The Fed is Subsidizing Corporate EPS

CrownThomas's picture

As we see miss after miss on the revenue line, companies have seemingly still been able to meet EPS estimates (or at least stop them from plunging). How? (outside of releasing any and all reserves), simple - fed funded share buybacks. Indeed, contrary to popular belief of other "business" sites, this is not a recovery driven by fundamentals.

Corporate share buybacks are on the rise, as companies struggle to figure out who else to lay off in order to hit OP targets in light of shrinking demand


Isn't this expensive you ask? No, not when rates are trending lower, and there are no more projects to invest in that will deliver immediate results (you kind of need demand for that). And thanks to the Federal Reserve, and banks (ehem, Federal Reserve) rates are indeed trending lower since the crisis began.


This all leads to corporations issuing massive amounts of debt in order to buy back shares, juice EPS, and pay divvy's.




In summary, things aren't always as they seem -- and the Fed is manipulating everything.




Sources: St. Louis Fed, NYT, SIFMA

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proLiberty's picture

More correctly, by intervening in its distortion of the time value of money, the Fed has caused distortions in all manner of price signals by which the myriad of participants in the economy attempt to make rational economic calculations.  When they cannot do so with real success, that is success measured in terms of real economic resources, not by nominal dollars, they end up with a loss in real terms, and thus consume real capital instead of increase it.  Fiat money can create such a temporary mirage of prosperity that at least for a while we can have a profit in terms of nominal dollars yet have a real loss in terms of economic resources those dollars represent.

When I give my usual introduction to the auditors or regulators, I tell them that I realize and respect that their job has to do with accounting for millions of dollars in corporate income, expense, capital and labilities to the penny and that our goal is to have fully compliant books clean of adjusting entries.  The problem that this entire environment creates is that they are fixated on accurately accounting for every penny without any concern that the value of the penny has changed over the accounting period.  The Federal Reserve is the party who distorts the value of the penny as a matter of deliberate goverment policy.

Every time I have said this, I get a blank stare but one or two of the crew will suddenly realize the full meaning of what I said.  The entire profession is so compliance oriented they are clueless about the real reason they exist.  

We cannot make real economic profits unless and until we use metrics that cannot be manipulated.  Money, or more specifically currency is not a scalar metric.  It is a multidimensional metric, for it has both an instanteous value (like how much gasoline will $5.00 buy right now) and a value over time (like the yield curve).

The Federal Reserve manipulates both the instanteous value of money and its time value.  The more it suppresses the time value to zero, the less expensive long term projects appear to be in comparison with their real economic costs.  By this distortion alone, great harm is done when long term projects are approved that are not "sustainable" when the Fed gets exhausted and can no longer suppress the time value of money.



mkhs's picture

I guess it beats sacrificing a goat to the gods of economics.