Was corporate profit growth a bubble inflated by "financial engineering"?
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There's a long way to go down to normalize this situation. I'm not saying this will happen, but the downside potential is enormous.
Also, don't forget about the 50% of US GDP ($11T) that have been loaded into US capital markets (both debt and equity) by foreigners. This is also hugely out of balance: https://fred.stlouisfed.org/series/IIPUSNETIQ
If a company like amazon generates very little corporate profit, is that unproductive growth? Aggregate corporate profits are not the only stat that matters when discussing economic growth/value.
Of course not. There would be more employees, more taxes paid, more buildings being built, more assets, etc. thus more money going into the economy.
I've always dreamed that companies should run with zero profit (like the outdoor store co-ops like REI or MEC in Canada). They could price their products so they don't make any "extra" money each year after all expenses and salaries, etc.
I think we'd live in a better world if a company like Apple didn't exist to make ever increasing profits, but existed just to create the products they create.
Isn't that precisely what you get from competitive pressure in a free market? Things end up priced barely above production costs.
> I think we'd live in a better world if a company like Apple didn't exist to make ever increasing profits, but existed just to create the products they create.
That would be a nicer world to live, true. Unfortunately, we've created a system in which the primary reason for a company to exist is to make profits - and then we pit companies against each other to minimize profits made. The end result is a lot of creativity unleashed in the process of innovating, cheating and defrauding your way into not being a commodity.
Evidently no. Companies are making hundreds of millions in profit every ear, they're paying their CEOs tens of millions as a "bonus".
They're they're making a lot, LOT more than just "barely above production costs"
The other part of my comment also mentioned that companies do everything they can to avoid being commoditized: that's another source of inefficiency/surplus revenue. The market is in flux; commoditizing takes time.
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https://www.modernhealthcare.com/article/20181030/NEWS/18103...
It's not about what percentage of their revenue it is, it's about how that money that should go to adding customer value, not making exceedingly rich people richer.
500 million dollars could change the lives of tens of thousands of people that Aetna calls customers... but instead it goes to ONE person.
It doesn't have to be that way.
Everything can be improved, and we should strive to improve everything. I'm very aware of companies that operate very well without making a profit. They add a lot of value to society, the employees get paid and they're even expanding (MEC in Canada). But no profit. Nobody who doesn't work there gets richer. So why don't Apple work that way. Why doesn't Comcast work that way.
CEO pay represents a huge surplus of money (profit) that wasn't needed. The products and services offered by the company could have just been discounted that much, or the employees could all have been paid more, not just one person.
It's very hard defend the argument "CEO pay represents a huge surplus".
How much value does that CEO being by his skills/decisions? Why would he be hired with the salary he receives (that he does not get to decide) if he didn't create more value than what he costs? It's just like any other employee, except a more competitive space and where decisions have larger profit effects.
You are against join stock companies, but not interest bearing loans/bonds or arbitrarily high salaries for managers? Why?
The whole point of profits and investing is to hook up the "skin in the game" of investors to viability of project. That's the definition of capitalism.
It's interesting though that there are certainly extremely successful companies like MEC in Canada and REI in the US who don't follow this model.
Their customers are extremely happy. Their staff get paid. The y create excellent value for customers. BUT they don't make a profit. Nobody can get rich from owning a slice of it.
Why couldn't more companies be like that?
Also, heavy CAPEX or any other form of internal reinvestment does not mean there should be no profits. Look at Google, Facebook, Apple, Microsoft - all those companies were bootsrapped mostly through internal cash flow. All of those companies were profitable when IPOing (just look at historic S-1s).
Edit: What I'm saying is that profit is a lagging indicator of CAPEX, and your lack of profit now could be the result of bad CAPEX 5 years ago, or good CAPEX 5 years ago, plus aggressive new CAPEX now.
CAPEX is written down via depreciation charges over many years. I.e. if you buy something for $1M, and it has an accounting life of 10 years, you book $100k losses per year.
What you're thinking about is called "cash flow", not "profits".
Even if CAPEX generates profits, if the returns were lower than your capital cost then company would have been better off not investing and returning that instead to shareholders.
Presentation on this very topic: https://youtu.be/c20_S-QgvsA?t=730
Same amount of profits (DCF + discounted terminal value) spread over fewer shares implies a higher share price.
