Goldman Sachs Says It May Be Forced to Question How Capitalism Is Working

[GennGreymane]

Goldman Sachs Says It May Be Forced to Fundamentally Question How Capitalism Is Working
(title altered to fit)

http://www.bloomberg.com/news/articl...ism-is-working

One of the most heated debates among investors is the question of whether corporate profit margins can maintain their elevated level, or whether they will inevitably revert to mean.

A new note from Goldman Sachs Group Inc. analysts led by Sumana Manohar looks at the bull and bear arguments for the profit margins debate.

Manohar argued that profit margins have expanded, thanks to four key trends: strong commodities prices, emerging market cost arbitrage (companies making things more cheaply in emerging markets), demand growth from emerging markets, and improved corporate efficiency driven by the use of new technology. Continuing one of its major analytical themes of recent months, Goldman also noted that the market has rewarded companies that have undertaken mergers and share buybacks, as opposed to companies that have invested internally, further bolstering margins.
So will profit margins inevitably roll over?

Goldman went through both sides of the argument. On the bull side, the bank said that ongoing consolidation in industries, cost deflation, and tighter purse strings help keep a floor under margins. Ultimately though, it found that the above trends, coupled with weak demand and general industrial overcapacity, mean that margins are likely to come down.

But what if margins stay elevated? That too is possible, and its implications could be unsettling.
Goldman wrote: "We are always wary of guiding for mean reversion. But, if we are wrong and high margins manage to endure for the next few years (particularly when global demand growth is below trend), there are broader questions to be asked about the efficacy of capitalism."

In other words, profit margins should naturally mean-revert and oscillate. The existence of fat margins should encourage new competitors and pricing cycles that cause those margins to erode; conversely, at the bottom of the cycle, low margins should lead to weaker players exiting the business and giving stronger companies more breathing space. If that cycle doesn't continue, something strange is taking place.

Needless to say, it's not every day you see a major investment bank say it might have to start asking broader questions about capitalism itself.

[unbound]

I always chuckle when corporations like Goldman Sachs talks about capitalism. They absolutely know that we don't really have capitalism anymore, and haven't really had capitalism for the vast majority of markets for about 50 years now. We've had oligopolist markets for a long time.

As the number involved in oligopolies have shrunk (i.e. 5 to 10 major players in a market shrinking to 3 to 5 major players in a market), the opportunity for price inflation and any cost efficiencies continues to go down. The article even hints at the truth without spelling out the reality. With an oligopoly group of 2 or 3, there isn't anyone left to merger with and the price balance remains pretty fixed at that point. Each member of the small group has already reached maximum profits.

Goldman Sachs is not going to admit that the margin growth has been due to the lack of competition, hence prices have been much higher than if there really was capitalism going on. Had there actually been capitalism happening, you would never seen huge margins on top of massive compensation packages for the top executives...in a capitalist market, you would have dozens of competitors that would eat those companies alive.

[Reeve]

conversely, at the bottom of the cycle, low margins should lead to weaker players exiting the business and giving stronger companies more breathing space.

That's assuming they don't get a massive government bailout, of course.

[Independent voter]

Don't fat margins mean the company is a candidate to get bought by a leaner, more hungry company? I don't know, not a business major.

[Reeve]

Don't fat margins mean the company is a candidate to get bought by a leaner, more hungry company? I don't know, not a business major.

Fat margins imply you're already pretty lean. But those fat margins also mean that the company might want to acquire companies with lower margins, in order to reduce competition, and in part because their fat margins give them the cash to do so.

[Deleted]

A vote for Hillary is a vote for goldman sachs.

[GennGreymane]

A vote for Hillary is a vote for goldman sachs.

Only one running who would not benefit them is Bernie. But I dont fully support what he wants to do... I do like him as a person though, same reasons I like Ron Paul.

[Rukh]

I always chuckle when corporations like Goldman Sachs talks about capitalism. They absolutely know that we don't really have capitalism anymore, and haven't really had capitalism for the vast majority of markets for about 50 years now. We've had oligopolist markets for a long time.

As the number involved in oligopolies have shrunk (i.e. 5 to 10 major players in a market shrinking to 3 to 5 major players in a market), the opportunity for price inflation and any cost efficiencies continues to go down. The article even hints at the truth without spelling out the reality. With an oligopoly group of 2 or 3, there isn't anyone left to merger with and the price balance remains pretty fixed at that point. Each member of the small group has already reached maximum profits.

Goldman Sachs is not going to admit that the margin growth has been due to the lack of competition, hence prices have been much higher than if there really was capitalism going on. Had there actually been capitalism happening, you would never seen huge margins on top of massive compensation packages for the top executives...in a capitalist market, you would have dozens of competitors that would eat those companies alive.

I agree. The company that got fined (a relative slap on the hand and a wink from congress) for manipulating markets and profiting from economic collapse is talking about capitalism. Can someone walk up and slap their entire board with a trout?

[Doctor Amadeus]

Well who says banks don't have a heart.

[Sunseeker]

Riiiiiight, Goldman Sachs, the company that's only still in business because of a massive government bailout, is wondering if capitalism is still a "good thing"? LOL

[Cthulhu 2020]

A vote for Hillary is a vote for goldman sachs.

I'd rather go with a bank that has acknowledged a problem, than one that wants to stay the course.

[Deleted]

I'd rather go with a bank that has acknowledged a problem, than one that wants to stay the course.

Would you vote for a Major who says that he is sorry for being a bankrobber while still standing in the bank with the cash in hand?
Hey he/she said sorry so it is fine.

[TrumpIsPresident]

/facepalm

Capitalism is fine.

Question the methods in which these types manipulate it if you want to find the source of some of the economic problems.

[Cthulhu 2020]

Would you vote for a Major who says that he is sorry for being a bankrobber while still standing in the bank with the cash in hand?
Hey he/she said sorry so it is fine.

I'd vote for someone who is repentant if my choice was that person or someone who just wants to keep robbing banks and never acknowledge that change needs to happen.

[Mayhem]

/facepalm

Capitalism is fine.

Question the methods in which these types manipulate it if you want to find the source of some of the economic problems.

Did capitalism provide the environment for these methods?

[Doctor Amadeus]

/facepalm

Capitalism is fine.

Question the methods in which these types manipulate it if you want to find the source of some of the economic problems.

Capitalism is not fine, the majority of the people living in the first world nations are fucking broke or in debt while a select few made up all the rules and have the freedoms to go where they want and when they want and how. And like borders on land they set up borders in social structures to have access to things others aren't even allowed.

There is no magical method, Capitalism might be the better system right now compared to everything else for those doing better than others, but it is a problem

[Deleted]

I'd vote for someone who is repentant if my choice was that person or someone who just wants to keep robbing banks and never acknowledge that change needs to happen.

You can't be repentant while doing and continuing with the crime.

Hey if all other people will stop robbing banks I will stop too.

[Cthulhu 2020]

You can't be repentant while doing and continuing with the crime.

Hey if all other people will stop robbing banks I will stop too.

So what alternative would you propose to someone that admits the system needs to change, when the only other option is not only someone who not only continues to do it, but thinks there is no problem and the system needs to stay as is?

I'd be all for Bernie being in the white house, but realistically it's not going to happen.

[Deleted]

I'd be all for Bernie being in the white house, but realistically it's not going to happen.

You give this guy coin tossign lessons.

[Venant]

They should have been questioning capitalism and the free market when they loaded up warehouses with copper so that they could rig the commodities markets.