James Montier Explains Why Corporate Profits Keep Going Up

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:15)

Joe, you know what's a hot topic at the moment? Don't say AI.

Joe Weisenthal (0:21)

I mean, it is, right? But I guess it is.

Tracy Alloway (0:24)

Yeah, okay.

Joe Weisenthal (0:25)

AI.

Tracy Alloway (0:25)

We're not talking about AI, we're talking about another hot button topic, which is corporate profits.

Joe Weisenthal (0:31)

Yes, but it might kind of be related. Valuations, stocks, booming, profits booming, et cetera. Like there might be some connection.

Tracy Alloway (0:40)

Right, okay. That is fair.

But one of the reasons everyone's talking about corporate profits at the moment is because obviously there is this new idea that maybe there is profit led inflation companies raising their prices a little more than they have to given, input costs and things like supply and demand, and that's boosting profits. So you see it everywhere now. And one of the things that you see is corporate profits have been very, very high in recent years, although it's true they are starting to come down.

Joe Weisenthal (1:13)

Right.

And the interesting thing about high corporate profits is that there has been this, it's been for years. I mean, they've been very high in recent years, but I mean, I remember, you know, years ago, people talk about corporate profits being high and they had to mean revert, right? And there was this assumption that they were at unsustainable levels and people talked about this in the wake of the great financial crisis, that corporate profits were very high and it was only a matter of time before labor would take a greater share out of profit, et cetera. Anyway, the point is though, they've been high and they've stayed high.

Tracy Alloway (1:44)

I'm glad you mentioned mean reversion because today we have really the perfect guest. We have someone who forecast that profits were going to mean revert, they were going to fall. This was a prognostication that was made back in the very early days of 2012 So right after the 2008 financial crisis, when everyone was sort of scratching their heads about why the recovery, the economic recovery was slow and painful, but the recovery in corporate profit margins was quite quick and dramatic. So this particular guest made the forecast that eventually profits would mean revert.

However, it is now more than 10 years later, they didn't mean revert.

And our guest has just published a giant mea culpa, which is something that you don't see that often in the world of financial research. So kudos to the guest for doing that. And we are going to dig in about why corporate profits remain so high.

Joe Weisenthal (2:43)

I can't wait. This is a really important topic. And again, with this sort of new boom in the stock market, really over the last couple of months again, kind of, you know, we're at a bull market again with stocks last October, last fall, really negative, just absolutely on a tear lately recording this June 15th.

What's driving it, how sustainable it is, these are great questions to dive into now.

Tracy Alloway (3:05)

Yeah. And we're going to talk about valuations too, because of course profits, valuations, sort of naturally go together. But without further ado, I think I already gave it away, but we are speaking with James Montier. He is of course a strategist over at GMO, someone we've wanted to talk to for a very long time. So I'm glad we could finally have him on.

James, thanks so much for joining Odd Lots.

James Montier (3:26)

Thank you very much for having me guys, really appreciate it.

Tracy Alloway (3:29)

So I want to sound genuine here.

I really applaud someone revisiting their previous work and thinking about it again and saying, having the honesty to say I was wrong. So talk us through just to begin with, how did this sort of mea culpa come about?

James Montier (3:47)

So I guess it really stems from just a longevity in the business. When you've been in it as long as I have, you cannot possibly claim to have anything approximating a kind of good track record for forecasting. And I've written before many, many years ago when I was back at Dresdner on the folly of forecasting and how stupid it is to actually attempt to forecast things. And yet, I still do it.

And I think if one's going to do that...

Tracy Alloway (4:13)

There's a whole industry dedicated to doing it, so you're not the only one.

James Montier (4:17)

Absolutely, yeah. The entire financial industry seems to think it can tell the future. We make gypsies with their crystal balls look positively reasonable with our accuracy. And so I've long taken to the view that we really have to go back and examine our mistakes, right? There's this concept of the growth mindset that Carol Dweck wrote about years ago. And it really is that the only way of learning is to embrace your mistakes.