Friday, November 14, 2014

(#44-1) November 14 2014. Three strikes and you are not even charged? You are almost certainly a banker.





Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly.” – Jeremy Grantham, Barron’s

You know, someone once told me that New York has more lawyers than people. I think that's the same fellow who thinks profits will become larger than GDP. When you begin to expect the growth of a component factor to forever outpace that of the aggregate, you get into certain mathematical problems. In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well.” – Warren E. Buffett

As U.S. corporate profit margins have made it to record highs, a debate has raged between those who place their hopes on a new paradigm of sustained high profits and those who believe in capitalism’s efficiency and the tendency of margins to revert to the mean. We show that an often-cited explanation for the new paradigm – that the U.S. economy is more service-focused – lacks empirical support.

I have taken the above from a thoughtful piece in the blog, Essentially, it argues that corporate profits are disturbingly high by historical standards and will revert. Their full article is well worth reading.

When corporate profits are extraordinarily high, the bulk of those profits go only to a privileged few, and the pay of most Americans is in decline—in real terms—you have a problem. That is exactly where we are at right now—even though you would scarcely know it from the mass media. But most Americans seem to be aware of it—hence the recent Mid-term results—even if they don’t really understand the details. On the face of it, we have an improving economy—yet it doesn’t feel that way as far as most households are concerned.   

I hold to the view that any economics system which does not work to the benefit of all its population is intrinsically flawed—and that such is the situation in the U.S. right now. I’m not arguing in favor of equality. I am advancing the cause of equality of opportunity. It is supposed to be the American way. It certainly isn’t right now. The economy is distorted to an extent that is damn near criminal—and on many occasions is just that.

We imprison people for considerable length of time because of their possession of relatively minor amounts of drugs—yet  bankers, who are found guilty of fraud and otherwise betraying their own clients to the tune of billions, are not even charged. This is a manifestation of a very sick United States of America—though mostly we refuse to admit it—or are complicit.

All too many of us cower down behind the parapets of our corporate entities and are are just that—complicit in the most egregious behavior, particularly in the financial sector. But the senior executives of few major corporate entities—regardless of market sector—are innocent today. They go along to get rich—and they do get rich—and to hell with integrity. It has no place in the current American Business Model. 

Evidently not.

Look no further than the current fining of five major banks (habitual criminals incidentally) to the tune of $4.3 billion (for a scale of criminality that makes this figure seem like chicken-feed—that malfeasance took place in a market that trades at the rate of $5 trillion a day) and it is striking that, yet again, there are no criminal prosecutions. This makes a mockery of our system of justice.

We’re in very bad place at the moment—and it’s going to get worse before it gets better. Disturbingly, neither political party is fighting for change. As far as their economic interests are concerned, most Americans have been disenfranchised. The ultra rich, and those who serve them (and there are a large number of those) now have control as effectively as if there has been a military coup.

The good news? I suspect there is a book in all this—probably not quite a comedy. Greed and corruption, when you get right down to it, are not that funny.

Do sex and greed go together? I guess they do. More research, it seems. Today’s women are so inventive, it is hard to keep up to date. Yesterday’s risqué is today’s routine.

A writer’s work is never done. Fortunately.

We writers illuminate the human condition. Sometimes, even though it is revealed in plain sight, most people choose not to see it. Sometimes what is there to be seen is disturbing.

VOR words 807.

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