Hello, and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway.
And I'm Joe Wisenthal.
Joe, you know, it's a hot topic at the moment. Uh, don't say AI.
I mean it is, right, but I guess it is.
Yeah, Okay, Hey, we're not talking about AI. We're talking about another hot button topic, which is corporate profits.
Yes, but it might kind of be related valuations, stocked, booming, profits booming, et cetera.
Like there might be some.
Connection, 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, you know, input costs and things like supplying to 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.
Right, And the interesting thing about high corporate profits is that there has been this expect 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, Yeah, 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 profits, et cetera. Anyway, the point is, though they've been high and they've stayed high.
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 twenty twelve, so right after the two thousand and eight financial crisis, when everyone was sort of scratching their heads about why they recovery. The economic recovery was slow and painful, but the recovery in corporate
profit margins was quite quick, yes, and dramatic. So this particular guest made the forecast that eventually profits would mean revert. However, it is now more than ten 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.
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 a bull market again with stocks last October, last fall really negative, just absolutely on a tear lately recording this June fifteenth. What's driving at how sustainable is? These are great questions to dive into now.
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 a mom James, thanks so much for joining odd Lots.
Thank you very much for having me. Guys really appreciate it.
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 maya kulpa come about?
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 group track record for forecasting. And I've written before, many many years ago, when I was back a Dresna 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, there's a whole.
Industry dedicated to doing it, So you're not the only one.
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 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 right. If you get it right, fine, you got it right, but you
don't learn anything. If you get something wrong. There's the opportunity to learn something. You know, why did you get it wrong? And so for me, as I've gone over the years and I guess I've aged and an ego has died. You know that kind of enthusiasm of exuberance of youth where you're like, yeah, I mean vincible, I'm always right, and you're like, no, the market's just wagh, you're down. Over time, you've been wrong. And I think what's particularly fascinating to me is when you have a
long term forecast. You know, the short term ones are just noised right, any goody would be right tomorrow, who knows. But the long term views, where you're talked about mean reversion in your intro and mean reversion doesn't happen, that really gets interesting to me. And I've always kind of piken those examples of where I've been wrong now ten years after the fact and so, okay, what on earth did I miss? Because for me, it's all about learning.
How do I improve? I'm fifty two years old this year, and I'm still stupid enough to think that I can learn and maybe get better. I probably won't get better, but at least I can learn.
So why do we go back to start? Why don't we go back ten years or a little more? I guess to your call in twenty twelve, and at the time there's a chart in your newest white paper that's useful. It shows that at the time when you sort of sort of rain the alarm about corporate profits US NEPA profit margins is a share of GNP. They're about ten percent,
which was well higher than anything we had seen. And say the fifty years or I guess seven years prior, they've sort of gotten as high as nine percent, but they had gotten really high at that point. So what do we start there, like talk about the conditions that had gotten us in twenty twelve to an extraordinary high level of corporate profit margins.
Sure, So the framework I tend to use to understand these things is something called the Kalechi equation.
Which many of our many odd Logs listeners. We did a full episode on Koleetchki and.
Well Collecki Tribua.
Yeah, so this is home term for odd logs listeners. But yes, keep going exactly.
Yeah, good old yeah, and it did all the hard work for me. And I was fortunate enough when I was at university all those years ago to have someone who actually taught this stuff and arrogant enough at the time to ignore it. Back then, I was a full believer in rational ex expectations and I was a mathematical and columnist, and the beauty of rational expectations was really awesome to me. And then I realized as I began my career in finance that actually that was just a terrible,
terrible framework for thinking. And I fell back on these tools that i'd been taught that i'd kind of thrown out when I was being taught them. In fact, I saw my old lecturer a good few years ago sadly at the funeral and had to apologize to him for my extreme arrogance when I was a student and tell him that the stuff he'd actually taught me was the only stuff I actually used these days. And I used this equation to kind of frame the world and try
and understand profits. And it comes down to this view that profits can really be decomposed from a macro point of view. The beauty of a macro framework is it imposes conditions that tend to get missed when you're dealing with kind of micro topics. So often you'll hear people say, oh, now profit margins are high because they crushed their suppliers. Well, the problem is from an aggregate point of view, that
doesn't make any sense lens. Right, it might be true for that one individual company, but it can't be true in aggregate because those suppliers profits are also companies, right, yeah, exactly, they get their inputs, So everybody's output is somebody else's input kind of thing. Right, So you can't get higher profits by squshing in aggregate, by squashing your your suppliers, because they just end up with a lot of profits.
