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Guest Post: About Those Permanently Rising Corporate Profits...

Tyler Durden's picture


Submitted by Charles Hugh Smith from Of Two Minds

About Those Permanently Rising Corporate Profits...

We're constantly assured stocks can't go down because corporate profits are rising. So what happens when they start falling as global recession takes hold and the U.S. dollar stops falling?

The entire "story" of the Bull market is stocks rests on one reed: permanently rising corporate profits. Too bad those profits are set to fall. Like everything else about the "recovery," the "rising corporate profits" story is founded on financial flim-flam, starting with the boost provided by a sinking dollar.

A simple example reveals how a declining dollar has grossly inflated U.S. global corporate profits. Let's say Johnson & Johnson made a 1 euro profit from a sale of toothpaste in Europe in 2003. Translated into U.S. dollars for its financial reports, that 1 euro became $1, as the euro and dollar were at parity.

Now when J&J earn that same 1 euro in profit, it translates into $1.40 in profit. The revenue remained the same, and the profit remained the same, but profits stated in dollars rose 40%.

And this effect isn't limited to Europe. Global Corporate America's profits made in China have risen 20% over the past few years when stated in U.S. dollars (USD) as the yuan has strengthened from 8 to the USD to 6.4 to the dollar.

To truly grasp the monumental scope of this smoke-and-mirrors game of "profits" rising from currency arbitrage, we have to recall that most of the big U.S. global corporations earn between 50% and 65% of their profits overseas. Since the dollar has weakened about 30% in the Fed's free-money campaign (quantitative easing), then we can guesstimate that fully 15% of all profits from global corporations is phantom: if half their profits are earned overseas, and the dollar declined 30%, then their overseas profits rose by 30%. Since that is half of all profit, then that 30% rise boosts total profits by 15%.

This gaming of corporate profits via weakening the dollar has long been a favorite Fed pastime:

Notice how the long slide in the dollar coincides with the Bull market 2002-08:

As noted on the chart, the game has been disrupted recently as global financial turmoil has led to the dollar slowly rising. Most commentators see the dollar as losing its "safe haven" standing, but safe haven has little to do with demand for dollars: it's much more a matter of needing dollars to pay down debt that is denominated in dollars.

As global financial crisis triggers margin calls and counterparty settlements in dollars, the demand for dollars rise. That's why the dollar spiked during the 2008 meltdown.

Now there is a second factor driving the dollar higher: the slow but sure demise of the euro. European authorities are rather naturally doing their best to slow the collapse, but their efforts will fail for the all the fundamental reasons I have covered here at length, for example Why the Eurozone and the Euro Are Both Doomed (June 23, 2011).

Since the euro is 60% of the dollar index (DXY), then the euro and the USD are on a see-saw: if the euro declines, the dollar must rise, and vice versa. The euro's current valuation looks extremely high in terms of standard deviation:

Notice how non-financial (i.e. global) corporate profits spiked up from 2002:

Here we see just how outsized corporate profits have become in historical terms:

What happens to corporate profits if the dollar stops declining? They take a huge hit, that's what.

The second reason why corporate profits have soared is labor costs have been slashed via layoffs, early retirement and the wholesale movement to contract/free-lance workforce. Put another way, labor's share of corporate revenues has plummeted, a fact reflected in this chart:

While mass layoffs may be declining, that doesn't mean Corporate America is hiring domestically. Rather, the slash-and-burn campaign to lower labor costs to boost profits continues with undimmed ferocity, as those of you within the gurgling bowels of Corporate America know all too well.

The third factor is the global recession. While headlines this morning are cheering a blip up in retail sales in America as "proof the recovery is intact," the majority of other data from the nation and around the globe indicate a slowing global economy. Corporate America has squeezed vast profits from slashing costs and the weak dollar, but it's reached the point where no more big profits can be reaped from those factors. If revenue slips, so will profits.

A fourth factor is the flow of government largesse will no longer be expanding. Corporations have been reaping guaranteed profits from government spending (not hiring people, just skimming profits), and now that the fiscal flood is facing some constraints, that trillion-dollar prop under Corporate America is weakening.

The easy money's been made from slashing costs and dollar arbitrage; all four supports of corporate profits are at risk. With these props gone, how are corporate profits going to keep rising? If the "rising corporate profits" story dissipates, so does the Bull market.


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Fri, 08/12/2011 - 11:31 | 1554362 buzzsaw99
buzzsaw99's picture

as if profits have anything to do with stock prices. equities go up when losses are less than expected, or because a pigeon is cooing outside some hedge fund trader's window, or because bernanke belched at a meeting. profits, we don't need no steenking profits!

Fri, 08/12/2011 - 11:39 | 1554382 spiral_eyes
spiral_eyes's picture

Krugman says the answer to everything is more inflation! 

Fri, 08/12/2011 - 11:31 | 1554363 TheGameIsRigged
TheGameIsRigged's picture

Amazing info.....You would NEVER see this on Bubblevision.  TPTB would not let this info get out....and even if it did, most people are too preoccupied to even notice.

Thanks, Tyler

Fri, 08/12/2011 - 11:45 | 1554402 TruthInSunshine
TruthInSunshine's picture

Tyler, don't forget to let everyone know that along with those "record profits", publicly traded corporations have issued a record 12 trillion in debt via the selling of bonds, taking advantage of the suppression in yields on government bonds, which are their main competition (so if gov't bond yields go lower, so do corporate bond yields - e,g. IBM selling a three year, multibillion dollar bond which yields 1%).

Publicly traded corporations have more debt now than ever.


Fri, 08/12/2011 - 12:09 | 1554480 pazmaker
pazmaker's picture

but....CNBC keeps on saying Corporations have cash surpluses because they are sitting on so much cash!   hahaha!

