Tuesday, May 1, 2012


James Montier at GMO has an interesting white paper on margins arguing that "what goes up must come down".
Starting from the the equation that income=expenditures and decomposing each side further he comes to the following defintion of profits:

Profits = Investment – Household Savings – Government Savings – Foreign Savings + Dividends
(explanations here)
He then shows that since roughly the peak in the market 2006/2007 the contribution to margins from the rising budget deficit has been substantial.

Watch those margins when budget deficit reduction measures are implemented.