- starting from short riskfree rates [all since 1981, but problems surfaced only in 2008]
- to long riskfree rates [all since 2008]
- to corporate default rates [ECB since 2012, the Fed since 2020]
- and in some cases, even to equity risk premium rates [BOJ and SNB since 2008]
Expect more alphabet soup of pump facilities to materialize. I don't bother listing them here, it's all the same (reduce this or that rate).
Still, not "since forever", only since 1998, or so.
1. https://en.wikipedia.org/wiki/Long-Term_Capital_Management
The US set up the Home Owners' Loan Corporation[1] during the great depression to refinance loans saving a lot of banks from disaster (tho helping common folks too), and there were also the savings and loan bailout in the '80s and '90s[2]. Chrysler was bailed out in 1979[3] and Lockheed in 1971.
[0] https://en.wikipedia.org/wiki/Istituto_per_la_Ricostruzione_...
[1] https://en.wikipedia.org/wiki/Home_Owners'_Loan_Corporation
[2] https://en.wikipedia.org/wiki/Savings_and_loan_crisis
[3] https://www.investopedia.com/articles/economics/chrysler-bai...
All also being assets. (Health care equating to health). Who has benefited the most from asset inflation? Those well off or the lower working class?
But I think the inflation in health-care/education is caused by lack of competition.
As in - you can choose to not buy a new coat this winter, but you HAVE to buy health insurance. You HAVE to buy college education for your kid or otherwise s/he won't be able to ever start a family (working as a barista, or some such).
Also, none of these services were outsourced to cheaper location (because they can't. although a good number of people have been going abroad to get their medical degree, etc.)
Doesn't that make a lot of assumptions about assets, expenditures, and business model?
If I start a business handing out $0.99 to anyone that gives me $0.90, I think I could easily grow revenue at a 10% loss for as long as investors were willing to fund it.
These the so called "too big to fail" types of companies which borderline monopolize market sectors like Amazon and Walmart. But they don't care during recessions because they're fine. They essentially are the government as they have a larger impact on your daily life than the actual government!
It's not so much that the stock buybacks are the straw that broke the camel's back, it's just another inevitable economic event that the invisible hand dealt. There is no stopping it. Otherwise we're just back in a labor economy again where money can't flow where irrational people deem they need to place it.
It’s the C Suite members, and it’s the board members... it’s a small group of people at the top who are trying to enrich themselves at the expense of the company and at the expense of the people who actually run the company.
It's a load of crap that this is even a concept if the government cannot get involved at that point.
Amazon and Wal Mart could disappear overnight and I would just shop elsewhere. Amazon isn't in charge of my water quality or road maintenance.
Do you think that there is enough inventory and stock to go around? Would those alternatives replenish their inventory in a timely fashion? Would you seek alternatives to your normal shopping?
I think people vastly overestimate the capabilities of their local options.
Neither Amazon nor Walmart produce those commodities, they distribute them. Sure, there would be some initial issues, but both the remaining distributors as well as the producers would have strong incentives to quickly resolve those issues.
Companies like Amazon and Walmart massively distort the market, and do so quite deliberately. It's hopelessly naïve to think that if they vanished tomorrow, everyone would be able to just shrug and switch their purchasing to a drop-in replacement.
That's only possible in, as someone else described it, the "spherical cow in a vacuum" type of hypothetical free market. We live in the real world, where an arbitrary number of fully equivalent businesses can't actually continue to compete perfectly for everyone's money.
An enormous amount of people in America would be utterly screwed if it went away.
Also, the overwhelming majority of people are driving to Walmart so even if significantly less convenient they can also drive somewhere else.
Although the only thing I wish they cut back on was their employee culture cult stuff. It reminds me of McDonalds where you have to say thank you to a supervisor after everything, even if they're yelling at you to be a dick. It's like the f'ing military. That kinda brainwashing garbage needs to go.
It's somewhat interesting that when coming up with a list of two 'monopolist' companies, you came up with two companies that compete directly.
I find it interesting how in economics, analysis is based on rational actors, but whenever something goes wrong or doesn't agree, it's irrationality's fault.
Maybe there is a rationality to perceived irrationality that simply doesn't agree with the sensibilities of the claimer of other's initial irrationality?
Even if that were true, "the organization that has the biggest impact on your daily lives" is a weird definition of "government".
Your behavior is shaped by so many external influences that we often forget that the government most often has very little direct influence in our lives. Businesses typically encounter more interactions with the government, but average folks interact with businesses. Corporate cultures in a weird way end up becoming our "culture" we believe in, our "religious" views (not in a theological way). While we're all essentially considered "Freemen" in this world, sometimes you are not because of things like bills or debt bondage. You cannot leave from your "Lord" or "company" because you owe a debt somewhere or simply cannot afford to leave. It's a complicated system, but the concept of fuedalism has just been expanded.
