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Guest Post: The Rising U.S. Dollar Will Be Corporate Earnings/Market-Negative

Tyler Durden's picture




 

Via Charles Hugh-Smith of OfTwoMinds blog,

Many large U.S. corporations derive 50%-65% of their revenues overseas. As the U.S. dollar rises, the foreign-exchange boost to overseas profits of the past decade will reverse.

 
One of the most glaring omissions in mainstream financial-media stock market commentary is the connection between the U.S. dollar's relative value and corporate earnings. I have often commented on this bullish consequence of a weakening dollar. 
 
50%-60%+ of global corporate earnings and profits are non-U.S., i.e. booked overseas in a currency other than the U.S. dollar (USD). As the dollar weakened, global corporate profits skyrocketed as earnings in euros, yen, etc. rose when stated in dollars.
 
In other words, overseas profits expand as if by magic when stated in dollars.
 
When the euro and the dollar were 1-to-1 back in the early 2000s, then 100 euros of profit converted to $100 when stated in dollars. When the euro rose to $1.60, then the same 100 euros of profit earned by the U.S. corporation in Europe converted to a stupendous $160 in profit when stated in dollars.
 
This explains why the Fed has been so keen to trash the dollar: it magically increases corporate profits and thus drives stocks higher. The mainstream financial media's explanation for the weak-dollar policy is that the Fed is anxious to increase exports, but this is a sideshow; exports make up less than 9% of the U.S. GDP. The real action is in corporate profits, which thanks to the weak dollar are near all-time highs of $2 trillion, about 14% of the nation's entire GDP.
 
Record Corporate Profits (Economix, N.Y. Times)
 
As the dollar strengthens, overseas profits will decline when stated in dollars.
 
Courtesy of Chartist Friend from Pittsburgh, here are two charts showing the long-term trend in the U.S. dollar: up.
 
 
No wonder corporate profits have risen strongly since 2002, other than that brief spot of bother in 2008: the dollar's relentless decline magically boosted global corporate profits. Since many Fortune 100 U.S. companies (McDonalds, etc.) derive 2/3 of their revenues overseas, this foreign-exchange (FX) created boost in profits is a dominant dynamic in U.S. corporate profits.
 
 
If we combine the FX drag of a rising USD with the cyclical top in corporate earnings described in What If Corporate Earnings Have Topped Out?, we discern a potential double-whammy on earnings and thus stock market valuations.
 

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Wed, 01/09/2013 - 12:17 | 3136653 LawsofPhysics
LawsofPhysics's picture

85 billion per month in direct monetization and the dollar is rising?  Bah ha ha ha ha ha!!!!  This isn't the 70's, interest rates are zero bound.  - FAIL.

Ask yourself, what impact do corporate profits have on the real economy, how much of that cash actually makes it to main street.  The capital and resource mis-allocation and mal-investment continues...

Wed, 01/09/2013 - 12:20 | 3136679 Arrowflinger
Arrowflinger's picture

The elites behind every world central bank have "financial earnings" and corporate metrics that rise with cheaper currencies, hence the race to out debase each other. I am surprised that more is not made of this truth.

Wed, 01/09/2013 - 12:44 | 3136703 LawsofPhysics
LawsofPhysics's picture

Correct.  It will not last as more and more people ask one simple question; "What product or service of real value did these paper-pushers actually produce in order to justify those "earnings"?

The question is whether or folks start to believe their "lying eyes" before or after they are marched into "reducation camps" and have been disarmed.

History is very clear on how this all turns out, hedge accordingly.

Wed, 01/09/2013 - 12:22 | 3136686 kliguy38
kliguy38's picture

Exactly......I picture this guy playing a shell game on the side walk sliding the shells ever faster and looking up and saying "Malinvestment...whats that?"

Wed, 01/09/2013 - 12:35 | 3136698 Cognitive Dissonance
Cognitive Dissonance's picture

The chart is a broad index of competing fiat turds being flushed down the toilet bowl. This just means that in the big picture one must be first and one last.

