S&P 500: $0; Federal Reserve: $2.5 Trillion: The "Anti-Correlation" Between The Economy And Profits

Tyler Durden's picture

There is a reason why US corporate balance sheets have rarely been in better shape: it is because the Fed has become the S&P500's bad bank.

As the chart below shows, in the six years between 2006 and 2012, corporate net debt of the S&P500 has barely budged from $1.5 trillion, even as corporate profits have soared (albeit profit margins have now declined for two straight years as SG&A has already been cut to the bone, while the marginal benefit from such below the line items as net interest is about to turn negative if and when rates really turn higher - hint: they won't, because Bernanke is all too aware of this particular nuance). What has offset this?

Why the bad bank formerly known as the Federal Reserve of course, which has huffed and puffed, and force-fed $2.5 trillion in new credit money (mostly reserves) down the market's throat (created out of thin Treasurys), which has zero end-demand for such credit, as a result it has gone straight into the one place that will gladly accept it - the stock market. For now at least. At some point this fungible money will spill over and then all bets are off.

It gets better.

Ever had the feeling like the market is beyond broken, and all correlations between corporate profits and fundamental economic factors have been totally and utterly broken (sarcasm aside of course)? Of course you have. So has Morgan Stanley's Adam Parker. To wit:

One of the main challenges to assessing corporate profitability is the breakdown in relationships between economic variables and corporate profitability metrics. In fact, the two seem incongruous in some cases. If companies don’t invest in capital spending and research and development, they may maintain higher margins, but this lack of spending will not be a good catalyst for economic growth.


Why do some of the economic and corporate relationships no longer hold? One possible explanation is that while company balance sheets are in great shape, the Fed’s balance sheet has massively expanded over the past few years.

See chart above... and read on:

There appeared to be a relationship between GDP and margins from 1970 through the early 2000s, but there has been a notable departure since. In fact, there has been such a bifurcation between the US economy and the profit margins of US companies that they appear to be anti-correlated now.


Ah, good old Bernanke: nothing like a central planner meddling so much in the economy and the stock market, the two are not only intuitively broken but also empirically. But hey: as long as the music which is good for the S&P, and now by definition bad for the economy, goes on, one must dance. If only those 0.1% who directly benefit from Bernanke's socially bankrupt policies.

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LetThemEatRand's picture

Musical chairs is a good analogy, but it sounds so innocent that it lessens the pure evil of what these guys are doing.  How about Russian Roulette?  Giddy Mao!

knukles's picture

And uh... ummmm... say... ain't some of them profits also beings taken care of by the mark to market of debt on the corporations balance sheets?
Or am I just dreaming when I hear about them funny little adjustments that once rateses starts to go backs ups, turns intos losses?

Go back to sleep Knuks, nobody cares anyhow.
OK Knuks, good idea
Say goodnight Knuks
Goodnight Knuks


SafelyGraze's picture

fed assumes the bad debts?

treasury pays the fed?

taxpayers pay the treasury?

look in the mirror.

say "*I* am the bad bank"


spoiler: slaves standing up, proclaiming "I am bad bank!"


BoNeSxxx's picture

Here is another one for anyone interested in seeing an intelligent argument in the EU from someone other than Nigel Farage.

Maybe if we could get Larry the Cable Guy to carry this message, Americans would start to wake up... no?  Snookie?



TheReplacement's picture

Unless I'm missing some context to your statement I don't think musical chairs applies at all.  It would seem there are .1% chairs available and only .1% of the players get to circle them.  When the music stops the .1% will sit down.  The rest of us never get near a chair and never have a place to sit.

That isn't musical chairs.  That's just tyranny and theft.  

LawsofPhysics's picture

When does my business get to use "mark to fantasy" accounting?

LetThemEatRand's picture

The same day my business gets to expand and pay off interest-bearing debt with free money from the Fed.

bonin006's picture

When you donate enough money to the politicians in charge of obstructing justice.

infinity8's picture

Never, unless you're TBTF. C'mon, you know this.

Zero Govt's picture

the free market corrupted ...again

it's in the Feds founding documents, to prop up and support wankers ...sorry bwankers!!

