Below is a brief excerpt transcribed from today's edition of The Macro Show hosted by Senior Macro Analyst Darius Dale.
This is THE most important thing I was alluding to when talking about the General Motors situation.
To understand, you need to look at corporate profits versus labor. This is one of the most critical and basic relationships in American finance.
Let’s break this down. US recessions are the red bars. If you're new to this business and sort of roll the bones on stocks, lets start with where recessions are and where growth and labor accelerate.
Labor is a late cycle indicator. You can see it indicated on the gray line (Employee Compensation) against the black line which is capital (corporations profits).
Use this chart as a map to analyze what has happened before. In the early part of the 1970’s you can see what labor does. It peaks and rolls throughout the recession.
Mid 1970’s it peaks and rolls during the recession.
1981? You guessed it. Peaks and rolls.
Look at every recession going forward. And look at where these lines point. It’s peaking where and rolling into what? Ah-ha! Alas! Now we ask ourselves, 'Will we have a red bar ever again?'
The one thing we know for certain is that labor is going higher and corporate profits are going lower.
What’s fascinating about these other times in the past is that you don’t have to be a rocket scientist to know how consistently the black line displaying capital goes down. Now look at where we are now now on the chart. Yup, the black line is clearly going down.
This chart is essentially the most important point that I’m trying to make, that will squarely be realized in the next 6 weeks. Earnings will be negative year over year across the board. That’s why the workers at GM have leverage. Their cooperate profits are at generational highs and the people want a piece of that. As you can see, it’s all part of the cycle.