My question is: Why had the stock market continued to go up despite flat profits?
To use poker as an analogy: if you aren't sufficiently bankrolled, the correct play (most positive EV) can involve an unacceptably high risk of ruin. ....and BTW are you also factoring in the probability of fraud or a government seizure in your calculations?
Why?
When interest rates are low, firms can finance to buy back. Not only that, investors shift their investments to stocks, instead of bonds. Two forces are at work to pump stocks, both forces are products of low interest rates.
If true then that's pretty impressive and possibly much better than what the markets ~10 years ago expected?
Since 2014, Profit (before taxes) has been roughly $2.2 trillion every year.
Amazon and Walmart's power comes from being cheaper/better than the alternatives (though they may engage in unfair and unethical behavior as a means to that end). Government's power comes from having a monopoly on violence. These are very different and one has to be very far removed from government violence to think otherwise.
Desperate people with no practical negotiating leverage may have the theoretical power of foot-voting, but it provides zero practical value.
Given that a lot of regions outside of urban areas are varying degrees of labor-monopsonies with a very few large employers, not having an official right to shoot your workers really doesn't make a massive difference in the amount of control they can exert.
This isn't to say whether or not it's a bubble, but I am surprised at the number of people who think that stock prices going down is due to financial health of companies rather than people attempting to sell stocks either in a panick or because they suddenly need the liquid cash on hand (due to job loss) and are thus willing to sell at a loss.
And regardless of their merits or demerits, share buybacks do increase actual earnings per share, which is one method to valuate shares. It's like, if there are four partners in a partnership and two decide to buy out the other's shares, their shares are now worth twice as much, assuming the corporation continues making revenue.
Then I hear about corporate debt and how that forces layoffs. The fact is companies are not going to retain employees when they cannot conduct business, regardless of cash on hand. It's not even a moral concern. Companies can simply layoff their employees and have them receive unemployment insurance. Even if they wanted to be 'ethical' and provide health insurance, the cost of a severance package with 18 months of health insurance is less than paying them and providing health insurance. From a corporation's perspective, irrespective of how much cash or debt they have, layoffs are simply superior.
The financial health of many companies is significantly affected by virus mitigation strategies. Companies that were healthy in January may be on the brink of insolvency in June. The market is pricing that in to some extent.
The fact of the matter is, companies should not keep 'emergency cash reserves' enough to operate for six months. The money should be returned to shareholders. Shareholders and other investors should keep liquid cash reserves for emergencies. Then, when companies face emergencies, they should issue new stock to the markets, and the saved up emergency capital can be used. That leaves individual share holders and potential shareholders to decide the fate of companies, which seems more in the spirit of democracy.
How much market volume do you think is attributed to retail investors?
I know a lot of people who logged in to their accounts last Monday who never normally to sell shares and hold cash until the market bottoms. I'm guessing the retail volume in the past week has been higher than ever.
Even barring retail investors telling brokers to sell shares, there are all sorts of reasons consumer behavior can force share sales including increased expectation of withdrawals by banks, people not contributing as much to 401k. Defined allocation mutual funds rebalancing, etc. Also, today a lot of low cost brokerages sell trades to algotraders for fulfillment, so an order for the sale of 1 share of a consumer investor can end up accounting for more in trading volume
For some reason markets going up is fine but when they inevitably decline sharply this is viewed as 'disorderly' and the Fed prints money to keep asset prices high. The Fed ensures that hedge funds have counter-parties to buy their toxic overvalued assets.
It's now clear that our economic system is run for the benefit of corporations and hedge funds.
I can't imagine what would happen if you gave every citizen 10k. I would think there would likely be something akin to a revolution that may or may not result in a more robust economy. What the gov't is doing by giving so much money to existing companies that have already failed vs individuals with the possibility of failing is very much protecting the existing social structure of society.
Corporations like these are a hierarchy that generate implicit social striations in our society. By maintaining this regardless of the fundamental success of the product or competence of the management, they act only to preserve the class structure enforced by the institution and thus the stability of society in a configuration with marginal utility as regards productivity.
They're clearly ensuring their own future.
Maybe all in the short term, but, this stimulus is specifically looking to avoid short-term discontinuities.
