This guest commentary was written by Jesse Felder of The Felder Report.
Back in 1999, in a now-famous article for Fortune, Warren Buffett discussed how stocks had become priced for perfection and that investors would inevitably be disappointed (and, for what it’s worth, stocks are even more highly priced today based on Buffett’s favorite metric). While he was wrong about reversion in profit margins at the time, he may end up being proven right in a way he clearly hoped he wouldn’t be:
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. In addition, there’s a public-policy point: If corporate investors, in aggregate, are going to eat an ever-growing portion of the American economic pie, some other group will have to settle for a smaller portion. That would justifiably raise political problems—and in my view a major reslicing of the pie just isn’t going to happen.
We haven’t seen the mean reversion Buffett expected because ‘corporate investors have actually been eating an ever-growing portion of the American economic pie and labor has so far settled for a smaller portion.’
And we are now starting to see the political problems he envisioned that are a direct result of this reslicing of the pie. Populism and nationalism are merely symptoms of rising animosity among voters and it’s not hard to see where it comes from. Real median earnings for men have gone nowhere now for over 40 years. Over the same span of time real corporate earnings have risen roughly five-fold.
In the past, massive income inequality has inspired a significant change government policy toward unchecked corporate powers. This could very well happen again today. In fact, socionomist Peter Atwater has already proclaimed this the “Backlash Era” where voters, employees and regulators stand up and confront abuses of power seeking reprisal. This may be how the “winner-take-all economy” finally comes to an end and the downtrend in labor share reverses higher.
No companies represent the “winner-take-all economy” better than the FAAMG stocks. The massive cash piles built up on their balance sheets is exhibit A in this regard. And here the political pressures are already are rising very rapidly. The Russian interference in the election was just the catalyst for a broader understanding of the unprecedented powers these companies now wield. As a result there’s a growing consensus that many of these companies have grown too big for their own good. And it’s a consensus that is increasingly being embraced by both sides of the aisle in Washington.
These are very long-term trends and take a great deal of time to play out. That said, I think it’s abundantly clear that the unprecedented income inequality in our country today is already inspiring a social and political shift that could swing the pendulum back in favor of labor at the expense of Corporate America. In which case, Mr. Buffett will eventually be proven right about profit margins even if it didn’t play out the way he hoped it would.
This is a Hedgeye Guest Contributor piece written by Jesse Felder and reposted from The Felder Report blog. Felder has been managing money for over 20 years. He began his professional career at Bear, Stearns & Co. and later co-founded a multi-billion-dollar hedge fund firm headquartered in Santa Monica, California. Today he lives in Bend, Oregon and publishes The Felder Report. This piece does not necessarily reflect the opinion of Hedgeye.