The question of profit margins, and whether they’re sustainable continues to be a hot topic.
A couple weeks ago, GMO’s James Montier made a big contribution to this discussion, drawing the line between high corporate margins and big government deficits.
IIn his latest weekly note, John Hussman builds on Montier’s work with this chart.
Photo: John Hussman
It’s pretty clever, as it spells out the link between the lack of savings (which Hussman represents as the inverse of government and household savings) and corporate profits as a percentage of GDP.
Furthermore, the red line is 4 quarters ahead, with the point being that where it goes, the blue line shall soon follow.
And so we’re already seeing a downturn in the red line (meaning savings are increasing), which should suggest margin shrinkage.
Of course, this isn’t the whole story.
We’ve argued here why profits could still rise if top-line growth is strong, or if other sources of income, such as private investment revert upwards to their historical mean.