Sort of like that old saying about not having to outrun the bear, just outrun the guy or gal next to you. What's not said is that there are plenty more bears where the first one came from. You're just delaying some bear's meal by running.

Wed, 01/09/2013 - 12:41 | 3136776 SheepDog-One
SheepDog-One's picture

Race to the bottom...but everyones afraid of being first across the finish line.

Wed, 01/09/2013 - 12:46 | 3136798 LawsofPhysics
LawsofPhysics's picture

I'd argue that everyone wants to be first (the most devalued currency) while trying to make sure that nobody else finishes (making their products more expensive).

Wed, 01/09/2013 - 13:06 | 3136871 Ghordius
Ghordius's picture

I'd also argue that the holder of the global reserve currency sets the pace in this race. the others react

but of course it's very difficult to explain to some that the problem is not the car but the driver and his driving style

sure, you could argue that China started first, but hey, wasn't a fine thing that they bought trillions of USTs? While it lasted?

was that a warning sign for congress to balance the budget, immediately? no, we had to hear "deficits don't matter"

at this speed, accidents can happen, and the FED has no fucking brakes except gold

national banks don't monetize, governors do - but governments have to overspend, first

Wed, 01/09/2013 - 15:25 | 3137568 Panafrican Funk...
Panafrican Funktron Robot's picture

"national banks don't monetize, governors do - but governments have to overspend, first"

I would suggest your chicken/egg argument masks the reality that these fuckers are symbiotic.  Monetization is simply wealth transfer.  Government bonds are an excellent transmission mechanism for that wealth transfer.  Ergo, why the financial industry is consistently #1 in campaign finance contributions (and other, less above-the-board influence techniques).  

Wed, 01/09/2013 - 21:53 | 3139335 old naughty
old naughty's picture

Good chicken/egg argument...but please don't stop there.

"...simbiotic...wealth transfer..." is simply slavery of humankind by non-humankind.

Where we're supposedly heading is a trillion times more nightmarish than UFO (unidentified fried object) that KRC had offered.

Ok, a quadrillion perhaps...

 

Wed, 01/09/2013 - 13:00 | 3136844 DeadFred
DeadFred's picture

These are really long range charts and I see the low 70s again are quite easily possible. The euro controls half of DXY value and I'm hard-pressed to see what stopped the recent rise in EURUSD. What did it bump into that made 132 a good turn around point? No resistance, just news that the US debt problems were "fixed"? If there wasn't any strong resistance then I suspect we will see more rise in coming weeks. There's not much value to any of these currencies floating to the top so relative value has more to do with George Soros's wishes than with anything that you or I can see. It also looks like the EURUSD is losing it's control on equities.

Wed, 01/09/2013 - 13:29 | 3136956 cspg
cspg's picture

Wouldn't currency swap hedges have an impact on their ability to report these earnings at the spot rate..

Wed, 01/09/2013 - 15:31 | 3137617 Panafrican Funk...
Panafrican Funktron Robot's picture

Are those hedges on or off balance sheet?  

Wed, 01/09/2013 - 14:24 | 3137181 alangreedspank
alangreedspank's picture

Makes sense. It could mean the other countries in the dollar index are doing more easing.

Wed, 01/09/2013 - 16:11 | 3137858 A Nanny Moose
A Nanny Moose's picture

...relative to other fiats that are racing to the bottom, in order to subsidize the manufacturing of...cheap shit.

Wed, 01/09/2013 - 17:38 | 3138333 sessinpo
sessinpo's picture

 LawsofaPhysics:  "85 billion per month in direct monetization and the dollar is rising?  Bah ha ha ha ha ha!!!!  This isn't the 70's, interest rates are zero bound.  - FAIL.

Ask yourself, what impact do corporate profits have on the real economy, how much of that cash actually makes it to main street.  The capital and resource mis-allocation and mal-investment continues..."

 

Comment:

The monetization of debt is a symptom of deflation. But you are correct, this isn't the 1970s.

Consider your question on how much money makes it to main street or any sector. That just makes demand for US dollars stronger if dollars are not reaching that sector.