That said, I'm a big fan of corporate stress tests and capital buffers as well. I'm not a fan of debt-fueled share buybacks, but, I understand them as a response to a system that allows them.
The $1200 that people are getting is tax-free.
Hierarchies are still important, but now they're just training wheels in many instances.
only if you haven't been paying attention
Does this apply here? It seems you could argue that profit is the one true number that _is_ a good measure, but it seems even that can be 'hacked' so that it isn't good anymore.
A measure of what? As a proxy for social utility, it's been thoroughly gamed and the two have little correlation.
Profit is currently used as a self-serving measure, because you can eat profit (after exchanging it for bread, or drugs, or yachts). In this sense it can't be hacked. Accounting around it can be and is, though.
So in principle there's nothing wrong with the buybacks. However, investors can have the mistaken impression that these buybacks would continue into the future, and predictions of the future -- and thus the fair stock price -- can change in a heartbeat.
Big moves when there is big news (like a global pandemic say) are normal events.
The thing I find concerning is why the FED are "intervening". Dumping cash made sense during a cash shortage. But when there are actual, real, concerns about the future (coronavirus), price falls are perfectly correct. They don't need "fixing". Happy to be corrected if anyone knows?
The idea was never to keep the economy afloat- it was to build a bridge to prevent being exposed to the rough waters.
Their moves so far might float us though a short recession, but it's not clear at this point if it will be enough.
I get mainstream econ looks down on it, but given the fact sticking strictly to Keynesian thinking has led to businesses being incentivized to create faulty product (Boeing), committing outright fraud (Wells Fargo), causing widespread destruction through abdication of due diligence (PG&E), exploiting addictive chemicals for business growth and engaging in unscrupulous price gouging (Shkreli, Pharma st al), and our current economic powerhouses are increasingly centered around consumer finacialization (every bloody major tech company), and for God's sake, Juicero happened; I'm honestly curious if the Austrian's might not be on to something.
Maybe the market does need to crash down to the basics. I just don't know if there is really a way for that to happen at this point given how capital is so damn centralized right now.
The problem is I just don't think it would be politically possible in the slightest to actually just sit back and hands off; and even if someone were that bold, they'd basically have just proven that there is no reason for them to exist as an institution anyway.
Which I don't necessarily think is an inconceivable state of affairs, but I don't see the economists of the world throwing in the towel and admitting that willingly.
Vast money supply inflation, rock-bottom interest rates, stagnant wages, share buybacks. All accelerating over the last several decades.
History has shown again and again that corporate tax cuts and repatriation schemes go right into stock buybacks and don't trickle down nearly enough to individuals. So tired of corporate welfare.
Worth listening to the full interview if you have 15 minutes: https://www.youtube.com/watch?v=NvEWez59fbI
There is no moral component as to whether a firm should be financed with debt or equity. While EPS has a smaller denominator, it also has a smaller numerator as earning will reflect the interest payments on the debt.
https://am.jpmorgan.com/blob-gim/1383407651970/83456/MI-GTM_...
What slide/s would you use from the JP Morgan Guide that is better than the St. Louis Fed chart I featured?
* https://fred.stlouisfed.org/graph/?g=qx3r
The question I would ask is why the stock market graph looks so different than the St. Louis "Corporate profits before tax" graph?
My hypothesis is that many of these companies borrowed a lot of money in the bond market to buy back their shares and thereby juice their earnings per share.
Profit also involves some major accounting nuances. In SAAS, for instance, advertising costs resulting in customer acquisitions are generally accounted for upfront, reducing accounting profits in the period of acquisition. This is opposed to other industries, where investments are more easily capitalized and then charged over their useful life.
It’s easy to call a market reversal if you’re comfortable calling 9 of the next 2 reversals.
The problem is that systemic risk is then distilled out of the priced instruments that are created, yet those instruments are significantly more vulnerable to systemic risk than simple equities, etc.
> With Corporate profit growth unmasked and the Baby Boomer’s transition into retirement, it seems unlikely that stocks will make a quick return to their prior levels unless governments engage in massive asset inflation.
It is not the Federal Reserve's mandate to inflate asset values, however it tends to be a consequence of their mission to support low unemployment and some stable, positive inflation. We have $6 trillion in emergency stimulus arriving shortly -- two thirds of that support is monetary policy.
