Wednesday, April 2, 2014

Macro Economics : Shooting That Chart

We are talking about THAT chart (US corporate profit to GDP)

Here is an absolutely must read article from Philosophical Economics, which perhaps not yet been so popular. So far I have seen covered by only Cullen Roche and FT Alphaville (FT does a much better job though, but my advice, read the original one, and FT for TLDR)

However after all the excellent analysis it seems Jesse Livermore still can add to the lists why the dreaded Profit Margin vs GDP chart does not warrant too much worrying. 

In the accounting of profit on income basis, profit = income - wages - interest costs. 

Now with super low interest rates and a steadily dwindling wage to GDP ratio in the US, there is every possibility the "mean" that the chart would revert to has shifted upward. Else the rates has to go up and/ or the wage fraction of GDP (which means you now need to shift the arguments from stock brokers feeling bearish to economists talking about Secular Stagnation and Inequality)

One less reason to feel bearish. But let's stop at that before someone flip it to the other side

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