This is Water
April 17, 2019·16 comments
Corporate earnings per sales dollar have tripled in thirty years, yet productivity growth has collapsed to near zero. The story we're told is technology and innovation. The reality is something closer to a confidence game, where financial engineering and balance sheet manipulation have replaced actual investment in real growth. What happens when the mechanism that's propped up the system starts to crack?
- Profit margins are at historic highs while productivity is at historic lows. Companies are extracting three times the earnings from each sales dollar compared to 30 years ago, but not because they're working smarter or investing in technology. The math doesn't match the narrative.
- Easy money created the opposite incentive of what policymakers intended. The Fed assumed cheap capital would encourage investment in plant, equipment, and innovation. Instead, it made financial engineering so risk-free that real investment became the riskier choice.
- Stock buybacks are the tell. They spike precisely after profit margins surge through financialization, not productivity gains. This isn't accidental alignment of management interests with shareholders. It's the mechanism by which excess earnings extracted through tax games get converted into executive compensation.
- Valuation multiples are hiding what's actually happening. The P/E ratio looks reasonable at 19, but without financialization, it would be 28. We're comfortable with valuations only because we've built a house of cards that disguises what we're actually paying for.
- The system requires we all hold up the same card without seeing the picture. Everyone from the Fed to Wall Street to corporate management to retail investors is nudged to support "capitalism" and "value," but the structure has fundamentally shifted from rewarding productivity to rewarding financial manipulation.
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