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One Reason that the Stock Market is Rising While Unemployment is Soaring
Daniel Gross points out
that part of the reason that the American stock markets are going up
even though unemployment is rising and the real economy suffering is
because multinational corporations headquartered in the U.S. are
experiencing strong sales abroad:
Here's
a puzzle: The stock markets are doing very well, yet the performance of
the underlying economy doesn't seem to justify optimism. The buoyant
S&P 500 has risen 53 percent since the March bottom. And while the
economy expanded at a 3.5 percent rate in the third quarter,
unemployment is high, incomes are stagnant, and consumers are shaky...
It could be that the notion the stock market is an accurate gauge of the domestic economy's temperature is outdated.
The
Dow, the S&P 500, and the NASDAQ are primarily indices of large
U.S.-based companies, not main street businesses: more Davos than
Chamber of Commerce.These increasingly cosmopolitan firms have been
busy globalizing and expanding their operations overseas. In 2006,
according to Standard & Poor's, 238 members of the S&P 500
broke out revenues between U.S. and non-U.S. sales. These companies
notched about 43.6 percent of sales outside the United States. For
large companies that had already saturated the U.S. market, the home
market was something of an afterthought. In the second quarter of 2007,
66 percent of Coca-Cola's beverage business came from outside North
America.
And thanks to the long recession, demand for products
and services of all types in the United States has shrunk even since
2006. Yes, the global economy in 2008 experienced its first year of
shrinkage since World War II. But growth has resumed, and in some
places—Peru, China, India—it never stopped. As a result, the globe's
economic geography has continued to change, with the United States
accounting for a smaller chunk of global output and demand each year.
For much of the past two years, virtually all growth in economic
activity has taken place outside America's borders. As a result,
U.S.-based companies are becoming even more reliant on non-U.S.
customers and operations for sales... in two years, big companies'
proportion of sales coming from outside the United States rose 9.8
percent. It's likely the 2009 figure will be something very close to 50
percent.
Don't American Workers Win?
The fact that companies based in America are raking in profits from sales abroad is good for American workers, right?
No.
Gross points out that American workers don't benefit because a lot of the goods sold abroad by American multinationals are made abroad:
If
companies participated in foreign markets primarily by exporting
U.S.-made goods, this shift would be good news for the U.S. economy and
workers. But that's not how it works. In fact, in the months after the
global credit meltdown, U.S. exports plummeted. They bottomed in April,
at $120.6 billion, and though they have been rising, the August 2009
total is still 20 percent below the August 2008 total.
Globalization is changing the way we do business. It's not a matter of
U.S. companies exporting goods—burgers, soda, cars, software—made in
the United States to Beijing but rather, making goods overseas and selling them overseas...
"Based
on a Russian fairy tale and produced in Russia using local talent, the
film is the latest step in Disney's broad push into local language
production," the FT reports. As Disney CEO Robert Iger put
it: "We would not be able to grow the Disney brand … if we just created
product in the US and exported it to the rest of the world." If Book of Masters succeeds,
it will be good for Disney's American shareholders but won't do a whole
lot of good for its U.S.-based employees. Or consider American icon
General Motors. GM's sales in China are rocking. In the first nine
months, the company sold 1.3 million cars in China, including more than
181,000 in September. By contrast, GM in the United States in the first
nine months sold 1.5 million cars in the United States, down 36.4
percent from the year before. And in September, GM sold just 156,673
cars in the United States. That growth in China is good for GM's
shareholders and for some of its executives. But since most of the cars
sold in China are produced there, with parts produced by suppliers in
China, rising sales in the Middle Kingdom won't translate into jobs for
unionized workers in the Middle West.
The rising U.S. stock
market and a weak, slow-growing U.S. consumer sector aren't really in
contradiction. Given the large-scale trends transforming the global
economy—and the role of large U.S. companies in it—it may be possible
to have a sustainable rally in American stocks without a sustainable
rally by American consumers.
Don't Multinationals Pay A Lot in Taxes?
Well, at least the multinationals are paying a good chunk of taxes into the American economy, right?
Not exactly.
The Washington Post notes:
About
two-thirds of corporations operating in the United States did not pay
taxes annually from 1998 to 2005, according to a new report scheduled
to be made public today from the U.S. Government Accountability
Office...
In 2005, about 28 percent of large corporations paid no taxes...
Dorgan
and Sen. Carl M. Levin (D-Mich.) requested the report out of concern
that some corporations were using "transfer pricing" to reduce their
tax bills. The practice allows
multi-national companies to transfer goods and assets between internal
divisions so they can record income in a jurisdiction with low tax rates...
[Senator]
Levin said: "This report makes clear that too many corporations are
using tax trickery to send their profits overseas and avoid paying
their fair share in the United States."
Indeed, as Pulitzer prize winning journalist David Cay Johnston documents, American multinationals pay much less in taxes than they should through a variety of widespread schemes, including:
- Selling
valuable assets of the American companies to foreign subsidiaries based
in tax havens for next to nothing, so that those valuable assets can be
taxed at much lower foreign rates
- Pretending that
costs were spent in the United States, so that the companies can count
them as costs or deductions in the U.S. and pay less taxes to the
American government
- Booking profits as if they
occurred in the subsidiary's tax haven countries, so that taxes paid on
profits are at the much lower safe haven rate
- Working
out sweetheart deals with certain foreign governments, so that the
companies can pretend they paid more in foreign taxes than they
actually did, to obtain higher U.S. tax credits than are warranted
- Pretending they
are headquartered in tax havens like Bermuda, the Cayman Islands or
Panama, so that they can enjoy all of the benefits of actually being
based in America (including the use of American law and the court
system, listing on the Dow, etc.), with the tax benefits associated
with having a principal address in a sunny tax haven.
- And myriad other scams
As Johnston documents, the American economy is hurt by the massive underpayment of taxes by the huge multinationals.
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If these companies pay off taxes we might even reduce the deficit, which would be bad because thats deflationary.
maybe it's much simplier and all asset classes go up because the dollar goes down?!
The P/E of S&P500 companies is now 137.98 according to the S&P website.
http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices...
If multinationals are making a lot of money abroad. Then somebody forgot to tell their accountants about that.
And if GM was making so much money in China, then why did it go bankrupt?
Just because the stock markets are going up everywhere doesn't mean that the earnings are doing well and the stock prices are justified. The fact is that stock market investors once in a while overprice stocks. And when the stock market goes up a lot. Then chances are good that such high stock prices aren't well justified by the fundamentals.
For future growth, the best companies are either foreign where the demographics support growth or companies with a significant portion of growth in foreign markets where the demographics support growth.
We need a new national tax system based on sales tax.
I'm sure you'll get your wish. The bad news is that a national sales tax will probably be in addition to the existing system.