Chanos On Reality

Investor Jim Chanos, in a Bloomberg interview this morning with Barry Ritholtz pretty much echoed my earlier note featuring BlackRock’s CEO, as well as — per a reply to that earlier note (“sounds like yesterday’s discussion!”) — (while I have my own nuance) my own conversations with clients:

“(Bloomberg) — Few would argue that the U.S. stock market has already priced in a lot of optimism for an economic recovery starting in the second half. But even with a swift cyclical recovery, structural problems from profits to politics may become headwinds for the stock market in the post-Covid19 world.

Jim Chanos, for one, suspects that markets are too
optimistic. In an interview with Bloomberg columnist Barry Ritholtz, the famed short seller and founder of Kynikos Associates, laid out the structural bearish case, saying profit margins are as good as they can get for corporate America. Here are some of his views. 

A. Earnings expectations for 2021 are too optimistic

It certainly could happen. But I will be very surprised if we’re at 2019 levels of profitability in 2021.

B.Corporate taxes are likely to go higher

Taxpayers are bailing out corporations again and again. Essentially, the American public is writing a blanket insurance policy for U.S. companies to cover every risk — whether a natural disaster or Wall Street largess — that “keeps showing
up every 10 years.” Therefore, the American public should get an increase in insurance premiums, like through corporate taxes.

C. Political climate now favors labor over capital

With this latest set of bailouts, I think when fear turns to anger, as it inevitably will as we look at who got bailout money, who took money they shouldn’t. I think that that anger is going to be stoked even more.

And so the question is, do we finally see policies like a rising minimum wage, higher corporate taxations, higher rates on capital gains, end of carried interest? That is a lot less capital-friendly and a lot more labor-friendly coming out of
this.

 D. Profit margin may have peaked 

Profit margins are as good as they can get after “years and years of cutting interest rates, cutting taxes, cutting costs, going global, slashing labor rates.”

Keep in mind that revenue growth has not been great in the last 10 years. Small changes in activity here could have disproportionate impacts on profitability for lots of different industries. It just might be that Corporate America is not as profitable as it used to be.

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