So Govt established a permanent nanny, the Fed, to change the wankers, sorry bwankers nappies on a never ending basis ...no wonder these gambling junky babes never grow up and permenantly shit their nappies

Ben Bernanke, nappy changer... it's a shit job but some village idiot has to be hired to do it

ekm's picture

As I've always said, from my own life experience, STRUCTURALLY QE has the following definition:



nonclaim's picture

I agree with the conclusion "ownership of means of production" ... but the Fed is private and they are buying it with freshly printed money (won't go as far a calling it counterfeit since they are self-entitled to print it).

Is this the fabian "revolution"? They are just buying it out? ...

ekm's picture

It's a public-private partnership.

The Fed is public but the regional Feds are somehow private.


The partial private owners care about the 6%, but that's all I'd say.

nonclaim's picture

Lines in the sand ...

The Government (the institution) is now the biggest Muppet loaded with debt that can never be paid back, so a slave to the bankers and will do as is told (or be shut/shot down). The bankers offload the risk back to the Fed and buy "the means of production" with the proceeds at any price since the gov is, in the end, paying for it.

The dollar can go to hell and take the Gov and Fed with it ... the bankers don't give a shit: they own the land and the means and since they won't let it go there's no point in giving it a price (price can go to zero but the value/ownership stays).

So ... at long last the plan it getting to the final stages. A round of applause to the Fabians.

[and the people? how many rounds of hollow points again?]

ekm's picture

The way you describing it, is leading to full scale revolution, forget Fabians.

scaleindependent's picture

Dumb argument. Imho nonclaim makes an excellent case that the problem here is control fraud on a grand case. The pvt bankers are offloading all the risk to us, the public, by buying the regulators and congress critters. They are also buying the USA, the land, and all the valuable assetts.

The ironic shit is that when the reset comes they (the pvt financiers) will have idiots like u and the 11 plus votes u got in their back pocket. Both the govt and the fed will be blamed (as they should), but their role and their profit will be veiled. In the end they will own the most valiable assets cause they have rhe superpower of a printing digital press that gives them unlimited $$.

Why is this so hard to see?

To call this communism is going Full RETARD. This is fascism; which is defined as public-private partnership, and there is a working difference between it and communism, although both have serfdom as their common end.

This obsessive and compulsive faith in that private companies can do mo wrong is just as bad as those who pray to a government savior.
Excuse the typos as this was written on a tiny screen

ekm's picture

I used the word STRUCTURALLY and I didn't say it's full communism.

Now, I have lived communism.


I have no problem you call it fascism, however, this point of view is still academic since I don't think you're that old to have experienced fascism.


Now, do not get me wrong, it is fascism on a definition point of view, what I'm saying is: Communism is my life experience and I find STRUCTURAL similarities.

Diogenes's picture

Fascism = national socialism

Communism = international socialism


scaleindependent's picture

Ok I get it. But IMO calling it communism removes the real responsible parties from the picture. The old mantra that "government is the problem" is incomplete. Yes, govt. is the problem because it's coercive powers are being used by TBTF, large gigantic multinational corporations, etc.

Look at the article by testosterone pit where big olive oil companies are creating idiotic and repressive laws for Europeans, for their own profit.

bozzy's picture

Time to dangle bernanke, dimon, geithner and all the other nomenclatura. I'm off to hire a crane.

Seasmoke's picture

Since 2008 the MO has been good bank - bad bank.

buzzsaw99's picture

The looting will continue until morale improves.

q99x2's picture

Well if the market collapses then all the FEDs debt used to buy the markets will vaporise. They will have stolen the money gave it to themselves and made a get away. They are banksters. That's what banksters do..

kito's picture

i speak to highly educated people in the financial industry who honestly believe tapering wont affect the stock market....that the economy is strengthening on its own......maybe im the crazy one....................

devo's picture

That's the info they're seeing every day. I used to believe what I read on Fidelity or Bloomberg, too. Now I figure the truth is somewhere between those sites and ZH. Also, look around your 'hoods...if a lot of people are out and about during the day it's not a good sign.

Anusocracy's picture

They're also out throughout the night.

A worse sign.

ekm's picture

"In individuals, insanity is rare; but in groups, parties, nations and epochs it is the rule" – Nietzsche

bozzy's picture

In the land of the blind, the one-eyed king thinks he knows what it is to be blind, and pretends sympathy whilst always holding station.

That is until the flames start to lick around his ankles. America gave us Bernanke - and America must take it away. 

Ditto dimon and the rest. How come Corzine is still breathing?



devo's picture

S&P will become the new savings accounts. There's a lot of propaganda out there saying deposits are bad, investing back into society is good....collectivism, force, etc.