So when you take a macro lens, it gives you a kind of framework that is coherent and consistent, and that's a really powerful style. So the collect equation says, hey, look, there's a few drivers of profits. There's net investment. If you go out and you buy stuff that's going to add to productive capacity, that's going to be good for profits. It makes sense as a corporate you're investing in your future,
but you are providing profits to somebody else. Again, we get that kind of no firm can bootstrap itself out of that situation, but it does in aggregate create profits. Dividends are another source of profits. Now it sounds weird because we always think about dividends being paid out of profits, but dividends, of course are an income flow to a household somewhere, and ultimately they are therefore a form of spending or potential spending. Then you get the kind of
negatives that drag on profits. So if households choose to save, that's obviously a drag. You know, I'm not spending all of their income they're saving. That's going to drag profits down if governments are saving it, And that turns out to be kind of the opposite of what governments do. But if governments were saving, that too would be a drag. And if the foreign sector is saving, that too drags down profits. And so when I was looking back in
twenty twelve, we had pretty big fiscal deficits. Investment had fallen dramatically and effectively the government deficits had expanded to fill some of that gap, and I foolishly made the forecast that it was really the government deficits that were going to have to come down, and that was going to be the macro driver of the profit margin mean reversion that we kind of all expected.
So, just on that note, why did you think that government spending would come down? Because nowadays, I mean, we've had, you know, successive years of the US deficit getting bigger and bigger and bigger, and it's almost taken for granted at this point that it's just going to keep growing. But why did you think that spending would actually reduce back in twenty twelve.
So I think it was it was a product of two things. So I was standing there on twenty twelve looking at the fiscal deficit and we're, you know, POSTGFC, and during the GFC, of course, the fiscal deficit exploded to levels that frankly, we hadn't ever seen before, which are now dwarfed by what we experienced in COVID, but back then were really exceptional. And it was that kind of extremely high level of fiscal deficit over the post GFC or the GFC, and it's kind of hangover if
you like. That really had me thinking, right, it's got to come down, right, governments can't continue spending at this rate. And that's that was undoubtedly the thing I got wrong. Because it's simply never seen, at least in the US fiscal deficits of such magnitude for such a period of time. I should, of course have learned from my experiences with regard to Japan, where they'd already been running very large
fiscal deficits. But at that time I hadn't really figured out that kind of secular stagnation and the kind of is the US turning Japanese was going to be the road path? It took me a little bit longer. I began to write about that towards the end of twenty twelve. Actually I began to figure out that actually that was
probably a more likely template. I should have actually listened my old colleague out Albert Edwards from and he'd been telling me this for years, the US was turning Japanese, and I was like, yeah, whatever, its a great line, and it's the sun by the vapors. It's all cool. But I kind of just ignored him, and I really shouldn't have done, because it turns out he was spot off.
We start to move over the course of that next decade, we didn't see the big contraction in the deficit as many people expected, and then, of course with COVID deficits blew out again and are significantly wider than you know. Twenty twelve was obviously a great time in retrospect to buy stocks. And if you just bought the sort of broad stock market in the US and twenty twelve and held to it today, you would have done quite well.
If we decompose the returns over that last ten or eleven years, how much can we attribute to corporate profitability from the from those years to those stock returns.
