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Independent financial advisers founded in 1975
Over £1.4 billion client funds under management
17 industry awards for advice since 1989

By Mike Williams, Genesis Managing Partner

Founder and Managing Partner of Genesis Asset Management, New York

Letter from America

When the Consensus Contradicts Common Sense

By Mike Williams | Wednesday, 11 September, 2019

Often in all the noise, we can lose sight of how much better things get over time.

This is surely the case when it comes to corporate profits in America, while massive job demand has been being created in parallel.

Let's take a look at a couple of great charts from Scott Grannis at the Calafia Beach Pundit:

The first chart (above) shows 60 years of corporate profits compared to nominal GDP.

You can see that the y-axes are both plotted using a semi-log scale, and both are scaled identically (i.e., the top value is 150 times the bottom value).

And the lines plotted have an identical slope if their growth rates are also identical.

What stands out here is that corporate profits have handily outpaced nominal GDP growth since 2001.

The second chart (above) is a bit more impressive for a couple reasons:

  • It uses the same data as #1, dividing profits by GDP. From 1959 through 2001, profits averaged about 6.1% of GDP, and they were mean-reverting around that value.
  • Have a look at the region starting back 2001. Since then they’ve averaged 8.7%, with no signs of a mean reversion to 6%.

In short, corporations these days are generating profits on a scale never seen before 2001.

For the past 17 years, corporate profits have averaged a higher percentage (about 40% higher) of GDP than they ever saw in prior years.

That translates into a roughly 40% increase in profits when measured against GDP.

And if you look back to the period of the bull market of the 1980s and 1990s, that entire span of time spent a vast portion of its steady rise below that average.

Amazing what perspective can do, eh?

Back in the 1980s and 1990s, failing was considered a badge of honour. We knew no defeat (Remember the first "Wall Street" movie with Michael Douglas?).

Today the first thing we think of is risk and volatility.

In essence, we have seen a massive shift in deep-seeded emotions.

Fear Shapes the Current Paradigm

The investor consensus is not loading up on stocks, ETF’s, and mutual funds even though we are within single percentage points of all-time highs.

That’s the case after 10 years of expansion.

Instead, they’re flooding bond funds and standing in line to buy bonds at close to record low yields.

This is the exact opposite of what you would historically expect if markets were truly in trouble.

The behaviour on both sides of the board screams fear.

These actions completely overlook all of the policy stimulus being introduced into the system, which is in reaction to all the fear itself.

And while this is a nutty cycle, it’s also a positive one for economies and markets; fiscal stimulus, policy stimulus, monetary growth, and lower yield.

So, while the general expectation about our collective future is now just a shade below "Apocalyptic" in nature, it’s very easy to get the "Wow! That’s not even close to as bad as we thought" type of response.

History suggests that it is this next phase of thinking which drives a market out of a lengthy and patience-testing trade ranges, and into surprising new highs.

The good news is that we have had a slow growth recovery process.

Slow growth controls elements which have previously led to over-extended investing and a creation of over-supply which leads to the recession everyone is convinced is already here.

Instead that "slow 2% stall speed" has led to full employment, with a 4% unemployment rate, more jobs than people, record earnings, record consumer wealth, record consumer liquidity, record personal incomes and record small business liquidity to top it off.

©2022 Alan Steel Asset Management Limited is authorised & regulated by The Financial Conduct Authority. Please note that the Financial Conduct Authority does not regulate some forms of tax advice. Company Registration: SC58014

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