteeism to a few highly paid parents and the low-wage mom-gang workers who can work these low-wage jobs in the service sector due to spousal income that covers their major bills, child support that covers rent or free rent, free EBT groceries and $6,444 child-tax-credit welfare for reproducing while single and working part-time jobs in the service sector to stay below the earned-income limit for welfare and the cut off for refundable child tax credits. Immmigrants, too — legal and illegal — get this unearned income from goverment, with the monthly welfare and tax welfare for US-born kids, propping up the low wages of a sole, male breadwinner who stays below the earned-income limit for the welfare programs in traceable income. The back-watching crony-mom-protection racket in low-wage office jobs, made possible by unearned income for womb productivity, is why wages for the vast majority of females never go up except to the extent that the massive wages paid to a few females in dual-high-earner households raise the average. This does not help most women one bit. Male wages have been falling for 40 years due to so much offshoring of manufacturing jobs to Asia and so much competition from welfare-buttressed illegal aliens here in the states. 

 

In reply to by earleflorida

MoreFreedom Endgame Napoleon Sun, 01/21/2018 - 13:47 Permalink

Your post fails from the start claiming "per-capita income in many states at between $18k and $20k" considering no state has such a low per-capita income:

https://en.wikipedia.org/wiki/List_of_U.S._states_by_income

Mississippi has the lowest at $40,593.   You'd have to be earning the minimum wage to get an income in the range you specify.  Those are entry level jobs for which workers quickly move to better ones as their work experience and skills advance.

As for the disincentives to work government welfare creates, I agree with you.  But I object to government welfare, because it's immoral to use force to take from some for the benefit of others.  Just as if criminals do it. 

In reply to by Endgame Napoleon

dirty fingernails Sat, 01/20/2018 - 19:19 Permalink

Stopped reading at "purchasing power has increased dramatically".

 

Motherfucker, 10 years ago $100 at the grocery store got you a cart of food. Today you'll walk with 5-6 bags.

How about going from single breadwinner households to 2 breadwinners and still scraping by. Shit, my electric bill is more fees than electricity!

 

HRH of Aquitaine 2.0 JibjeResearch Sat, 01/20/2018 - 19:36 Permalink

Several cities in my area made plastic bags illegal a few years ago. I bought some sturdy bags and walk into the grocery store looking like a bag lady! Oh, and guess what bags you can buy now? This still makes me laugh, paper bags! So much for saving the trees and not using paper. Now we have gone back to paper to save the earth from plastic, supposedly. Oh, and the super-duper plastic bags I bought? They are made of the kind of plastic used to make rice bags, it is reinforced with nylon handles similar to the type used to make halters. That shit will be around in a 1000 years. I don't get the enviro freaks. I never have. SMDH.

In reply to by JibjeResearch

HRH of Aquitaine 2.0 iLLivaniLLi19 Sat, 01/20/2018 - 22:52 Permalink

Oh fuck off and die you commie hag!

Paper is made from farmed pulp trees, one. And the super duper plastic bags that are reinforced with heavy nylon handles? Good luck burning that shit. Or burying it. Archaeologists will be digging up that shit for 1000 years.

But paper bags were so fucking bad. You don't even understand how paper is made in the US and Canada. From farmed pulp trees. Moron.

In reply to by iLLivaniLLi19

WTFUD dirty fingernails Sat, 01/20/2018 - 19:36 Permalink

Darn Right!

Hookers & Blow have remained relatively constant though. In fact with the former, there's a huge over-supply, glut, on the Market, that you can even be more discerning than the $20 crack whore on the corner. Puff is still £15 quid for an 1/8th or £25 a quarter and for Charles, you can pick up 9/10ths Grade, 1/8th of an ounce for £100 (including delivery ).

Black Market's got it tough with Al-CIAd'uh flooding the Market. The ONLY Real Market Out There.

In reply to by dirty fingernails

scaleindependent dirty fingernails Sat, 01/20/2018 - 20:56 Permalink

Where does it say that in the article?

Did a search on it and can't find it.

I think you misread it.

 

In fact, the article is making the same point you are; mainly that corporate monopoly has decreased the purchasing power and economic well being of the middle class.

Where is Teddy Roosevelt when you need him, and did America's reading comprehension go to China along with all our jobs?

In reply to by dirty fingernails

HRH of Aquitaine 2.0 Sat, 01/20/2018 - 19:19 Permalink

OT RANT: Back from the grocery store.  Oh, it is bad, people.  It is really ugly out there. I am not sure if I have ever seen so many depressed people.  Few make eye contact.  Most walk around in a little bubble or zone completely unaware of anyone else around them.  I am not sure how to describe it other than not good.

Stefan Molyneux did an intro for the Veritas guy that wrote a book comparing the US media to Pravda.  Stefan mentioned power and how power is modified.  He said that power (I am presuming he was referring to the US) will be modified by truth, collapse, or revolution.  

Look at the stupid women in the US marching around with pink pussy hats and acting like they are intelligent!  If I were a man, living in the US, there is no way in hell I would marry any of these slags let alone touch one or allow them to raise my offspring!  Normal men in the US have my complete sympathy.  Not all women are complete morons but, sadly, these days, many are.  I suggest looking abroad for a wife.  Russia, Poland, Hungary, Slovakia, Bulgaria, Romania.  The USSA is nearly done.

I have reached the conclusion that UBI (universal basic income) will happen. It is only a matter of time.  There have been multiple generations raised on welfare, with no father.  It will take centuries to repair that genetic damage, if it can be repaired.

The USSA was once an amazing country.  Now?  An empire in its fading days of glory, with twilight drawing nigh.

shovelhead HRH of Aquitaine 2.0 Sun, 01/21/2018 - 14:46 Permalink

 I was in the market yesterday and said hello to the girl stacking the shelf next to what I needed and she looked at me like I stabbed her cat.

Just to be a dick, I stared at her and didn't leave until she mumbled hello back.

Don't give me attitude because you hate your shitty life. I don't know the sad tale of how you ended up stocking shelves on a beautiful Saturday afternoon but the one thing I do know is that it ain't my fault.

I was pretty happy. I got a pile of massive T bones for $4.99 a lb. on sale and grabbed the last 3 babyback ribs at $2.00 lb. That kind of shopping puts a spring in your step and a smile on your face, so don't harsh my buzz, bitch.

In reply to by HRH of Aquitaine 2.0