Research from the noted asset management firm Grantham Mayo Van Otterloo (GMO) suggests that today's soaring profit margins are due for a hard fall.
A new white paper, appropriately titled "What Goes Up Must Come Down!" offers a simple and elegant explanation for today's high profit margins and expected mean reversion, but takes a long and wonkish analysis to get there.
James Montier, the paper's author, is known for his analytic sophistication and uses a little-known economic model, called the Kalecki profits equation, to explain the key drivers of corporate profits. Without going through the steps he outlines, Montier is essentially looking for a way to understand why corporate profits today are at an all-time high despite the weakest economic recovery in post-war history. Profit margins today are north of 10% (click on chart, above), more than twice the average margins for the years 1926 to 1999.
In a nutshell, Montier (left) shows that net investment has generally been the foremost driver of corporate profits. Yet private investment fell off a cliff in the economic crisis to near-zero levels! Nevertheless, the U.S. fiscal deficit filled the investment gap, and Montier's 
