Wayne -
I think that the key in discussing productivity is the decision to distinguish the effect on individual companies and the effect on the market and the economy as a whole.
If an individual company can invest both capital and human creativity towards the improvement of various factor unit productivities, then it will be able to either produce more output with the same resources, or the same output with less resources, but the extent to which that will translate to higher profits depends on both consumer demand schedules and on how well its competitors, both real and potential, are able to do the same. The success of fundamental-based investment depends on being able to separate the winners from the losers in advance.
On the other hand, the effect on the overall economy and the market is much different. First of all, it IS true that improving unit productivity is positive for the overall economy, but, to the extent that the benefits are limited to lower prices to the consumer, profits will NOT improve and stock prices will NOT rise, absent market multiple expansion.
I think that productivity enhancements need to be broken down into two groups, as their effects are far different.
One type is the result of existing, dominant, companies investing large amounts of financial capital to add to an existing large physical capital base to continuously lower costs and defend their dominant product market position. This WILL improve profits over time and CAN support stock price appreciation. The capital invested in this type of program is that which is seeking moderate returns at low to moderate risk. At any point in time, the companies in this category are the ones which primarily determine market benchmark returns.
The second type of productivity enhancement is that due to sharp technological advances and breakthroughs. The financial capital invested in these ventures is seeking extraordinary returns at high risk. The successes of this type will exhibit massive appreciation, but will initially have little positive effect on market benchmarks.
In fact, the market benchmark effect may well be negative as the economic value of the physical capital bases for the existing dominant companies is destroyed as new processes and products come into being. Even if it is the dominant companies that deploy the new technology themselves, the existing physical capital will still be destroyed and profits will be only maintained, at best.
Regards, Don |
