Lloyd Blankfein, CEO of Goldman Sachs, made headlines this week with a suggestion that Bernie Sanders’ campaign is dangerous. Battle lines were drawn and Sen. Elizabeth Warren – who hasn’t endorsed a candidate in the Democratic presidential race – weighed in.
What I found much more interesting was a note that Goldman Sachs analysts released right in the middle of all that. It starts with a recognition that corporate profit margins have maintained an elevated level (income inequality anyone?) That has happened because of things like technology, a growth in emerging markets and the ability of corporations to exploit cheap labor by moving operations overseas. In other words, all of the issues Democrats have been talking about for years now.
But Goldman Sachs analysts recognize that much of that is changing. Corporate America has squeezed all of the blood that is available out of that stone. And so they expect profit margins to begin to decrease. But here’s the kicker…what happens if they don’t?
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.
Whoah! Goldman Sachs analysts are prepared to question capitalism if profit margins remain elevated?! Someone call Blankfein because that sounds like a Sanders or Warren campaign statement, doesn’t it? On the other hand, it would be fascinating to hear what Sanders or Warren have to say about Goldman Sachs issuing such a statement.
Park this one in the place where you store items that remind us that the world is always more interesting and complex than we sometimes assume.