Sunday Spectacle CLXXIV

Macro-economic Drivers of Corporate Profits

(source: "What Goes Up, Must Come Down! - March 2012," Exhibit 5, James Montier, GMO, March 2012)

One of the reason people like me are bearish, and don't trust the trailing and forward P/Es, is because corporate profit margins are quite high. Most of this, as can be seen above, is driven by government "savings" (i.e. deficit spending).

IANAE—I Am Not An Economist—and can't say I understand this chart very well or agree with it entirely. For instance, I always thought the fact that consumers (in USA and Canada) were living outside their means and running big deficits was accretive to corporate profits; whereas this chart implies it is a drag. If consumers start increasing their savings (i.e. positive savings), does this mean corporate profits would be even higher? I don't get that — can anyone explain that to me?

In any case, this chart does provide a rough view of what may be driving corporate profits. The original document is well worth reading in full, if you are a macro-oriented investor.


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