SHI 1.12.22 – Is Greed Good?

SHI 1.5.22 – Have Your Steak and Eat it Too!
January 5, 2022
SHI 1.26.22 – “… What a Stupid Son of a Bitch.”
January 26, 2022

Gordon Gekko believes it is:   “The point is, ladies and gentleman, that greed — for lack of a better word — is good. Greed is right.  Greed works.  Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.”   

Sure, Gekko is a fictional character from the movie Wall Street, but that aside, what do you think?   Is greed a good thing?    Or is it really, really bad?

 

I want more!

 

 

Is that greed?   I’m guessing the answer depends on who you ask.

 

Welcome to this week’s Steak House Index update.

 

If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/


Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.  

But is the US economy expanding or contracting?

Expanding.   Significantly.  In fact, in the 6 months of Q2 and Q3, growth nominal terms  exceed  $1.1 trillion of economic activity.    The world’s annual GDP is expect to end 2021 near about $93 trillion.   Annualized, America’s GDP settling in at $23.17 trillionstill around 25% of all global GDP.  Collectively, the US, the euro zone, and China still generate about 70% of the global economic output.  These are your big players.

 

The objective of this blog is singular.

 

It attempts to predict the direction of our GDP ahead of official economic releases. Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.


Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore “fun” items of economic importance.   Hopefully you find the discussion fun, too.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.


 

The Blog:

If you ask President Biden, I suspect his answer is an emphatic  NO!  Greed is VERY bad!

“I’ve said it before and I’ll say it again:  Capitalism without competition isn’t capitalism. It’s exploitation,” President Biden commented a few days ago at a White House event to discuss meat/poultry supply chain issues.  Perhaps this comment is not precisely on point, but is does suggest that the White House is not a fan of corporate greed – especially monopolistic corporate greed. 

President Biden was referring to a December 10 White House report titled, “Recent Data Shows Dominant Meat Processing Companies are Taking Advantage of Market Power to Raise Prices and Grow Profit Margins.”  Yes, that’s the title.   Ouch.   The report itself was even more damning.   Per the report, just four (4) companies – Tyson, JBS, Marfrig and Seaboard – “control” between 55% and 85% of the US pork, beef and poultry markets.   And further:  

 

“According to these companies’ latest quarterly earnings statements, their gross profits have collectively increased by more than 120% since before the pandemic, and their net income has surged by 500%.”

 

Ouch.  That does sounds like profiteering, right?  Are these 4 companies abusing the American consumer?

Countering the White House report, in a blistering response published by Julie Potts, President of the ‘North American Meat Institute,’ said the government’s calculations “awkwardly and misleadingly combine these sectors and the council’s analysis conveniently excludes data on rising input costs, rising fuel costs, supply chain difficulties and labor shortages that impact the price of meat on the retail shelf.

Of course, the White House report rejects this claim:   “Their profit margins—the amount of money they are making over and above their costs—have skyrocketed since the pandemic. Gross margins are up 50% and net margins are up over 300%. If rising input costs were driving rising meat prices, those profit margins would be roughly flat, because higher prices would be offset by the higher costs.”

Right.  Got it.   I’m awarding this round to the White House.   If you’re interested, here’s the White House report should you wish to read the entire thing.

https://www.whitehouse.gov/briefing-room/blog/2021/12/10/recent-data-show-dominant-meat-processing-companies-are-taking-advantage-of-market-power-to-raise-prices-and-grow-profit-margins/      

Food inflation hits the American consumer squarely in the wallet.   The Consumer Price Index report (CPI), released earlier this morning, reflects a 6.3% inflation rate for food during 2021.  Clearly, the price increases in pork, beef and chicken have contributed to this increase.   Consumers are not happy.   And President Biden is not happy with the meat producers. 

And I’m not happy!   After all, this is the Steak House Index blog, right!  🙂

Sorry, I digress.  Back to the earlier questions:   Are the meat producers acting greedy?   Is greed good or bad? 

