(lots to say about interest rate moralizing in both directions, but vis a vis this exchange i think it’s less the rates per se but the difficulty managers face in actually taking the hit that compels the borrowing…

obviously the hit is worse when rates are high. but the first order issue is terror of defying growth expectations upon which high valuation multiples are based.)

i think i believe in the effectiveness of the shareholder value revolution a bit more than you! 1/

a corporate’s balance sheet may be in good shape in terms of surviving a profitability rough patch, but share price fluctuations against which managers’ careers are leveraged overweight short-term results, so managers try very hard not to let a long view justify near-term disappointments. 2/

(however good a corporate’s fundamentals may be, recent decade management trends tend to impose continual pressure on management to sustain cash flows. that may or may not show up as overt leverage, debt service being the most straightforward way to demand cash flows.) /fin

we may not be disagreeing so much then. i don’t claim this kind of thing persists indefinitely. firms want to avoid both price shocks to customers and profit shocks to themselves. unfortunately those goals conflict here. 1/

so, for the immediate term, larger firms may smooth the price shock over a period of, as you suggest, two to three years, and manage the potential profit hit by looking to other markets not under unusual stress. 2/

that second part would be hard if firms were price takers, but they are not, and even less so because their main competitors face the same challenge and are interested in the same solution. 3/

over two or three years, yeah, i agree, if the tariffs are still in place firms will largely have passed them through, and tacitly coordinated price increases in other markets will have begun to unravel. 4/

the idea isn’t that firms permanently defy competitive forces. it’s that they have some degree of temporary play, and more temporary play when industries are consolidated and face similar challenges. 5/

economic profit, along with resilience and capability across a variety of dimensions, derives from that play, from how far and wide they can or can’t push their deviations from textbook behavior. /fin

my contention is definitely stronger than Rolex, macroeconomiy significant, but also “it depends”. as Donovan suggests, it’s a market by market thing. 8% on a once every 10 year purchase just gets passed through. 1/

but things more frequent and salient, those proverbial nappies for example, sellers feel constrained in their ability to raise. they really do care about reputation and customer pushback in ways not discernible on a supply/demand graph. 2/

you see this on the other side, when during earnings calls they were very candid and even exuberant about using the 2022 general inflation as cover to raise prices and increase margins. 3/

but now US importers face the opposite, no general inflation to provide cover but rising costs. where they must, they will partially pass through, partially lose margin, incidence determined by relative elasticities like an Econ 101 class. 4/

but real businesses are sprawling and creative and have choice sets that go far beyond price and quantity. they face constraints like “we will be punished in the stock market if the profits we report at a firm level decline”, not discussed with Marshallian scissors. 5/

when the toothpaste of profitability is squeezed in one place, a large firm try to make up for it in another. when members of a consolidated industry are similarly situated and face similar challenges, they will tacitly coordinate to make that work. 6/

(they may be competitors in consumer markets, but they face a common adversary in potential discipline and defenestration via stock markets.) /fin