tag:blogger.com,1999:blog-6798074091942701235.post7837281182509394254..comments2024-03-27T11:08:31.557-04:00Comments on Can Turtles Fly?: Stocks are Generally Good Inflation HedgesSivaram Vhttp://www.blogger.com/profile/06361276466660862882noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-6798074091942701235.post-4388985194856655312008-08-17T15:45:00.000-04:002008-08-17T15:45:00.000-04:00I concur with your first point. Namely, labour arb...I concur with your first point. Namely, labour arbitrage will keep a lid on worker compensation.<BR/><BR/>However, there are two scenarios that will likely unfold.<BR/><BR/>The first scenario, as I mentioned in the post, is increased taxes. Your seem skeptical that tax increases will occur but I'm not so sure about that. The burden has been increasing on the working and middle class and it wouldn't surprise me if there was some backlash. Given the huge fiscal deficits in some countries, I just don't see government continuing to shift the tax burden to the middle class.<BR/><BR/>Also, do keep in mind that so-called Globalization seems to have hit some bumps of late. On top of some increased conflicts and disagreements, the increase in oil prices has made transporation less efficient.<BR/><BR/><BR/>The other scenario is inability of corporations to increase prices. If consumer demand is weak then businesses will have to absorb margin compression. Given that the consumer balance sheet in America (and most of the developed world) is stretched, I suspect corporations will see declining margins. In the past they have been able to pass on cost increases since the consumer was doing well. But with the consumer potential deleveraging in the future, I see companies absorbing increased costs.<BR/><BR/><BR/>To be clear, compression in corporate profit margin is not the same as declining profits. If the GDP is growing, corporate profits will still grow--but at a slower rate (and hence the market will price down the assets.)Sivaram Vhttps://www.blogger.com/profile/06361276466660862882noreply@blogger.comtag:blogger.com,1999:blog-6798074091942701235.post-88437748377532185382008-08-17T05:16:00.000-04:002008-08-17T05:16:00.000-04:00Two remarks on the notion that corporate profits m...Two remarks on the notion that corporate profits may decline as a share of GDP in the near future:<BR/><BR/>1. The opening of the vast labor potential of India, China and the former Warsaw pact countries is putting massive pressure on wages. The balance of power between labor and capital has for the moment shifted decisively to capital. Given the huge reserve if underutilized labor remaining in those countries I don't see this changing soon. <BR/><BR/>Over here you can read regularly that workers at a given factory or other facility are given the choice between taking a big effective paycut (often largely in the form of longer hours and reduces benefits rather then a straight cut) or getting fired with the facility moved to Eastern Europe. The workers always cave. If I am not mistaken similar moves are afoot in the US (no clue about Canada).<BR/><BR/>2. At least in Europe the burden of taxation is shifting away from corporations and rich individuals, who are generally adept at tax evasion, and coming to rest on the (lower) middle class. Corporate tax is coming down and will continue to go down as long as places like the Baltic states offer rates of 15% with big allowances for reinvestment and the like. The US seems to be able to avoid this tax competition for now, but I doubt it will last.<BR/><BR/>In many ways the current period is comparable to the 1870-1914 period with large parts of the world opening to business and rapid technical innovation. In that time also labor was continuously on the defensive and wages declined as a share of GDP. <BR/><BR/>Much as a president Obama might want to jack up taxes "for the rich" he may find this impossible in practice without causing heavy flight of capital. (tellingly, our own socialist government over here is raising taxes on the poor and lower middle class while simultaneously mulling cuts in the corporate tax rate)<BR/><BR/>I think a decline in corporate profits as a share of GDP is not a given. It might happen, but some important developments are pushing the other way.Anonymousnoreply@blogger.com