"It is too early to say where the bottom is to this recession, but we have reason to believe the Millennials and Generation X do not have the resources to purchase the stock that Baby Boomers want to sell at prior market highs. With Corporate profit growth unmasked and the Baby Boomer’s transition into retirement, it seems unlikely that stocks will make a quick return to their prior levels unless governments engage in massive asset inflation."
It's almost like bankrupting a generation by forcing them through punishingly expensive higher education, obscene healthcare costs, absurd cost of living in major metropolitan areas, and stripping worker benefits makes an entire generation of this country's youth unable to prosper like their predecessors. I truly have no idea what will be left behind for me and my peers, when all of this is said and done.
The last month of cliff-fall would suggest your premise is wrong: prices absolutely can go down.
I agree with you, and I'm especially concerned about this "unless". Markets are supposed to reward accurate predictions, but I would not be willing to put my money where my mouth is now. How can we trust the stock market will not be massively manipulated by the US government, by bailouts, and by measures like stock buybacks?
Outside of the US Millenials have enjoyed cheaper (when adjusted) education than ever before and better healthcare. I think you paint an unnecssarily bleak and defeatist future (coming from another in a similar situation)
Do you have a source for this? Considering the disparity between nations, that seems to be painting with an overly broad brush.
Similar to how say an automobile's year-over-year price may have increased by 5% but the adjusted value is 2% because last year's models didn't have side airbags as standard or something like that.
What's really going to be challenging for capitalists is losing the whole "It's good for your 401K!" justification when nobody actually owns enough stock to care. Only 45% of millennials have retirement accounts and only 33% of millennials have one they are actively contributing to[1]. The median balance also shows them getting a late start [2].
[1] https://www.businessinsider.com/millennials-saving-for-retir... [2] https://www.investopedia.com/articles/personal-finance/01061...
> absurd cost of living in major metropolitan areas
I fail to see how this is the Boomers' fault. Cosmopolitan urban life is a choice, often fiercely defended by Millenials on account of access to "culture", which frequently boils down to a wide diversity of differently-decorated venues in which to get drunk.
Sure, suburban life is boring, and living in the country is hard. But it's not a choice your Dad or your guidance counselor made for you.
Boomers get the blame for capturing regulatory agencies in zoning and housing construction and preventing growth in cities in like SF.
The root cause is technology obviating many jobs and letting labor from around the world compete with the same labor in the US.
Obviously if middle class people live like kings in the US compared to 90% of the world where people don’t have single family homes with garages and two cars, then there exists a tremendous arbitrage opportunity which will have to be taken advantage of if a business/country wants to remain competitive globally.
You've done this repeatedly:
https://news.ycombinator.com/item?id=21725642
https://news.ycombinator.com/item?id=21597613
https://news.ycombinator.com/item?id=21594517
https://news.ycombinator.com/item?id=22705734
and we've warned you before: https://news.ycombinator.com/item?id=21732554.
Continuing will get you banned, so please don't.
At the end of the day "the people in power" have power because the masses allow them to. If enough people refuse to participate in the system then the system will fall apart - e.g. the state only has the capacity to process so many evictions. This pandemic has been the greatest catalyst for class consciousness that I've seen in my life, and I think it has the potential to reshape our society after it's over.
That being said, I have more hope for smaller, local circles, because then the partisan lines get blurry due to a common local identity.
‘A banker, a worker, and an immigrant are sitting at a table with 20 cookies. ‘The banker takes 19 cookies and warns the worker: “Watch out, the immigrant is going to take your cookie away.”’
If the ruling class plays it right the working class will go after each other instead of the ruling class. And so far they seem to do really well.
And yes, that is definitely what they'll do - every time something major happens in our society I've observed the mass media following the playbook from Chomsky's "Manufacturing Consent" almost exactly.
That being said, every "big event" is an opportunity for mass radicalization of the working class and these "big events" are happening more and more often. It's like the quote from the IRA: "We only have to be lucky once. You will have to be lucky always".
Make sure they really do this. The boomers started out with “love and peace” before they turned to “greed is good”. I can easily imagine the next generation to create an even tougher society if they aren’t careful.
You'll grow up, don't worry.
It will amaze you how much smarter your "boomer" parents get as you get older.
I'm sure you meant it in an avuncular way, but that doesn't translate so well on the internet.
It's banter, it's common on the internet, it's been common on the internet for decades.
For example, the above paragraph is completely hollow until it gives some numbers. What % of the stock is held by boomers retirement funds? (is it 1% of the market volume? 10%?)
A half-analysis is no better than no analysis.
Of course, that's entirely independent of whether the points are valid or not.