So yeah, I said, this is a really good way of framing it, and I think the way I tend to look at it don't have the decon right to hand. I have done it before, actually looking at the kind of drivers. But what I found is, by far and away the most important factor turned out to be valuation rather than profits. Profits were good, you know, they stayed high, but they did come down compared to the kind of
absolute peak that we reached in twenty twelve. So profit margins and that kind of new levels of corporate profitability, although they didn't mean revert, they didn't continue to go up. And therefore the key driver of the performance that we've witnessed is actually been valuation and that I think is as Ever, here's the progostfication for you, of course, for concern right as a value based investor, when I see a market that is essentially being driven by multiple expansion,
that makes me kind of nervous. And so yeah, the fact that margins didn't come down, but they didn't go up from twenty twelve actually kind of they came down a little bit, and they've stayed over that decade higher than they were historically, but they didn't rise from twenty twelve. They average. That I think tells you that the evaluations have been a massive part of this problem.
Just setting aside valuations for a second, I mean, if we look at some of the fundamentals in the macro economy that might have boosted profits, one of the things in your equation is dividends, as you've laid out previously, And I think there are people out there who would argue that companies have gotten bigger, they've gotten more pricing power, maybe with monopolistic tendencies. Could that be genuinely boosting profitability.
It's really fascinating. I think that the increasing dividends is certainly a noteworthy feature, right, Dividends in the last decade have indeed been significantly higher than they were over most of history. The causes of that, I think are also interesting to me. The fact that dividends have increased is really has to be combined with what happened to investment, because I think investment and dividends, as com buying, is a corporate payout decision. Right, you can either invest or
you can pay dividends. Those are at a very crude level, those are your two options. And what we've seen over the last decade, compared to let's say the nineteen fifties onwards, investment roughly halved and dividends roughly doubled. And so you saw this switch in payout from a world in which corporates wanted to invest to a world in which corporates
chose to distribute. Now to what extent that is driven by increasing concentration and monopolistic power, I think is a open question, and it's certainly one that I intend to return to. I did some work internally which I haven't published yet, but it's the next one in the or maybe sneak pre y later. Yeah, exactly. Yeah. Three, I've written like three papers that are now in the works.
There's one more after that, which is going to be the one on monopoly, I think, and what I showed was monopoly can redistribute profits between corporates, but doesn't actually raise the absolute level of profits terribly much because what tends to happen is there are other offsetting factors. So I think these shift in the corporate payout policy is
probably a function of monopoly. But it's not hugely surprising to me that when I combine investment and dividends and compare them over history, they haven't really as a pair driven this expansion of margins that we've seen, And so that fits very nicely with the work I've done, which again actually follows from Kleetski. It is such an amazing man and so important, and yet so few people know of him, Thank goodness. The odd lots listeners are a
different breed. But you know, you walk around and there, why are you quoting some long dead Polish economists? And yeah, even worse from an American point of view, Yeah, he was associated with Marx. It's oh no, the end of the world is nigh. He talked to Rosa Luxembourg, this
kind of thing. But he did a whole load of work on what he called the monopoly power and it's using some of his insights that I can now demonstrate in a very simple little model that actually monopolies do not rise the aggregate level of profits.
Well, let me ask you another question, and it's sort of it's another thing that I remember we and by me, we I mean like sort of like you know, people who are like blogging ten years ago and trying to figure this stuff out. But another story that people told and maybe tell is that, Okay, you see these profit margins at extremely high levels, and that it represents some tilting of the balance between capital and labor. The labor's share of GDP has declined, or unionization or labor bargaining
power has weakened steadily over the years. And you could put two lines on a chart, and unions are going down and profit margins are going up. Is there a zero sumness in this in terms of like how much is how much on your cruise to corporate province versus say, how much workers can get?