It's amazing what interest rates can do.

Go Tribe's picture

What was it obama said, something like "Government is just what we all do together." The collective has gained tremendous strenght in the last few years.

Anusocracy's picture

"Government is just what we all do together."

Goodie! I want to fly my drone over Washington.

WTFUD's picture

What ever happened to Old WhatsHisName who tried to tell the Twuuth? Egan i think! Had to sign this this and this No Comment disclaimer until Bernie Mad gets parole Or the Dow hits 180,000. Be a good recruit for Z/H!

Unpopular Truth's picture

Indeed! Here is some math: DOW going from 15,000 to 180,000 will mean that BitCoin will have gone from 130 to (130 x 180,000 / 15,000 =) 1,560

Big Slick's picture

QInfinity ensures your predicted Dow move.

Of course Milk will be $40/gallon

WTFUD's picture

Would buy some if JPM would return some of my PM's but the buggers are fobbing me off with some airport heist story and it may take 7 years to repatriate! whooda guessed?

Rusty Diggins's picture

It may be predictable, boring and redundant but



Fuck you Bernank and whatever glue factory bound nag you rode in on.

harumscarum's picture

"Too Big To Fail" Sorkin was on pbs this evening (rerun, which would only compound the error) and without blinking averred "Most of the money has now been repaid by the banks."

With what?

Where are we at in respect of the 'Troubled Assets' i.e., worthless mortgages; you know, on all those subdivisions laid waste throughout Chimerica? 

Where is the actual productive economic activity?

Where are the jobs and salaries being generated?

I just don't get it and see only more smoke and mirrors, though I would like to know of relevant studies.

Mediocritas's picture

Furthermore, with interest rates so low, it's an absolute no-brainer to borrow-to-buy-back, shrinking floats and sending buy-backs to record levels. With it comes:

  • increased earnings per (remaining) share outstanding.
  • boosted price from the added buying pressure.
  • reduced chance of a takeover bid.

Which in turn:

  • makes the board look great (to suckers), thereby enhancing the opportunity to demand more bonuses and perks
  • jacks the price higher as bots front-run the buying
  • attracts further price rises as heat-mappers chase the trend
  • brings executive options further into the money so they can cash out richer
  • makes it easier to borrow more
  • loop

Big payoffs at low risk. Why work hard to improve the fundamentals of the company to attract investment when you can get the same effect with free money? Plus, with the kind of fraud that is systemic these days (aka: creative accounting), I'll bet that borrowing to buy your own stock isn't even counted as debt and hence isn't reflected accurately in corporate books, perhaps accounting for some of the difference observed between company and Fed balance sheets.

Just another distortion created by Bernanke's ZIRP. Everything looks peachy until interest rates start to rise....which is exactly why they won't.




Fix It Again Timmy's picture

In addition to the FED "taking care of the economy" why not spare the American public the never-ending tsunami of political campaign bullshit that we are constantly swamped with [2016 Prez elections will ramp  up sooner than you think] and have the corporations vote for our representatives; yeah that's right, take the public out of the voting picture since they're ultimately irrelevant anyways......

polo007's picture


China is studying the possibility of investing a portion of its $3.4 trillion in foreign-exchange reserves in U.S. real estate, said two people with direct knowledge of the situation.

The State Administration of Foreign Exchange began the study after seeing signs of a recovery in the U.S. property market, said the people, who asked not to be identified as they weren’t authorized to speak publicly about the matter. China may acquire properties, invest in real estate funds or buy stakes in property companies, they said. The safety of the investments will be the top priority, said the people, who didn’t elaborate on a timetable or other details.

China has set up an operation in New York to make alternative investments in the U.S., an effort by the country’s foreign-exchange reserves manager to diversify away from U.S. government debt, the Wall Street Journal reported last week, citing people it didn’t identify.

Prices for single-family homes increased in 89 percent of U.S. cities in the first quarter as the housing market extended its recovery following a five-year slump. The median sales price rose in 133 of 150 metropolitan areas measured from 74 year earlier, the National Association of Realtors said in a report on May 9.

“In the long run it should be a good opportunity as the U.S. property market is gradually rebounding,” said Frank Chen, Shanghai-based head of China research at CBRE Group Inc. “It will help diversify the foreign reserves’ investment portfolio. Properties such as office building have stable yields, which match its investment strategies.”