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Buffett on US corporate profits as a percent of GDP


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Hi -- wonder if someone can help find a Buffett reference to US corporate profits as a percent of GDP? 


You will all probably recall the 1999 Fortune magazine article where he said "In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can.....hold much above 6%".


However, I seem to remember that he said something within the last few years where he kind of backtracked on this.


[Or did I imagine it all.....]



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It was at the 2012 Annual Meeting.  That happens to be my question (someone was kind of enough to get it asked for me).  Here's the transcript (although there appears to be a little bit of paraphrasing):


Q10, Carol Loomis: Philadelphia. You said in 1999 in Fortune Magazine, that you have to be wildly optimistic to think that corporate profits can sustain above 6% of GDP. Now they are 10%. How should we think about it?


WB: It is pretty unusual, profits are extraordinary as a percentage of GDP at least on looking back on history of US. What is interesting about it is that US business is complaining frequently about corporate income tax, and it is half of what is was 40 years ago as a percentage of GDP but profits are two times. I would take with a grain of salt any complaints about US corporate tax rates. US business has done very well. Inequality has widened, but businesses have done well. It will be interesting to see if levels can be maintained. Business has come back strongly from the precipice of 2008. Employment has not come back the same way. That will be subject of a lot of public discourse. If I had to bet on whether corporate profits would be 10% of GDP, with much of that is earned outside, I think it trends downwards, but GDP will be growing so it won’t be horrible.


CM: I wouldn't be too surprised if 6% is on low side. Just because Warren thought something twenty years ago doesn't mean it is law of nature. [laughter]


WB: We'll talk about that at lunch.


CM: Stocks are owned by endowments and pension funds. There is no [automatic] correlation between the figures.


WB: Is 10% too high?


CM: If rest of world keeps coming down, it will be hard for us to keep it up. I don't mind paying more, but would like to see corporate rates down.


WB: He's republican, I'm the democrat!


Incidentally, the same question was asked to Howard Marks at the pre-value conference the day before.  I actually liked his answer a bit better.  This is what it was (from memory) and extremely paraphrased:


Right now corporations are squeezing and cutting everything in sight as they are pessimistic and worried about the future.  As a result, there is not a lot of investment in the future and growth.  Accordingly, corporate margins have gone way up.  However, at some point, they will become more optimistic and begin to invest back in the business, e.g., building new buildings, plants, hiring employees, and what not.  When that happens, the profit margins will probably shrink, but at the same time, these investments should start to increase revenue.  Thus, they may off-set each other until the new profit margin rate is achieved.  So, it is a concern, but there is also a positive on the revenue side.

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When Buffett said to Charlie that we'll talk about that over lunch, do you think that means he was disagreeing with him?


What are the thoughts of those who where there?


He was definitely joking. And it got a lot of laughs.



Yeah, I was there and they both agreed that profits were higher than they had thoughts were sustainable in the past.  But, both agreed that profits could stay high, too. 

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