But, yes mal-investment. Mal-investment is part of a free society. It is the same as the person that makes a bad investment they bought from some local scam artist. That is life. I don't necessarily rail against mal-investment. I do rail against government manipulated markets. That is corruption, non free markets and crony capitalism where you and I don't have the opportunity to play on the same playing field.

 

But like I've posted other times, considering how much "easing" we have had, how much printing, the Dollar should be GONE by now and PMs should be 100, 200 or even 300% higher. But they are not. That is a message unto itself that very few are seeing, even here at ZH.

Wed, 01/09/2013 - 12:15 | 3136662 Hubbs
Hubbs's picture

The waterline recedes uniformly when the tide falls.

Wed, 01/09/2013 - 12:22 | 3136673 SheepDog-One
SheepDog-One's picture

Hey everyone! The dollar is about to 'correct'...UP! Just as soon as we print up a few more trillion of em!

Yea well I'm not betting on that least beer stained pit rotted out BBQ sauced old wife-beater t-shirt myself.

Wed, 01/09/2013 - 12:19 | 3136676 yogibear
yogibear's picture

The Fed is printing like crazy. Bernanke and the Fed are trying to crash the US dollar.

China is on the edge of taking away the US dollar as the reserve currency. It's been perparing  for the takeover for 2 years. When it's the right time it will get many of the countries to dump trading in US dollars.

China is preparing for the right time to replace the Renminbi as the reserve curreny.

 

Charles must be smoking weed.

Wed, 01/09/2013 - 12:58 | 3136831 trav777
trav777's picture

not nearly as much as you have been...

Wed, 01/09/2013 - 13:00 | 3136837 earleflorida
earleflorida's picture

Indeed! First you disable the IMF and World Bank-- these unadulterated loan sharks sucking their host of all fiscal independence.

Here's what the BRICS have come up with while the west prints into infinity and pre-beyond: 'Will BRICS  [  http://en.wikipedia.org/wiki/BRICS  ] bank break IMF, and World Bank monopoly?' 

It begins... the pre-ordaining of usurping America's hegemonic demon? Where? and When?... 'The Joint Development Bank- March/2013 in South Africa'    http://www.africabusinessmagazine.com/africa-banker/finance/will-brics-b...

Two can play the same game at devaluating an artificial high,  in a world where the bar is set so low, that only a fiat could slither under it?  

Wed, 01/09/2013 - 13:02 | 3136856 LawsofPhysics
LawsofPhysics's picture

The BRICs?  You mean those countries that have already nationalized their energy and banking sectors?  Riiiiggghhht, good luck with that.

The earth is awash in fiat, the BRICs are simply better liars and have much more obidient sheep.

Wed, 01/09/2013 - 13:46 | 3137001 earleflorida
earleflorida's picture

we shall soon find out... shant we?

What's it all about ALFEI  ~= ~

http://www.youtube.com/watch?v=HdbcU9RDjLM

and, here's to you... 'America[U.S.]/ Luxembourg/ France/ England/ Italy'

Wed, 01/09/2013 - 13:19 | 3136918 earleflorida
Wed, 01/09/2013 - 15:34 | 3137639 Panafrican Funk...
Panafrican Funktron Robot's picture

I'm sorry, are you under the delusion that this would happen sans World War III?  Dollar hedgemony at all costs.  

Wed, 01/09/2013 - 12:21 | 3136685 fonzannoon
fonzannoon's picture

even if he were right he is still a sucker for thing earnings/fundamentals matter.

Wed, 01/09/2013 - 12:24 | 3136693 SheepDog-One
SheepDog-One's picture

'Completing bowl-bottom correction'

Looks like a bowl of bullshit to me.

Wed, 01/09/2013 - 15:35 | 3137645 Panafrican Funk...
Panafrican Funktron Robot's picture

The "Chartist Friend from Pittsburg" still thinks technical analysis is relevant.  

Wed, 01/09/2013 - 12:43 | 3136748 centerline
centerline's picture

I dunno guys.  In the short term (hard to say what that is), the dollar could gain value despite printing simply because all currencies are in fact falling at the same time and the increase in money supply is just getting parked (filling in the cratering shadow banking sector).

