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Why Profits Are Faltering

Discussion in 'Topical Discussions (In Depth)' started by Scorpio, Jan 10, 2017.



  1. Scorpio

    Scorpio Скорпион Founding Member Board Elder Site Mgr Site Supporter ++

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    Why Profits Are Faltering
    January 4, 2017

    Profits are faltering for structural reasons that are not easily resolved..

    The bedrock assumption of the Bull market is that corporate profits will keep rising indefinitely. Hiccups are allowed, but current stock market valuations are implicitly based on profits expanding.

    The fly in the ointment here is corporate profits have been stagnating since 2014. Here is the St. Louis Federal Reserve (FRED) chart of pre-tax corporate profits:

    [​IMG]

    Is it just coincidence that profits have stagnated since the U.S. dollar strengthened in early 2014? Actually, there is a causal connection between the USD and corporate profits.

    The majority of America's large corporations are global, and up to half of their sales and profits are earned overseas in other currencies.

    Consider the impact of foreign exchange fluctuations on profits when converted to dollars. When the euro and the dollar were 1-to-1 back in the early 2000s, 100 euros of profit earned by U.S. corporations in Europe converted to $100 when stated in dollars.

    When the euro strengthened to $1.40 (and the USD weakened accordingly), the same 100 euros of profit earned by the U.S. corporation in Europe converted to a $140 in profit when stated in dollars--a hefty 40% premium gained entirely as a result of the weak dollar.

    So profits earned in euros soared 40%, not from rising sales or fatter margins, but as the direct result of a weak USD. Now the trend has reversed, and as I have been discussing for years, the USD is in a multi-year uptrend.

    Which brings us to this FRED chart of the trade-weighted (broad) U.S. dollar index. Is it just coincidence that a strong dollar is correlated to recessions?

    [​IMG]

    Given that profits earned in other currencies crumble when the dollar soars, it follows that there is a profits recession in strong-dollar eras, and that pressure on profits may contribute to an economy-wide slippage.

    But profits are faltering for domestic reasons as well. The cost pressures crushing the restaurant sector (There's A Massive Restaurant Bubble, And It's About To Burst) are not limited to restaurants: rents are soaring for households, crimping disposable income, while small businesses across many sectors are facing rent increases.

    Then there's healthcare. I have noted many times over the years that healthcare can and will bankrupt the nation: for example, How Healthcare Is Dooming the U.S. Economy and Can Chronic Ill-Health Bring Down Great Nations? Yes It Can, Yes It Will.

    The restaurant described in the above article saw its healthcare costs for employees skyrocket from $14,000 to $86,000 in a few years. While this may seem extreme to those of you who are not exposed to the real, unsubsidized cost of U.S. healthcare, those of us who pay real, unsubsidized costs are not surprised at all.

    Every dollar diverted to healthcare and pharma cartels is a dollar that is unavailable to the enterprise or employee for other spending or investment. As I have noted, skyrocketing healthcare costs act as an economy-wide tax.

    Then there's rising wages. Most people view increases in minimum wages sympathetically, and there are solid arguments in favor of returning the minimum wage to its purchasing power in 1970.

    But to enterprises staggering under higher rents, higher healthcare costs and higher junk fees/local taxes, increased wages may be the coup de grace.

    In sum: profits are faltering for structural reasons that are not easily resolved.


    If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

    Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print). For more, please visit the OTM essentials website.


    http://www.oftwominds.com/blogjan17/profits1-17.html
     
    Flight2gold and Goldhedge like this.
  2. platinumdude

    platinumdude Gold Chaser Platinum Bling

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    So the government should give about $10k to every person which will weaken the dollar and create bigger profits.
     
  3. Uglytruth

    Uglytruth Gold Member Gold Chaser

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    Healthcare, $4.50 a gallon gas, food, property, phone, water, sewer, electric taxes are all a massive government controlled burden and steal spendable money.
    High unemployment, stagnant wages, zero % interest rates, 95 million dropped off the unemployment map, nafta moving all manufacturing jobs away and they wonder why people have no money to spend.
    Heck I wonder how and why anyone can buy a new car or even go on a vacation.
     
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