In 1776, Adam Smith published the book that made him an economic luminary, “An Inquiry into the Nature and Causes of the Wealth of Nations.”   Both a moral philosopher and economist, Smith was a champion of “free markets,” promoting his concept of “the invisible hand,” which essentially suggests that when individuals act in their own self-interest, one unintended result is greater social benefit and public good.  Was Smith promoting greed?   Is “the invisible hand” theory responsible for the moral decay seemingly inherent in Capitalism? 

In the book, Smith argues the answer is no.  He contends:

 

“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest…”

 

And he adds: 

Every individual… neither intends to promote the public interest nor knows how much he is promoting it… he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”  Interesting

Is promoting one’s self interest the same as greed?  What, precisely, is greed?   Most definitions suggest greed is an “intense” and “selfish” desire for more of something — usually money. 

That doesn’t sound good. But if we strip out the words intense and selfish, and consider the foundational principal of greed – the desire for “more”–  why is that an inherently bad thing?  Doesn’t everyone typically want more?  Isn’t that an essential human condition?   Employees want raises.  Homebuyers want a nicer, bigger home.  Landlords want to raise rents.  Retirees want more income.  Governments want more tax collections.  Countries want more income in the form of GDP growth.  “More” is a common theme.  It always has been.  So, is “more” a bad thing?   Sure, some people are satisfied with what they have … but most companies, governments and countries are not.  They want more.

Is the individual desire for “more” OK … but corporate greed is unacceptable?    Should companies be able to make as much money as they can, simply because conditions permit it?   If the answer is no, then consider the opposite:  If favorable conditions permit a company to maximize profits, but such an activity is deemed by society to be either unlawful or unethical, then should the government or society step in and prevent losses for a specific company or industry should conditions become exigent?   Isn’t this precisely what happened just last year, when the US government handed out the SBA sponsored PPP funds?  One could argue the government mandated closures caused the problem in the first place; but early on in the pandemic, public health was deemed by governments of the world to be paramount.   It’s a slippery topic, to be sure. 

Deirdre McCloskey is professor emerita of economics, history, English, and communication at the University of Illinois at Chicago.  Yes, she is a professor in all 4 topics.   The woman is absolutely brilliant. Staggeringly brilliant. 

One of the best non-fiction books I’ve ever read is the third volume of her trilogy titled, The Bourgeois Era, Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the Worlds.   Yes, it was the third of 3 books.   And this one weighed in at 976 pages.  If you plan to read it, make sure you have access to a dictionary.   You’ll need it. 

Or you can read a much shorter, 24-page essay on the same topic (right click, open in new tab): 

http://deirdremccloskey.org/docs/pdf/ScandinavianEHR2016.pdf

Or, alternatively, you can read a few excerpts: 

 

“From 1800 to the present the average person on the planet has been enriched in real terms by a factor of ten, or some 900 percent. In the ever-rising share of places from Belgium to Botswana, and now in China and India, that have agreed to the Bourgeois Deal – ‘Let me earn profits from creative destruction in the first act, and by the third act I will make all of you rich ….’”

 

Is this staggering achievement, over the past two centuries, an example of human greed?   I think Professor McCloskey would say no.   Of course, she would say it more eloquently, AND more interestingly, than my one-word response, to wit:

 

“The scientific problem in explaining modern economic growth is its astonishing magnitude—anywhere from a 3,000 to a 10,000 percent increase in real income, a “Great Enrichment.” Investment, reallocation, property rights, exploitation cannot explain it.  Only the bettering of betterment can, the stunning increase in new ideas, such as the screw propeller on ships or the ball bearing in machines, the modern university for the masses and careers open to talent.  Why, then, the new and trade-tested ideas?  Because liberty to have a go, as the English say, and a dignity to the wigmakers and telegraph operators having the go made the mass of people bold.  Equal liberty and dignity for ordinary people is called “liberalism,” and it was new to Europe in the eighteenth century, against old hierarchies.  Why the liberalism?  It was not deep European superiorities, but the accidents of the Four R’s of (German) Reformation, (Dutch) Revolt, (American and French) Revolution, and (Scottish and Scandinavian) Reading.   It could have gone the other way, leaving, say, China to have the Great Enrichment, much later. Europe, and then the world, was lucky after 1900.  Now China and India have adopted liberalism (in the Chinese case only in the economy), and are catching up.”