But, at some point, the cash will likely mobilize and the dollar will roll over in short order.  We get our Shazam moment (then the lights go out).

Wed, 01/09/2013 - 12:48 | 3136809 Dr. Engali
Dr. Engali's picture

Charles fundamentals have absolutely nothing to do with this market. It's all printing , the big banks , and some robots. If you want to know where the market will end the year just ask Ben. I'm sure he has it programmed in already.

Wed, 01/09/2013 - 12:50 | 3136813 Quinvarius
Quinvarius's picture

You should probably note in your article that FOREX rates are set and maintained by agreements between CBs.  It is far more likely that the dollar does nothing and prices just go through the roof.

Wed, 01/09/2013 - 13:17 | 3136906 JR
JR's picture

Charles, this is a Fedbuster; if the public ever understands it, it will destroy the Fed. Thus, your down votes, Charles; the Fed trolls realize its danger.

Money now rules the globe. Fiat money! Money created out of nothing, by and for the bankers!

The Fed’s choice, as it has always been, is to choose the international banks (and the corporations they own and/or control) over the citizens of the United States.

The point is, the dollar is competing against real value throughout the world, internationalizing inflation.  What the investment bankers are basically doing, because they have overwhelming leverage in US corporations, is not only wiping out their competitors, they are using this leverage to generate even more money for themselves, like they do everything else, at the expense of Americans.

Ron Paul has said over and over that the declining dollar severely hurts American citizens. He has said, according to Jason Hommel of the Silver Stock Report, “that because we have internationalized inflation by exporting dollars, nations are beginning to reject the dollar.”

And Paul says rejection of the dollar won’t happen slowly, as popular concensus believes: he notes that that it "never happens that way in history." Typically, he says, paper currencies crash suddenly!

Paul said in 2007 that what is most important now is not the CPI (consumer price index) or M3 (money in the banks): but rather, it's the value of the dollar on international exchanges, as Hommel reported.

Ironically, in response to Ron Paul's questions, Bernanke has said a declining dollar would not hurt Americans!

See:
http://www.youtube.com/watch?v=yAwvlDJgJbM

Wed, 01/09/2013 - 13:52 | 3137050 marathonman
marathonman's picture

Of course Bernanke said a declining dollar won't hurt Americans.  The man's job is to lie to everyone about the real motivations of his actions.  He is the point man in a global confidence game of epic proportions.  All the banks are in on the hustle.  The government is in on the hustle.  The media that matters is in on the hustle.  Everyone except the sleeping sheep that just want a quiet life eating the grass in the pasture.  It's not until they lose skin or become chops that they realize that their overlords in the hustle look at them as cattle and a means to their ends.  Ben is there to calm the sheep and ration them to the wolves he is protecting so the sheep don't panic and break out of the pen. 

Wed, 01/09/2013 - 16:40 | 3138045 JR
JR's picture

This is a critical, brilliant statement, marathonman, and bears repeating. Your metaphor is significant – a sheeple led by a hustler instead of a shepherd.

What have the people gotten from the Federal Reserve, anyway?

The System published a paperback a few years back entitled The Federal Reserve System, Purposes and Functions, used for college lectures especially in money and banking. It explained the functions of the Fed: “An efficient monetary mechanism is indispensible to…the nation….The function of the Federal Reserve is to foster a flow of money and credit that will facilitate orderly economic growth, a stable dollar, and long-run balance in our international payments.”

And that is exactly what America has not received in the past 100 years under Fed financial central scheming and control... an “orderly economic growth, a stable dollar and long-run balance in our international payments.”

Wed, 01/09/2013 - 13:29 | 3136955 Shizzmoney
Shizzmoney's picture

This just in: Corporations don't care about America.

They, like China, will quickly throw the USD under the bus (and the 200+ million people attached to it).

Multinational Corporations with this treason would make Nathaniel Hale look like Mother Theresa.

 

Wed, 01/09/2013 - 13:59 | 3137084 earleflorida
earleflorida's picture

Bingo... you've won the grand prize-- an all paid expense free,  one-way trip to beautiful Guantanamo Bay! 