Yeah, absolutely there is. And this was really what let's get again was talking about with his monopoly power theory, right, He was talking about exactly this issue, the distribution of the economic pie, if you like. He wrote a wonderful paper on the political aspects of full employment, all about why corporates don't actually want full employment, despite the fact that it would seem like a good idea because obviously the economy would be booming, everybody be spending, that would
be trendous. But actually his argument was that corporates would really not like that because it would give exactly the point you raise their labor too much bargaining power. And I think one of the things that people have got wrong in the whole kind of inflation story that we've heard over the last few years is the kind of permanence and that whole team transitory versus team permanent and
all this kind of thing. Yeah, to me, the big thing that really drives all of this is exactly the dynamic you're talking about, which is, do you have the conditions for a wage price spiral? And I have been unable to see any evidence of really significant, prolonged recapturing of labour's bargaining power. I think that that's absolutely true.
This whole dynamic is really fascinating and massively integral to understanding what we are going through, what we've been through, and potentially the danger of forecasting in where we will be going. But it's to me that that distribution between labor and capital is really important, and it's tied in with monopoly, it's tied in with these kinds of issues we're talking about the profit margins. But the really nice thing about the Kalechi equation is that it sits above
all of that and it frames it all. So I've described it as like Lord of the Rings. I'm a nerd. I love the Lord of the rings, and the Kaleki equation is kind of the one ring, right. It can bring all the others and bind them in the darkness. And so having that overarching framework is really useful. It allows us to understand what's been going on with profits and therefore think about what may happen with him in
the future. And what you have really is if you'd seen a huge amount of corporate power relative to labor normally, that would lead to wage suppression, which indeed we have seen. You know, wages have certainly not kept up with productivity. And here I go being wrong again. In twenty eighteen I wrote a note called late cycle Lament, and here we are still in a late cycle and I use some work by another very very insightful economist, Launce Taylor, who sadly died a couple of years ago.
Now.
He showed how we could look at wage repression and the corporates had effectively been holding wages down relative to productivity, which I thought was a very interesting take on the kind of monopoly theme because it was to me less about monopoly power and the way we normally think about it, and that perhaps is more associated with the degreed flation story that we've heard more recently, which is corporates using their pricing power, but much more about what one would
call monopsony, where it was more like you had a single buyer rather than a single seller of a product. In this case was the corporates were acting like a
single buyer of labor and had squashed labor down. Now, it doesn't actually explain why over the last decade we've had high profit margins, because had they been squishing labor down, I would have expected household savings to have to decline, But by freak of accident, in the sample that I looked at, it turned out that household savings had been
exactly the same. Now, some of that is driven by COVID, because obviously it was a huge spike in household savings during COVID, but some of it is not quite adequately represented by the average of the floor of averages, if you like. But in between these two samples, at least the nineteen fifties to twenty twelve and then twenty twelve and afterwards, we know that household savings haven't been the
big engine or be by by happenstance. I don't think I wouldn't draw any conclusion by their equality in those two samples. I think they've been driven by some pretty unusual things, but we know they're not the cause of the big surge in margins that we saw.
Yeah, I remember monopsonly was like a big yeah topic. I think it was the twenty eighteen Jackson Hall and Kolleki to some extent as well. Okay, so it makes me kind of wonder whether they're going to talk about profit led inflation this year. But anyway, setting aside Kaleki and monopolies, which we've been talking a lot about, can we talk a little bit more about just big government spending.
Because of course, there was another very famous economist who talked about the potential for this sort of big government moment. Are we there?
Absolutely? I think we are there, And you quite rightly allude to Minsky, who interestingly was a follower of Koletski, and so there is a lovely intellectual heritage fowing through
these guys. And Minsky was yet absolutely a proponent of the financial instability hypothesis, which we all know and love, but also he was a big proponent of the need for big government, and he framed big government as really a more like a job guarantee scheme, which is not what we've seen, but we have as far as at least the data suggests, had an era where government spending has been considerably higher than anything we've seen before. And so yeah, I think Huiott Minsky wrote a book called
Can It Happen Again? And he was referring to the Great Depression, and that book is really all about making sure it doesn't happen again. And one of his takeaways was, in the event of a private sector shutdown, as there was in the Great Depression, the only thing that can happen to offset that has to be government spending. And I think with the GFC, with COVID, we have seenments
do exactly that. They really added Japan's base. For a very long time, we've seen governments do that, and so we've seen this era of big government actually and big government spending actually arrive. How long it lasts, as I confessed to the paper, I have no idea, but it's certainly there right now.
