>I completely agree that the cost of capital and the return on capital
>must tend toward equilibrium. But, I also believe that over time the
>productivity of both capital and labor increase, due to all the
>obvious reasons surrounding advances in technology and education.
>Therefore, I believe that this convergence of asset prices and asset
>returns will be
>at some level determined by the economic, political, social, and
>technological conditions of the future, not those of the 1920's,
>30's, 40's, etc.
<< Labor Productivity has been increasing for over 2000 years+ >>
I believe labor productivity was pretty much constant from the beginnings of fixed agriculture until the dawn of the Industrial Revolution. Up until that time, most of humanity had just enough to eat to grow to maturity and reproduce. The wealth of property owners, then, could only be expanded by increasing population and/or land, usually through conquest.
With the advent of industrialism, the wealth of both owners and laborers expanded exponentially. In theory, this could happen without changing margins. For example, through genetic engineering of yeast and flower, the size of a pie might expand greatly. Both the owner and the workers, then, could enjoy much more pie, though their proportionate slices might remain unchanged.
<< and is more related to GDP growth than a permanent increase in profit margins (temporary maybe). There is no doubt that productivity will increase for as far as the eye can see but it is unrelated to profit margins over the long haul. >>
You switched from ROE to profit margins. To be sure, high profit margins are no impediment to high ROE. But, ROE is what is decisive to valuation.
<< This is also not the first time that returns on capital have reached this level. >>
Actually, I think it is -- which makes me think the E in ROE may be undercounted.
<< In general, higher returns attract more investment which reduce returns. >>
No doubt about that.
<< In the present case the high returns have nothing to do with anything but extremely low savings rates ... >>
This raises an interesting question. Is ROE high because people are spending instead of saving (an unsustainable phenomenon) or are savings low because capital is so productive that a lower level of savings will satisfy the need to replace worn out capital?
A decade ago, the Germans and the Japanese often scolded the U.S. for consuming too much and saving too little. Now it would appear that their savings had to be so high because the uses to which their savings could be put were so inefficient.
<< ...and outrageous household credit expansion. >>
I believe household debt as a percentage of disposable income plateaued about a year ago.
<< Both are unsustainable! It is basically an income shift from people to business. It will end when the pie is divided more equally via wage increases, when the customers are broke, or when all the profits are reinvested to take advantage of the high returns and thus reduces them due to overcapacity. It could also end because the purchase of other businesses will become so costly that the returns will be reduced. >>
That could be a long way off. In terms of how to invest now, it does not appear to on the horizon 6 to 12 months out.
<< The high stock prices are the result of a flood of liquidity being
supplied by central bankers to prop up all the bad debts around the
world, >>
That seems to be isolated to East Asia. No doubt, some of it winds up bidding up prices on our Market. But, this just underscores the point that there is a certain off-balance-sheet Intrinsic Value in stability and efficiency.
<< widespread use of highly leveraged derivatives (instead of 90%
margin) >>
Don't market makers in derivatives hedge with offseting trades in the underlying security?
<< and a bad case of insanity and delusion. One need only look at the earnings pre-announcements and the large stock rallies of the same companies on the same day to know that this is the twilight zone! >>
Looking back over the past half century, economic optimism has proven less delusional than the corresponding pessimism.
<< Politics and social factors will certainly have an influence but they do not repeal the laws of economics. If can certainly have an influence but that is generally negative. >>
Removing negatives, which has been done massively and globally over the past generation, also has a certain off-balance-sheet Intrinsic Value. |