Wed, 01/09/2013 - 14:12 | 3137134 Shizzmoney
Shizzmoney's picture

Interesting tidbit from Philly.com about the trucking industry (and the affect on inflation on wages):

http://www.philly.com/philly/jobs/Lots_of_jobs_in_trucking_but_drivers_f...

Drivers get to see Utah's sunsets, cypress trees in north Florida and the autumn leaves of New England, but they live alone for weeks and even months. The pay is not keeping up with inflation, and turnover is rampant.

Just like manufacturers, who also complain of a labor shortage, trucking companies are not paying more for drivers. From 2007 to 2011, the pay for heavy-truck drivers rose 51 cents in the United States, according to the bureau.

Take inflation into account, and that was a 3 percent pay cut. In Minnesota, pay for heavy-truck drivers actually fell from 2007 to 2012, from a median of $18.22 per hour to $17.

Roy Olds, 48, of Dubuque, Iowa, drives a rig that delivers cars. He thinks the ATA's numbers are bogus, an attempt to perpetuate a myth of a trucker shortage when the reality is that big companies can't retain drivers because they don't pay enough.

Olds works for himself.

"They want to fill seats," he said during a stop at Stockmen's Truck Stop in South St. Paul, Minn. "They're hiring people with no experience, and then they're cycling through them."

The Owner-Operator Independent Drivers Association, a trade group often at odds with the ATA, agrees with Olds. "If there were truly a shortage, then companies would be raising pay," said Norita Taylor, spokeswoman for the association.

The clientele at Stockmen's has been getting more diverse in the past few years. Immigrants from Russia, Iceland, Australia, Mexico, Ireland and Somalia stop for a meal and a nap.

Brook Habte, 41, who grew up in Addis Ababa, Ethiopia, was working under the hood of his truck last week as snow started to fall in the parking lot.

His destination was Springfield, Ill., and he had a truckload of cheese. From Springfield he was scheduled to carry dairy products to Pennsylvania.

All the talk about a good-paying career in trucking feels hollow to him after six years owning his own rig, trying to rack up miles to make payments on the truck, getting fined for driving too much, and always worrying about lights burning out or points against his license.

If he weren't still paying off the truck, he says he'd take a $12 per hour job at a factory and piece together part-time work on the side.

"If you see how much we're taking home, we're making $30,000 per year," he said. "It's all a gimmick."

Wed, 01/09/2013 - 16:48 | 3138085 JR
JR's picture

And, to think, Shizzmoney, long haul driving used to be a well paid, middle class job; in the 50s and 60s it was not unknown for teachers to give up their classes to drive long haul - an occupation, btw, that is not only challenging but requires a tremendous amount of responsibility.

Wed, 01/09/2013 - 18:47 | 3138126 TruthInSunshine
TruthInSunshine's picture

Shizzmoney, you highlight some very interesting (and accurate, IMO) points.

If I am a business owner, and want to hire skilled workers at the present time, I need to have a relatively high degree of certainty and confidence about long term (or at the very least, intermediate term) trends, in terms of my order book, prices paid, likely revenue and profitability, before committing a large amount of working capital to expand output by HIRING additional employees, which is one of the largest constituents input costs of any business (and the highest, for most).

The markets are broken by incredibly radical central fractional reserve bank monetary policy, which has distorted everything possible to such a massive degree, & completely destroyed the ability to plan ahead, since nothing can reasonably be forecasted over the intermediate, let alone long term, and therefore even those businesses that see their present order books seeming to justify such large capital outlays are not willing to make such a committment.

Bernank'd, broken, FUBARed markets.

Here's a really interesting article that, just like with the "trucker shortage" article you linked, pretty much rips apart the notion that there's a "skilled worker" shortage in the United States, and lays bare the truth that many of those companies claiming this (and politicians repeating it) are essentially only willing to hire extremely highly skilled workers for what are barely above fast food worker wages, which won't even allow such workers to pay off their educational loans (another truth laid bare):

Skills Don’t Pay the Bills


By Published: November 20, 2012

Earlier this month, hoping to understand the future of the moribund manufacturing job market, I visited the engineering technology program at Queensborough Community College in New York City. I knew that advanced manufacturing had become reliant on computers, yet the classroom I visited had nothing but computers. As the instructor Joseph Goldenberg explained, today’s skilled factory worker is really a hybrid of an old-school machinist and a computer programmer. Goldenberg’s intro class starts with the basics of how to use cutting tools to shape a raw piece of metal. Then the real work begins: students learn to write the computer code that tells a machine how to do it much faster.