Well, you know, so much government spending in the US is entitlement spending. And it seems like there's no imminent prospect of some meaningful change in social security payouts or in the change of trajectory, no iminent prospects of the change of trajectory of healthcare spending. We have a society that's getting older. It's doubtful that there's going to be any change in defense spending. There's not even that much appetite on the discretionary side, nor does it seem that big.
Something I've wondered about is like, does this provide a sort of cushion of stability, as sort of like cushion of sort of macro stability and perhaps profits to ability That there is this huge chunk of spending, it's every year and guaranteed, and there's almost no political appetite to make it go down.
Yeah, absolutely right. You'll get some conservatives to tear their hair out that prospect of government intervention. And any number of them are interestingly fellow value investors, and I obviously missed the kool aid on that one, but they all get really hot into the collar about government spending. As an old lefty, I tend not to, but yeah, I think you're right. The big government is inherently a kind of prerequisite for stabilizing an inherently unstable system. And that's
exactly what Minsky was alluding to, right. He said that big government must be big enough to ensure that swings in private investment lead to sufficient offsetting swings in government deficits so that profits are stabilized, and that was his guiding concept right now. He thought you could best do that with a job guarantee. Well, yeah, that's been talked about in universal basic income and all these other concepts get talked about, but the reality is it's been implemented
in a very different way. But it's there. And as you say, it's kind of hard to imagine given the state of politics, it's kind of hard to imagine that's going to change anytimes too.
You mentioned value investing just there, And of course we would be very remiss if we didn't ask you about what's going on there, because we've seen these headlines for a while now, the death of value investing, the idea
that everything nowadays seems to be fueled by momentum. I wrote a story just recently about how all the most terrible stocks and assets, all the things that people were saying were overvalued for a long time, stuff like Tesla, Netflix, some long duration bonds, those are all surging once again. Is there any value to be found in value investing nowadays?
I really hope. So if there isn't, then I better retire and GMO along with me. I think there is, because we know that the market's Howard Marx always puts it really well right, that the markets swing on pendulums, from the euphoria to despair and back again. And you know, go back a year and we had what my colleague Beninca delightfully called jomo. So rather than the fomo, the fear of missing out, we had the joy of missing out. Finally.
You know, all the crap that had gone up didn't and some of the stuff we owned actually went up. But it was like yes, and now we're back to the other world. And so our JOYMO was very short lived. And GMO we have experienced any number of these horrific experiences where in the long term you can be right and in the short term utterly wrong. And that's an
incredibly painful thing. And it's why value investing is so hard, because you can sit there, you can do your work, you can kind of gather your intrinsic value, you know what fair value, if you like, should be, and then mister market turns up and decides, yeah, he's in a manic phase today and so ignores any kind of anchor of valuation right up until he doesn't, and suddenly he
wakes up one day and decides he does. And the problem is you never know when that is, and that kind of that's the classic uncertainty of It's what makes being a value investor so hard. Right, If that wasn't there, I guess everyone will be a value investor and value presumably wouldn't work. But because there is this collective madness of crowds experience. Joe, you mentioned AI right at the start. Will that be the next bubble? Yeah? Yeah, God only knows, right,
it's got all the hallmarks of it. It's a technical, technological innovation that gets everybody excited historically that that's kind of classic bubble breeding territory it could be. And sorry, go.
Ahead, well no, just to play Devil's advocate for a second. I mean, obviously, the twenty tens were this extraordinary decade for big tech, and maybe we're good, you know, big tech is raillyant again lately, but this handful of big tech. But the other thing about that decade is it's not just that those stocks did well. Those companies did really well.
