Friday 27 May 2016

Corp profit margins getting squeezed from here

Due to the political dynamics in the US (i.e. against recessions, asset market crises, pro growth, pro full employment etc.), although it appears to me the Fed wants to get rates to about 1%, I think the pace is slow and they will be very reluctant to go much beyond that for fear of triggering a recession.

In my opinion Trump will engage in infrastructure projects to inject some demand into the blue collar labour markets. If wages outpace nominal GDP by even 50bps a year you have a progressive compression in economy wide profit margins in favour of labour, reversing what has happened in the last 20 years due to a combination of outsourcing and debt supported aggregate demand. US corp profits have to fall about 40% before this rebalancing is done.

Many listed companies wont have this pricing power, by definition, and profit margin compression is likely to cause an ongoing de-rating of the equity market - there are overall headwinds to investing in US shares, while Draghi is still at the stage of inflating the asset prices.

You can see here the top is in already for US corp margins:

From here this rebalancing towards labour and away from the financial system and capital is more or less unavoidable whether its inflation or a recession delivering it and most of the actors are strongly biased towards inflation. 

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