Nearly six million factory jobs, almost a third of the entire manufacturing industry, have disappeared since 2000. And while many of these jobs were lost to competition with low-wage countries, even more vanished because of computer-driven machinery that can do the work of 10, or in some cases, 100 workers. Those jobs are not coming back, but many believe that the industry’s future (and, to some extent, the future of the American economy) lies in training a new generation for highly skilled manufacturing jobs — the ones that require people who know how to run the computer that runs the machine.

This is partly because advanced manufacturing is really complicated. Running these machines requires a basic understanding of metallurgy, physics, chemistry, pneumatics, electrical wiring and computer code. It also requires a worker with the ability to figure out what’s going on when the machine isn’t working properly. And aspiring workers often need to spend a considerable amount of time and money taking classes like Goldenberg’s to even be considered. Every one of Goldenberg’s students, he says, will probably have a job for as long as he or she wants one.

And yet, even as classes like Goldenberg’s are filled to capacity all over America, hundreds of thousands of U.S. factories are starving for skilled workers. Throughout the campaign, President Obama lamented the so-called skills gap and referenced a study claiming that nearly 80 percent of manufacturers have jobs they can’t fill. Mitt Romney made similar claims. The National Association of Manufacturers estimates that there are roughly 600,000 jobs available for whoever has the right set of advanced skills.

Eric Isbister, the C.E.O. of GenMet, a metal-fabricating manufacturer outside Milwaukee, told me that he would hire as many skilled workers as show up at his door. Last year, he received 1,051 applications and found only 25 people who were qualified. He hired all of them, but soon had to fire 15. Part of Isbister’s pickiness, he says, comes from an avoidance of workers with experience in a “union-type job.” Isbister, after all, doesn’t abide by strict work rules and $30-an-hour salaries. At GenMet, the starting pay is $10 an hour. Those with an associate degree can make $15, which can rise to $18 an hour after several years of good performance. From what I understand, a new shift manager at a nearby McDonald’s can earn around $14 an hour.

The secret behind this skills gap is that it’s not a skills gap at all. I spoke to several other factory managers who also confessed that they had a hard time recruiting in-demand workers for $10-an-hour jobs. “It’s hard not to break out laughing,” says Mark Price, a labor economist at the Keystone Research Center, referring to manufacturers complaining about the shortage of skilled workers. “If there’s a skill shortage, there has to be rises in wages,” he says. “It’s basic economics.” After all, according to supply and demand, a shortage of workers with valuable skills should push wages up. Yet according to the Bureau of Labor Statistics, the number of skilled jobs has fallen and so have their wages.

In a recent study, the Boston Consulting Group noted that, outside a few small cities that rely on the oil industry, there weren’t many places where manufacturing wages were going up and employers still couldn’t find enough workers. “Trying to hire high-skilled workers at rock-bottom rates,” the Boston Group study asserted, “is not a skills gap.” The study’s conclusion, however, was scarier. Many skilled workers have simply chosen to apply their skills elsewhere rather than work for less, and few young people choose to invest in training for jobs that pay fast-food wages. As a result, the United States may soon have a hard time competing in the global economy. The average age of a highly skilled factory worker in the U.S. is now 56. “That’s average,” says Hal Sirkin, the lead author of the study. “That means there’s a lot who are in their 60s. They’re going to retire soon.” And there are not enough trainees in the pipeline, he said, to replace them.

One result, Sirkin suggests, is that the fake skills gap is threatening to create a real skills gap. Goldenberg, who has taught for more than 20 years, is already seeing it up close. Few of his top students want to work in factories for current wages.[continue reading via link above]

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