And Amazon and Google and all these names were far more profitable in twenty nineteen than I think people in twenty twelve would have guessed about where they'd be in twenty nineteen. I mean, they really did do extraordinary well from like a business and profit standpoint, So I mean, setting aside you know, valuations and multiples, the companies did do really well and captured a huge share of that
overall corporate profits. And so right, I mean, and so like there's other so like I don't know when you look now at once again people piling back into these names, and QQQ not really that far off from its high, Like what is the is there some reason why that
can't be sustainable? And and I guess to you know, it's like if we already sort of stipulate too that there's sort of one source of profits, which is government deficits, does not seem to be going away, Like what changes this current environment?
Yeah, I think the thing with those kind of companies is we go back to that that kind of beauty of the Macroft framework.
Yeah.
They succeeded by eating everybody else's lunch. Yeah, right, They turned from I guess, you know, the weedy little kid to the huge jock who is wondering around thumping the weedy kid, and say I'm going to have your lunch money and your dinner money and your breakfast money as well. And that's how they won. Right, They did exceptionally well and far better than I think, You're right pretty much anyone would have said. The problem is I think that you at some point you run out of people to bully,
and you run out of the playground. Images everybody graduates, and what happens then, well, your job is your jock bully is suddenly not quite so comfortable anymore. And when you then put a kind of continued growth multiple on those kinds of guys. That gets hard. You know, it's not hard to grow fast when you're really small, it's really hard to grow fast when you're really big. And
that's I think always the challenge. It's that kind of growth callding growth torpedos right where people's expectations are so extreme, and the pricing of some of those stocks, not all of them by any means, but some of them is really extreme in terms of their implied growth for the future. You kind of have to scratch your head and go, where the hell is that coming from? You know, how much more advertising can alphabet really take over? How many
more businesses can Amazon completely disrupt? And maybe they will, right, there will be winners, and maybe those guys are the ones that will win. But the market is pricing it as if that is an absolute certainty, and that always kind of an anytime anyone said it for sure about anything, I tend to kind of get a little nervous because I'm not even sure I exist, let loan anything else. All I know, I could be a brain in the jar, in which case I clearly lack inventinations.
This is getting very existential.
Yeah, right, but it's it is possible, right, and that that to me is that absolute certainty is concerned. I think it was Voltaire who said to live in doubt is unpleasant, to live in certainty is absurd, and that that that's always been my byline. Right.
So we've been very focused on the US market and the idea of American stocks being priced to perfection. But of course America is not the only market out there. And I was reading just before we came on. Actually, actually, Joe, did you know there's more than half of Japanese companies trade below book value?
You didn't know.
I knew that.
Like Japanese stocks, I think they've been doing well.
I didn't know.
Yeah, so they were undervalued for a long time and then this year there suddenly seems to be renewed interest. But James, to your point about value investing, is the implication here that maybe investors should be looking to non US markets?
Yeah, absolutely, I think there's a couple of things people can do within the US. If you've got to be in the US. There is some stuff that's cheap, right, The really deep value, the stuff that the nobody wants to own, does actually look really compellingly achieved to US but outside of the US, I think you can do so much better. I mean, if you look at Funny you mentioned Japan, you're absolutely right about half the stocks
below book. But so here's another plug. Not the next note, but the note after that is on Japan, and it's profitability. Oh yeah, one day I'll get around to punt. Then they're all just waiting to be published now. And in there I looked I did a similar analysis to the one that we've talked about today the Japan. I won't drive on that now, but chart to me was when I looked at EV to ebit DA in the US versus Japan. So in the US, you've got the US
market trading on nearly fourteen times to ebit DAR. In Japan the market is trading on like five times EV to ebit. So Japan is certainly with any kind of measure that looks at anything that concerns balance sheet based analysis, Japan looks compelling. It too has had a profitability surge, now not to do the same levels as the US,
but it has had this ongoing profitability surge. But I think interestingly, in Japan's case, it actually looks kind of very sustainable because it has a lot to do with de leveraging and therefore kind of more cash flow flowing through to the bottom line. You've basically had this long battle between the holders of debt and the holders of equity, and the holders of debt have been taking a lot
of Japan's cash flow. Now that Japan hass de levered, which has been going on since the early nineteen nineties, you've I've got a situation where that cash flow is flowing through to the bottom line, and Japan therefore looks like it is a market where we have kind of increased profitability and low valuations. You know what's not to like there? And if you're if you're a really brave value investor, go play an EM. I mean, nobody, nobody
in their right mind wants to talk about EM. And we know that social pain, the pain of being excluded, being ostracized and ridiculed, is felt in the brain in the same parts as real physical So being a value investors like having your arm broken on a regular basis, which ain't fun, right, That's why most people don't do it. But EM looks amazingly cheap, like the bad news is so in the price, and so I think there really are some some amazing opportunities around the world.
