This page has been archived and commenting is disabled.
About Those Forecasts Of Eternally Rising Corporate Profits...
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
If corporate profits decline, what will hold up the market's lofty valuations other than the tapering flood of liquidity from the Federal Reserve?
I have often noted that profits of global U.S. corporations have been boosted by the weak U.S. dollar (USD). In a weak-dollar environment, a company need not sell more goods or services or expand margins to book more profit: all a corporation needs to do is book profits earned in other currencies in dollars.
When the euro and the dollar were 1-to-1 back in the early 2000s, 100 euros of profit converted to $100 when stated in dollars. With the euro around $1.36, the same 100 euros of profit earned by the U.S. corporation in Europe converted to a $136 in profit when stated in dollars--a hefty 36% premium gained entirely as a result of the weak dollar.
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 12% of the nation's entire GDP.

Courtesy of our friends at Market Daily Briefing, here is a chart of the USD and the S&P 500 stock index. Note that when the USD is strong, profits decline, and when the dollar is weak, profits soar:
For a variety of reasons, the dollar is in a long-term uptrend. These reasons include global capital flows, Triffin's Paradox and the need to defend the dollar to prop up the U.S. Treasury bond market and fund the U.S. deficit. I have covered these topics in depth over the past few years:
What Will Benefit from Global Recession? The U.S. Dollar (October 9, 2012)
Understanding the "Exorbitant Privilege" of the U.S. Dollar (November 19, 2012)
Why the Shrinking Trade Deficit Will Choke U.S. Corporate Profits (August 8, 2013)
We can see the uptrend in a chart of the U.S. dollar. There's nothing fancy here; the USD bottomed in late 2011 and advanced into a trading range that has lasted two years. A year-long triangle pattern has been broken to the upside, a move that can be viewed as a continuation of the uptrend from 2011.

Many observers focus on the eventual consequences of large-scale credit/money-printing, i.e. debasement of paper (fiat) currencies. While this may yet occur, the credit issuance/money printing of the Fed is actually modest compared to other issuances of credit/currency, and is tapering as the Fed is forced to defend other parts of the global Empire, for example, the Treasury bond market.
The dynamics and consequences of the various currency players' actions are not linear, and so predictions based on linear projections are often wrong. But I think these two dynamics--the correlation of the weak dollar to global U.S. corporate profits and the dollar strengthening as other players' fundamentals unravel--will be dominant, and the ones to watch in terms of explaining why U.S. corporate profits will weaken, regardless of sales and margins.
And if corporate profits decline, what will hold up the market's lofty valuations other than the tapering flood of liquidity from the Federal Reserve? Answer: nothing.
Complacent punters will discover to their great dismay that liquidity is only one dynamic of many.
And as we recently noted, In short: the plunge in actual corporate profits in Q1 was the biggest since Lehman!
- 7827 reads
- Printer-friendly version
- Send to friend
- advertisements -



