A quick note between feedings (baby Curtis Bear is 3 weeks old and doing great and, actually, giving us little cause to complain).
The markets continue to climb the proverbial “wall of worry (markets’ periodic tendency to surmount a host of negative factors and keep ascending)” The latest worry is that “corporate profits are rolling over! AIEEEE!” Alongside signs the tight labor market might finally be ticking up wages a wee bit.
Lets ignore the underlying blindered political/social perspective and just look at the mechanics.
- Corporate profits have been at an all time high as a % of the economy for ages. And especially since the 2008 crisis.
- The other side of that coin is that wages have claimed a declining share of the economy. Gallons of ink has been spilled over the lack of wage inflation as employment has recovered.
- Consumer (ie worker) spending is roughly 70% of the economy.
So Capital might (finally) losing ground to Labor. If you want a less political formulation – the engine driving 70% of the economy is finally getting a little more fuel in the cylinders. And pumping fuel into that consumer/worker engine is a heck of a lot more productive than super-charging the capital/financial side of the economy.
- Worker’s propensity to spend is high. A dollar in their pocket is going to (mostly) turn into a dollar spent. Going into the pockets of another worker. lather, rinse, repeat. Monetary velocity goes back up and the whole economy gathers speed.
- Capital’s propensity to spend is LOW. Rich people save. A lot. Plowing “extra” dollars back into financial assets. Driving up the price of assets but doing little for the “real” economy. Sound familiar?
The first signs of a real consumer-led recovery should be heralded as a good thing for the economy. That’s what real booms (and eventually bubbles) are made of. OK, corporate profits decline as a percent of total. But the total is growing faster as a % and that growth is concentrated in “real” sectors of the economy vs finance fun-with-numbers.
This is also probably good news for the markets over the next few years.
- Yes, corporate profits will face a headwind. Which means earnings will be harder to come by in the short-term. Put more bluntly, companies will have to give up a larger share of revenues to their workers and keep a smaller share for investors.
- But the total pie will start growing again. What happens when 70% of the economy comes out from under a decade-plus of repression.
The shorter-term vs longer-term risk trade-off in current markets is “animal spirits.”
- Rich people will feel worse because their share of the pie will be shrinking. Boo hoo. But the investor class is largely made up of rich people so…
- But merely prosperous people (doctors & lawyers & etc…) will start to feel the pulse quickening around them The retail investor will come back. Probably to be fleeced yet again, but I digress.
- The average Joe will start to feel better. And that’s what fills the streets (and stores) with upbeat animal spirits.
The question is which cycle kicks in when etc etc. But the overall trend is pretty darn good. unless you are a dog-in-the-manger plutocrat type. More on that later.