When you publish the other day, when you publish your notes on these, can you put the Can you provide the colletch Levy equations for these? Because I always see it for the US, and I never see people make them for Japan, just as a p no request for If I can put in a like a request, like a request for the dj please make a series of charts showing these same things for other countries, because I only ever see people make it for the US.
Really done, I promise you when when the Japan note comes out there, it'll be there right right up front for you.
Great.
We'll have to collate them all and publish them on the odd Lots website. I just saw a headline go by It says Pakistan gets no bids for fifteen, twenty and thirty year bonds. So you know, to James's point, if you want to run away from the herd, it does seem like parts of em are the place to go. At the moment, James, we're going to have to leave it there. But really appreciate you coming on. That was so much fun.
Oh my pleasure. Thank you so much for having me guys, Yeah, get a bluff.
That was a blast, James. We'll have to have you back. Thank you so much, Joe.
I love having a self described old lefties employed at large asset managers on the show. It's so much fun.
There are some of my favorite people to talk to you about. That was really good. I mean, I really enjoy it.
Like I think we've both been reading James's stuff for several years and hearing him sort of like put together his way of thinking some of the mistakes. He's got the opportunities right now to look really good.
The introspection, I think is really important because you do see people make these big calls and kind of gloss over mistakes they've made in the past. And really it's not about you know, schadenfreude or pointing fingers at people who got stuff wrong. It's about trying to understand the way we were thinking of things in twenty twelve and what happened differently to make those thesis, to make those theses not applicable.
I do think that almost everyone in every dimension assumes some level of mean reversion right from everything right, tech versus value, deficits, labor versus capital, et cetera. So you see something at the high end of some range of a chart, you make some chart on Bloomberger, you make some chart on Fred and the numbers at the top and you say, Okay, it's going to go down. And so like, looking back, it's like, well, why didn't it
go down? Why did it go up even further? Is really interesting and it sort of you know, as he puts, it makes you humble about your guests for the next ten years.
Early. Yeah.
Well, also James's point about maybe we are in the era of big government spending. I mean, that's a big point to make. But beyond that, the idea that that might not necessarily be good for shareholder returns is really counterintuitive to the way a lot of people think about it, because one of the big criticisms of government spending is like, oh,
you're just you know, inflating corporate profit margins. And this is why there are some investors out there who like to talk about, you know, big infrastructure programs and things like that. But James made the point that that might not actually lead to a good return.
Right, I'd like the knock on other value investors.
This is like, don't you know where our profits are coming from dog you know what drives corporate profitability?
And yeah, that's great stuff.
All right, shall we leave it there.
Let's leave it there.
This has been another episode of the Odd Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway.
And I'm Joe Wisenthal. You can follow me on Twitter at the Stalwart. Follow our producers Carman Rodriguez at Carman Arman and Dashel Bennett at Dashbot. And check out all of our podcasts at Bloomberg under the handle at podcasts. And for more odd Lots content, go to Bloomberg dot com slash odd Lots, where we have transcripts, a blog, and weekly newsletter, and for more check out our discord. It's really fun people in there chatting about all these topics.
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