"There are times when the markets do not seem to
be following the script properly, and we are left wondering whether we are
dealing with a temporary anomaly or a more permanent problem. Today we are
faced with one of these problems: the persistently high profit margins of U.S. corporations. High profit margins should not persist in a mean-reverting
world, and yet protability in the U.S. has been higher than long-term averages
for most of the last 20 years, oddly pretty close to the same length of time
that the U.S. market has been trading above replacement cost.
At first thought, it may not seem that odd that high profitability is associated with an expensive stock market
– after all, shouldn’t investors be willing to pay more for assets that achieve
a high return? But high valuations imply a low cost of equity capital, which
should encourage corporations to issue more equity, and a high return on
capital should encourage corporations to do more investing. These pressures
should gradually push the cost of capital up and the return on capital down. But
in the period since the mid-1990s, stock issuance has been down and corporate
investment has fallen as well, in apparent contravention of the basic rules of
capitalism. A high return on capital that occurred simultaneously with a high
cost of capital – that is a market selling below replacement cost – would make
sense because there is no discrepancy to arbitrage. The current situation is
not supposed to happen, which makes it tricky for us to understand exactly when
it will end."
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pliku pdf.
