The Wile E. Coyote Economy

I want to draw your attention to what to my eye is an absolutely brilliant white paper (PDF) from James Montier of GMO, “The Late Cycle Lament: The Dual Economy, Minsky Moments, and Other Concerns”. Here is as good a summary as any:

We have an increasingly fissured economy with low growth, lower productivity, and even lower real wage growth. An economy characterised starkly by growing differences between the haves and have-nots.

It is full of intriguing charts and graphs and interesting remarks. For example:

All the employment growth we are seeing is coming from the low productivity sectors. On top of this, the paltry gains in income that are being made are all going to the top 10%. This is not what a booming economy should feel like.

As if this wasn’t bad enough, when you dig down into the market you will find that a staggering 25% to
30% of firms are actually making a loss!


We aren’t the only ones to voice concerns in this realm. The Bank of International Settlements (BIS) (the central bankers’ central bank) has also noted similar concerns (see Exhibit 19). It has shown the number of “Zombie” firms (defined as firms aged at least 10 years old with an EBIT to net interest expense below 1) has soared.

Read the whole thing.

7 comments… add one
  • CuriousOnlooker Link

    GMO has a reputation as being bearish in their commentary. Indeed I recall reading in 2015 their 7 year projection that US stocks would have a negative return.

    Given stocks are up 40% (not including dividends) since then, GMO needs the stock market to go down 50-60% in 3 years, it is possible but unlikely.

    I am sure in the long run GMO will be correct but in the long run we will be dead too.

    As for the economy; the data is mixed. Measures like freight and trucking are strong, but construction is weak.

  • Andy Link

    That was definitely an interesting read. As a non-finance guy, it was well written enough that I understood most of it. I appreciated the nods to epistemology and cognition, which are more up my alley.

    Definitely food for thought.

  • Guarneri Link

    Isn’t this the exact same article you linked a few weeks ago? If not I can only imagine it was at Zerohedge or Seeking Alpha.

    I am not nearly as taken with these guys as you are. They smoothly alter measurement variables as they make their points (EBIT vs EBITDA, bond ratings vs covenant packages etc). In fact, if you read their piece on total factor productivity it borders on mathematical and definitional sleight of hand. They seem primarily be clever data and argument manipulators in support of their pre-conceived philosophical positions.

    I’m pretty sure this is the same article you previously linked, as the comment I made at the time was that the only interesting analysis they do is take the comparison of current to historical valuation multiples and extend it to demonstrate how extraordinary earnings growth must be to “grow into” those multiples. But then other than yield chase, I haven’t understood valuations for quite some time. (As an aside, Bain’s annual PE review – in all its multi hundred page glory – shows remarkable compression between private and public equity returns. Not good.).

    And lastly, as for those zombie firms, there has to be more to their story.
    In only very specialized cases do lenders tolerate no or partial interest service. For the authors to just throw out that notion without more detail is just shoddy work.

  • I don’t believe I’ve linked to GMO before. I got there via the Financial Times and I believe the FT links to them pretty frequently.

  • steve Link

    “between the haves and have-nots.”

    We are mostly there. I think that long run we ned with a two ro three tiered society.


  • Guarneri Link

    “What Goes Up” – Jan 23

    This must be what I was thinking about. The link in that post is broken. But it gets to the same list of articles.

  • Hmm. I had no recollection of that. Those aren’t the same articles (one was written by James Montier and the other by his colleague, Peter Tarlie, but they sound common themes.

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