 

OK.  Got it.  Something changed in the past 200 years.   And human society was enriched beyond levels never before seen in all of human history.   By no means are society’s problems solved today, but Professor McCloskey would argue humanity is far richer than ever before, in the aggregate. 

The problem, I suspect President Biden would argue, is too much of those riches today are being retained by a few near-monopolistic companies.  The problem, the administration might say, is corporate greed has run amuck, hurting the American consumer.   Are American companies making too much money off the American consumer today?   This graph might support that contention.  Here are the after-tax “corporate profits” for the past 10-years:

 

 

After averaging about $1.8 or $1.9 trillion per year, for 10- or so years, corporate profits increase significantly last year.  The annual run-rate, as of December 22, 2021, was over $2.7 trillion — a 45% increase.   And a company in the business of forecasting corporate profits, named Factset, expects another 9.2% increase in 2022.   Frankly, I think their forecast is low.   I think corporate profits will grow by another 20- 25% this year.   Which I contend is a good thing — in the aggregate.   It has been historically.  And I believe it will be in the future.  So, while the White House will promote GDP growth on one hand, they can — and do — take exception with monopolistic behavior in certain industries.   As, I believe, they should.  The White House report on the meat industry concluded with this comment:

 

Here is the bottom line: the meat price increases we are seeing are not just the natural consequences of supply and demand in a free market—they are also the result of corporate decisions to take advantage of their market power in an uncompetitive market, to the detriment of consumers, farmers and ranchers, and our economy.    

 

Ouch.  I wouldn’t want to be one of those meat guys.    Speaking of meat, let’s head to the steakhouses.   The SHI10 is showing more weakness.  This second reading of 2022 reflects diminished expensive steakhouse reservation demand this weekend than during Q4 of 2021.    Recall that pricey eatery demand is always lighter in Q1 than Q4.   And perhaps Covid is playing a roll here. 

I have not been to Mastros lately … so perhaps the far-higher meat prices are contributing to reduced opulent eatery demand.   We’ll have to see as the year progresses.   But thru any lens, without settling on the cause just yet, our steakhouses are much emptier this weekend than before the New Year: 

 

Steakhouses in San Francisco and St Louis are downright ghost-towns this week.   Of course, perfectly prepared New York’s are flying off the grill here in the OC.  And in Atlanta.  So it’s clearly a mixed bag.   We’ll have to keep our eye on the trends here … as the Omicron spike (hopefully) falls back to earth. 

Permit me to finish today’s blog with my personal opinion on the “greed” discussion.   I believe that greed, a la Adam Smith’s ‘invisible hand’  is  good – to a point.   Without a wide-spread desire for “more,” I fear the Great Enrichment Professor McCluskey so eloquently presents would never have happened.   Of course, she believes that ideas have been more powerful, more beneficial, over time than capital.   Paraphrasing Smith and McCluskey, with a tip of the hat to Malcolm Gladwell and his book “David and Golaith,” I suggest that greed, in the right amount benefits society.   But beyond a certain point, it can become counterproductive.  

However, in the final analysis, irrespective of your opinion about greed, Smith’s invisible hand, or McCluskey’s Great Enrichment, the simple fact is that corporate activity, and to some extent, corporate profits, powers the US economy, the global economy, and produces the US Gross Domestic Product.   The concept of GDP is first attributed to Adam Smith from his Wealth of Nations book … and since 1776 — or at least since the number could be meaningfully tracked — GDP  growth  has been carefully nurtured, promoted and tracked.   GDP growth, or more specifically, GDP growth per capita, has contributed to the betterment of individuals and society for generations.    My opinion. 

Consider this image: 

The desire for more has helped lift humanity’s living standards to unprecedented levels in the past 2 centuries.  I believe this is a good thing.  But, like with many things, too much of a good thing is not … well … good.   Perhaps we should have simply asked Benjamin Franklin about his thoughts on the topic back in the late 18th century.   He probably would have commented:  “Moderation in all things – including moderation,” as Ben is known to have said.   So perhaps greed is good … in moderation?   🙂

The Steak House Index will be taking a winter break next week.   We’ll be back on the 26th.    

  <-|->   Terry Liebman        

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