SocGen’s Albert Edwards is passionate about “Greedflation” or, more to the point, about highlighting the potential perils of it.
On at least three occasions over the past few months, Edwards dedicated his weekly missive to documenting the persistence of near record corporate profitability amid elevated costs.
Corporates have demonstrated remarkable pricing power in the pandemic era, which is to say higher input costs and then, later, soaring wage bills, were passed along to consumers with relative ease. Bottom lines were bolstered, margins expanded and as a consequence, inflation remained elevated.
Of course, we can’t place all of the blame for inflation on the shoulders of the C-suite. Fiscal policy was arguably too aggressive, monetary support wasn’t pulled back fast enough and after years of deliberation, a Moscow-based man moved ahead with aggressive expansion plans, pushing up prices for energy and food.
Still, there was something profoundly unpalatable about record corporate profits during a period when war, conquest, death and pestilence came for humankind.
Although analysts generally expect margins to contract going forward, corporate earnings came in better than expected yet again this reporting season, albeit relative to a lowered bar. Edwards on Thursday reiterated the anomalous character of the current circumstances.
“ALWAYS, prior and into recessions, unit prices do not keep up with unit costs, and hence unit profits fall. But not this time,” he wrote. The chart below illustrates the point.
Albert called the surge in unit profits in the face of sharply rising costs “a clear sign of corporate ‘Greedflation.'” “It is not,” he said, “what normally occurs — ever.”
Corporate management teams flatly reject allegations of profiteering, and as I’ve said repeatedly, it was our decision, beginning in the mid-80s, to institute a version of capitalism that subjugates every other concern to the interests of shareholders. This is, in a sense, our fault, or at least in the US.
The White House has attempted to play the “Greedflation” card with mixed results. Americans are taught, from birth, to worship capitalism. That greed is good. That the country is a meritocracy. That success is everywhere and always a function of hard work, while failure is the result of laziness or some deficiency. Only recently has that story started to crack.
On Thursday, Christine Lagarde mentioned corporate margins during her remarks to the media following the ECB’s seventh rate hike of the cycle. Recently, ECB economists flagged a price-wage dynamic in explaining persistent inflation (i.e., reversing the usual wage-price narrative).
“This is now ringing very loud alarm bells with policymakers, as Greedflation melts the glue of social cohesion via the cost of living crisis,” Edwards went on to say.
I’m going to recycle some language from a previous article published here on the same topic because, frankly, it can’t be said enough, and I think I’ve found just the right words.
The benefits of American-style capitalism are now accruing almost entirely to a literal handful of people, as opposed to the figurative “handful” to whom those benefits traditionally accrued. That’s a crucial distinction, and one I’m always keen to emphasize. It’s one thing for a competitive system to result in an unequal distribution of wealth. You could argue that’s a feature, not a bug. It’s another entirely when the number of people for whom the system works is so small that it’s plausible to make a list of those people. That’s a crisis.
A central theme of my monthly letters from February and March was the notion that capitalism in America began to break during the period we typically associated with its renaissance. Gordon Gekko’s “greed is good” was more than a movie slogan. It was a harbinger of the social apocalypse in America. As Edwards put it Thursday, the “glue” of societal cohesion began to melt.
In my view, this is only going to get worse. Maybe not in the narrow context of any data series, but certainly in the broader context of the Western world’s struggle to reimagine what, as initially conceived, was a promising secular religion — an “-ism” which, while imperfect, at least helped power society into modernity.
When taken to extremes, religions can be extraordinarily dangerous. Indeed, many (but not all) of history’s most dubious episodes were directly traceable to religious zeal. In the 21st century, our misplaced faith in the religion of capitalism (which worships profits) is threatening to destroy us.
Coming back to Edwards, he wrote Thursday that recession, when it finally comes, “will likely see elevated corporate margins collapse.” He continued: “And my goodness they have a very, very long way to fall.”
I was always told you never bring a problem to the table without also speaking of a potential solution. With that being said, what would need to be done to fix the current “extreme capitalist religion”? The C-Suite has a fiduciary duty to the shareholders and lowering margins for philosophical reasons would not fit the best interest standard. I guess you could use the ESG argument and say in the long run this leads to better results..but that has yet to be proven.
Since I previously complained about “Greedflation,” here are some potential solutions consistent with the notion that the C-Suite will not normally do most of these things proactively on their own: protect and promote unions, penalize huge disparities in company pay structures, raise the bar on approvable M&A deals, more strictly regulate (and enforce) insider trading, put more corporate fraudsters actually behind bars. As Hamster points out above, the C-Suite or broader corporation has a strict fiduciary duty that often compels them in the opposite direction of most of these goals. By not obligating corporations to act a certain way, we may be turning the all-powerful market into a hallucinating chatbot that has learned that serving the super rich is its best bet.
Agreed FuriousA
All states have laws regarding the practice of engineering and medicine. Narrow focus on “fiduciary duty” likely results in outcomes that violate the laws regarding the practice of engineering and medicine. Since all decisions have potential health and safety consequences, it’s certainly possible that corporations can also be held to engineering and medical standards as well as fiduciary standards. It could even be argued that the engineering and medical standards supersede
I think I agree there is widespread gouging but why is the consumer paying up? I would like to see more analysis into that.
