GMO’s Montier on the Dual Economy

A Financial Times article offers an in-depth discussion of GMO’s James Montier’s thesis that the U.S. is moving into a “dual economy where productivity growth is reasonable in some sectors, and totally absent in others.”

The article explains that the push by corporate America to make profits has been “replaced with the desire to achieve growth at any cost,” and this often involves using loss-leading strategies where products or services are offered free of charge in order to capture customers.

Although the article notes that there are certain justifications for such a strategy, it quips: “the more we mistake and celebrate this sort of bullshitting as legitimate corporate enterprise, the greater the risk actually worthwhile corporations mimic the exercise, and in so doing become increasingly useless.”

The article outlines Montier’s argument that the current recovery is the slowest and weakest in postwar history, noting the following factors:

  • Real corporate earnings growth has lagged GDP growth, “even after the significant boost from the financial engineering known as buybacks.”
  • Productivity data reflects a “segregation of the economy into sectors with reasonable productivity growth and those with no productivity growth at all.” On the growth side, Montier cites manufacturing as the biggest driver. Transportation, education, hospitality and healthcare are on the least productive side, showing neither productivity nor wage growth.
  • Employment is “increasingly dominated by the laggard sectors:”

According to Montier, “when you dig down into the market you find that a staggering 25-30 percent of firms are actually making a loss.” Even if you take GAAP accounting out of the equation, he argues, 1 in 4 are not profitable. He adds that over 80 percent of IPOs this year have come to market with negative EPS figures.

But despite the data, Montier contends, the individual investor has returned as a net buyer of U.S. stocks for the first time since the late 1990s. The article concludes, “As we all know (or should know if we read history books), individual investors are not collectively known as the world’s best market timers.”