Very interesting and pleasant read of GMO’s Quarter Letter “This Time Seems Very, Very Different” . However, two things on which I disagree with Jeremy Grantham:
1) Globalization and branding help to drive high profit margin?
Globalization and branding may sound a plausible explanation for high profit margin of S&P 500 companies. After all, with globalization those companies can now easily tap into international customers. However, according to S&P, “S&P 500 Foreign Sales at 44.3% in 2015, Lowest Level Since 2006”. That looks at odd with Jeremy’s assertion.
2) Benefit of real interest rate being competed away?
Jeremy dismisses the effect of real interest rate on equity valuation (see the screenshot below), saying that the benefit of real interest rate will be competed away. I disagree. Reducing real interest rate is exactly a policy tool that many central banks use to boost the economy (after they boost the stock markets…). While individual firms might compete away some benefit of lower interest rate, the market as a whole benefits from it. In fact, the GMO paper seems implicitly highlighting the effect of real interest rate on equity valuation.