+1
I used to be very sensitive to anecdotes of hardship and data showing a majority of Americans don’t have $400 in spare cash… then I saw what they did with the most generous fiscal package to fight COVID (and what is now happening to credit card balances)… and it’s harder to remain sympathetic when the wheel of economic activity/interest rates turns.
The chart clearly shows the cure for high prices is high prices, how many of the prior inflation cycles included helicopter money, zero interest rates and quantitative easing?
I just got back from home depot where the materials alone to build a set of nice custom speaker stands from scratch @ 18″ tall and able to support 80lbs, was $160. My amateur labor i estimated at $240 for the project.
I left without the materials i had diligently gathered and hit up amazon where I found a nice looking pair a half inch too short and only support up to 75# for $120 out the door, to my door. Perfect.
I do not know how much of this is greed-flation, but back in the day it used to be cheaper to build your own stuff like this if you had the tools and the knowledge.
I had figured at least the lumber pricing would be in my favor, nope not here.
You should really screw and glue to begin with. Glue alone as indicated in the article may not hold it all together under certain conditions.
What a difference a day makes, the speaker stands I ordered yesterday evening on Amazon had a price increase overnight that equates to roughly 30%. Also i forgot to mention just how dead the home depot was yesterday evening I have never seen it so dead at anytime before, much less on a nice spring day. Weird. It definitely was not woke, where woke means a lot of customers up and moving around. CEO may need to worry more about that kind of woke.
The inversion to price-wage rather than wage-price is important.
Sadly, outside of passing out “WIN” buttons once again, the only tools being brought to bear are firmly focused on pressuring the wage side. Sadly because of the danger to social stability as pointed out by our DL and Edwards.
A partner at my firm is an avid reader of history. He has pointed out how, at least in the US, the business sector does tend to react to that kind of pressure, but only when it threatens the sanctity of contracts and the capitalist system itself.
Maybe we are close to such a point? Perhaps not – the first impulse has been to turn to populist messages of blaming foreigners and immigrants for our own personal failings (such as opioids) and erosion of our competitive edge in the world.
Thank you so much for bringing this up. It is so true our form of capitalism is doomed. The only issue is if it happens in the next 5 or next 50. I am currently reading a book about who helped create the myth of “ the magic of the market “. These organizations and people have been trying to get rid of the mild reforms that have been instituted over the last 125 years or so since they have been put in place.
We have the capacity to fix it but unfortunately a large portion of the population has been convinced to vote against their own best interests.
I read that last year the highest paid CEO made 800 million. To address personal greed is very simple you reconstitute the tax code from the 70’s. A corporation can pay it’s CEO anything they want, but say everything made over 50 million is taxed at 90%. I also think a law needs to be put in place that for for every dollar that the C suite makes say over 200 to 1 the lowest paid employee they should lose tax deductions.
I also think that it should once again be made illegal for corporations to do stock buybacks.
Three straightforward solutions that could never be passed because the corporations run everything and would block any law increasing taxes.
The other lie is we are different from Europe, we are not different we don’t want to admit that many European countries have much higher taxes then we do and they have gotten along with less people being homeless and poor than we do.
The problem is not an ‘ism’, it’s us. The enduring human traits of fear, greed and a scarcity mentality have doomed us to perpetually fail at creating a ‘just’ society. No fixes or changes to the system can withstand the dark side of human nature for long. As a species, we are in dire need of a root cause analysis.
I agree. Nobody who can execute a technically perfect chokehold is unaware of the potential for quick death.
Some interesting color on the price-wage spiral in the April 26th FT. The story highlighted how consumer staple firms pushed up prices in the 4th quarter. a leader was PepsiCo which pushed up prices 15% Q-O- Q in the fourth quarter. Did input prices rise that much in that quarter to justify that?
Just the most egregious example in that story but other major staples players managed to raise prices a more modest 10%.
Should we be surprised that workers want higher wages to compensate?
Some will consider this trend to be small beer, but I am horrified at the rise in child labor. My father got his first actual job at 10 yrs old. He was a bobbin carrier for the Pepperell fabric mill near Lawrence, MA. To make sheets requires hundreds of bobbins weighing upwards of 50# each. Carrying full ones to the loom is an exhausting job, especially for a 10 year old. He made 5 cents/hr. We outlawed this crap year a century ago but like many oldies, it’s baaack. More greed.
He must have had arms like Popeye!
The slaughterhouses and meat packing plants in Arkansas and the Dakotas have to replace those horrible “illegals” somehow, right? Plus, it helps reduce wasteful spending on schools. It’s a win-win all around!!!!!
Excellent point….
If you wanted to get cynical you could argue the GOP is intent on
stopping immigration
a passive approach to Putin’s war
in order to fan inflation, create disorder, and finally acquire more power in the new vaccum
This is not in the least a cynical viewpoint, it’s been stated clearly in the “Tear it all down” policies of Trump/Bannon et al from 2015 onward. Our only saving grace was Trump’s incompetence the first time around. He and his would not make the same mistakes again, as he and his clearly telegraph with every opportunity.