The dollar is NOT in a long-term uptrend. It's merely collapsing slower than it's peers.
The dollar is going to spike when the next panic hits. It may be a damaged fiat currency, but it is still the reserve currence and is hell of a lot better than say, uhhh, Mexican pesos. Investors worldwide will buy when scared. Expect a large, temporary USD advance before the sell-off to death led by our friends the crooked Fed.
Bingo!
Then trash the dollar they will.
They will print and so will everyone else.....its when other countries no longer want the fiat dollar is when the trouble begins
Nearly there.
I'm thinking the whole Chinese situation is them finally cleaning out their fraud and
corruption as a prerequisite to a new monetary system.
Everything else seems to be progressing to a crescendo around Christmas this year.
A change in GRC has never happened without a (known)world war before, and will
be no different this time either IMO.
Nukes are the nigger in the woodpile.
Giant political rearrangements worldwide are going to force a change in GRC. Some on ZH just don't get the idea that because someone else is settling in another currency, as in the case of NG with Russia and China, the currency will continue to be relevant in the short term up to multiple years. Changes happen slowly politically and economically.
Please junk away. The truth hurts.
Continue to buy gold while it is still on sale.
enjoy ur daily dose of horse shit...
http://blogs.marketwatch.com/capitolreport/2014/06/06/more-people-entere...
And if corporate profits decline, what will hold up the market's lofty valuations other than the tapering flood of liquidity from the Federal Reserve? Answer: nothing.
Uh oh, Charles forgot to include The 1st Law of Bullshit in his analysis.
The 1st Law of Bullshit clearly shows that: Anything plus bullshit is worth more.
I predict new bullshit will be created to "hold up the market's lofty valuations".
The EU's negative rates could drive the market higher, to ultra-nosebleed levels. Especially, if rates go more negative than 0.1%. Has a major power ever had negative rates before? I don't think so. The implications are totally unknown.
gawd i hope there are some stocks left over i can buy...i don't want to miss the permanent plateau of all-time highs.
Welcome to the Corporatocracy, enforced by the Kleptocrats to benefit the Oligarchs.
My, my; wonder what wonders the future holds? Probably something along these lines:
"To obtain a workers permit you must have your RFID tag installed and your check direct deposited."
"Continuing improvement in the economy was bolstered by the FED's Negative Interest Rate Policy (NIRP) which will provide liquidity by collecting interest on deposits, which will increase worker pay and benefits."
"To start her second term President Clinton signed the Firearms Registration Act which requires any firearms owners to have the serial numbers of the weapons they own linked to their national RFID tag. She said that this will ensure safety for all citizens."
"Penalties for failing to comply with the ACA incresed to 10% of gross income this year; exemptions expanded to include non-registered immigrants, Muslims, Buddhists, Atheists, and those who don't own a firearm."
The Fed will not go negative and the taper will continue. Why destroy your own currency when Europe and Japan seem content to supply the world with all the liquidity it wants? The ECB's NIRP policy has no chance of working without captial controls, and the European Commission does not have the political muscle to implement those controls. So where do you think that fleeing capital will flee to? US Stocks, of course. Draghi and Abe have handed us an opportunity we can't afford to refuse.
I hate to say it, but this sounds like a good time to BTFATH and short commodies in US Dollars.
Someday this will change, of course. But not today.
Interesting ...
looking at recovery from the Recession between Individual Tax Revenue & Corporate Tax Revenue. I may not be as well read as others. Maybe someone can explain how Individual Taxes took a Dive, then recovered but Corporate Taxes Did not??? (Fiscal Year Data from Monthly Treasury Report)
Corporate Income Taxes Receipts 1998 = $ 188.7 Billion
Corporate Income Taxes Receipts 2002 = $ 148.0 Billion (Recession)
Corporate Income Taxes Receipts 2006 = $ 353.9 Billion
Corporate Income Taxes Receipts 2007 = $ 370.2 Billion
Corporate Income Taxes Receipts 2008 = $ 304.3 Billion
Corporate Income Taxes Receipts 2009 = $ 138.2 Billion (Recession)
Corporate Income Taxes Receipts 2012 = $ 242.3 Billion
Corporate Income Taxes Receipts 2013 = $ 273.5 Billion
Individual Income Taxes Receipts 1998 = $ 828.6 Billion
Individual Income Taxes Receipts 2002 = $ 858.3 Billion (Recession)
Individual Income Taxes Receipts 2006 = $1.044 Trillion
Individual Income Taxes Receipts 2007 = $1.163 Trillion
Individual Income Taxes Receipts 2008 = $1.146 Trillion
Individual Income Taxes Receipts 2009 = $ .915.3 Trillion (Recession)
Individual Income Taxes Receipts 2012 = $1.132 Trillion
Individual Income Taxes Receipts 2013 = $1.316 Trillion
So Corporate Profits are up:
http://research.stlouisfed.org/fred2/series/Cp
And Dividends are up:
http://research.stlouisfed.org/fred2/series/DIVIDEND
BUT Somehow Corporate Tax Payments are still down???!!!
Another part of the story is the Federal Government Contracts which surely expanded by double digits from 2001 under G.W.B. Let's look at where the money goes in the Federal Budget. Are we getting much less Roads Repaired than in 1998? Bridges, Dams, Highways, Waterways??? I don't see Federal Employees growth that is so huge... Privatization of government is much stronger (where big contracts are given in mass qualities of various sizes).
http://research.stlouisfed.org/fred2/series/CES9091000001 (Trend is about 2.8 Million Federal Employees)
But what is this spending on an old project that is supposed to be profitable private contractor/corporation?? Maybe this is infrastructure spending??
Total--Tennessee Valley Authority Outlays 2013 = $65.8 Billion (what is happening here)
Total--Tennessee Valley Authority Outlays 2011 = $38 Billion
Total--Tennessee Valley Authority Outlays 2009 = $32.7 Billion
Total--Tennessee Valley Authority Outlays 2007 = $19.4 Billion
Total--Tennessee Valley Authority Outlays 2005 = $20.9 Billion
Total--Tennessee Valley Authority Outlays 2003 = $13.9 Billion
Total--Tennessee Valley Authority Outlays 2001 = $11.3 Billion
Total--Tennessee Valley Authority Outlays 2000 = $8.3 Billion
Total--Tennessee Valley Authority Outlays 1998 = 9 Billion
Interesting, I didn't think to look at it through tax receipts...
Little nuggets like this is what I like about ZH.
2013... NSA infrastructure???
Looking back at the article...
I can see how diminished corporate tax receipts would occur from European Profits if incorporated offshore in Ireland or one of the Islands.
About 2013, I haven't really done a web search. I looked one evening for some info, but drew next to zero. I don't see any press articles. I thought maybe they had a coal energy plant that they might put scrubbers on. But I really don't know what installations are included. Sounds like it reaches from Kentucky to Alabama.