Fri, 08/12/2011 - 13:33 | 1554759 TruthInSunshine
TruthInSunshine's picture

Some say that it was responsible for the death of financial markets and the slaughter of whatever had formerly remained of journalism that was in any degree, no matter how miniscule, fact-based...

...all we know is that it's called CNBC.

Fri, 08/12/2011 - 12:08 | 1554473 Popo
Popo's picture

(Thank Charles Hugh Smith.  Of Two Minds is one of the best blogs on the web, imho)

Fri, 08/12/2011 - 13:17 | 1554683 tj3
tj3's picture

Thanks Tyler, Thanks Mr. C.H. Smith

"Although the euro was supposed to create efficiencies by removing the costs of multiple currencies, it has had a subtly pernicious disregard for the underlying efficiencies of each eurozone economy."

Fri, 08/12/2011 - 11:34 | 1554364 SheepDog-One
SheepDog-One's picture

Good article...its freakin hopeless. Even vast new money printing wont work now, the dollar crush effect has already been maxed out.

Whats next? As stocks resume their brisk and chipper march steadily upwards.

Fri, 08/12/2011 - 11:37 | 1554379 Boilermaker
Boilermaker's picture

Up, down, around.  What fucking difference does it make?  You're either running the game or getting gamed.  I know I'm part of the latter.  So, I couldn't give a shit less what they do with the markets now.  They're dead to me.

Fri, 08/12/2011 - 12:01 | 1554458 SheepDog-One
SheepDog-One's picture

All just a setup now to transfer as much wealth as possible from the peasantry to the banksters, every last bit of it. They already got the home value robbed, now for the 401K and pension robbery. I dont know what the next phase of the of the operation '3rd world america' will look like but probably big market plunge and lots of hysteria, get people to sell out at the bottom, while the banks use the next QE to buy it all up and 'annuitize' everyones holdings. Total control, bitchez.

Fri, 08/12/2011 - 11:41 | 1554390 baby_BLYTHE
baby_BLYTHE's picture

you would think they would use those 'heaps of cash' to buy up infrastructure, land, tools and hire more workers, instead they have decided they would rather hold a rapidly depreciating currency, bite their lip and hope the economy miraculously recovers.

Honestly all these pumped asset values and record profits are just the QEs (printed money) that made its way onto their balance sheets while the average American didn't get shit.

I hate the principle of money printing, but we no doubt would be in much better shape if we simply printed up the 1.6 trillion and divided it up and distributed it to ever man, woman and child that draws oxygen on American soil. That way they could have delivered more meaningfully, cleansed their balance sheets, saved some of the money and spent some of the rest directly into the economy.

Obviously, the Constitution doesn't matter. If it did, under the language of "All created equal" every American would have access to the FED discount window and be able to borrow at .25 bps to invest in higher yielding assets.

Fri, 08/12/2011 - 11:47 | 1554407 SheepDog-One
SheepDog-One's picture

Thats what I was arguing to do ever since '08...if you insist on printing money to stimulate things then divide it up and send it to the people. Nah cant have that, better to give trillions to a few select bankers and CEO's. So now our only option is far more of the same, until we all gag and choke to death on it.

Fri, 08/12/2011 - 11:52 | 1554427 TheGameIsRigged
TheGameIsRigged's picture

Amen, brother!

Fri, 08/12/2011 - 13:27 | 1554727 disabledvet
disabledvet's picture

U really r a guy. DARN IT!

Fri, 08/12/2011 - 13:34 | 1554768 baby_BLYTHE
baby_BLYTHE's picture

so women aren't allowed into Fight Club, eh?

I am probably one of the only, if not the only, ZHer that has been to an actual Fight Club. As a spectator of course, watched my cousin kick some punk ass in the steel cage.

Fri, 08/12/2011 - 14:32 | 1555005 Oh regional Indian
Oh regional Indian's picture

bB, there has been a noicable change in your tone and apparent eruditeness since you turned 21. Your commentary has taken on a totally different tone/hue.

Making some suspect you are not who you say you are.


Fri, 08/12/2011 - 14:51 | 1555091 baby_BLYTHE
baby_BLYTHE's picture

considering leaving ZH anyway, the quality of comments since spring 20010 has changed considerably. The Tylers are great, of course. I don't plan to ever stop reading their commentaries on economic news.

I could give a shit less if people think I am a fraud. I say to them, 'go eat a shotgun shell' you aren't worth the space on this planet anyhow.

This is a waste of everyone's time and detracts from what should be deep meaningful discussions. I am here to debate and engage with other ZHers.

Fri, 08/12/2011 - 15:04 | 1555152 Oh regional Indian
Oh regional Indian's picture

Follow your bliss bB.

Fri, 08/12/2011 - 17:12 | 1555633 ElvisDog
ElvisDog's picture

Hey baby_BLYTHE, I've developed a comment filter. Whenever I see words like "zionist", "new world order", and such I know it's probably time to bail on the comments for that post. I agree that there are a lot more crap comments as a percentage these days but there are still gems out there if you are patient.

Fri, 08/12/2011 - 18:45 | 1555848 disabledvet
disabledvet's picture

I apologize for questioning your manly intelligence! YOU WIN! YOU WIN! I have no clue about "fight club" because whenever i fought i cheated and killed the guy first.

Fri, 08/12/2011 - 21:46 | 1556195 Kynortas
Kynortas's picture

Previous Corporate Finance research showed that management is less likely to invest in projects when interest rates are low.

Firstly, all projects delivered a positive NPV in a low interest rate world.

Secondly, management persisted with high qualifying hurdle rates e.g 15%. Maintaining this high hurdle rate stopped management from moving forward on any projects!

Fri, 08/12/2011 - 13:08 | 1554642 slaughterer
slaughterer's picture

My new user icon says: "brisk and chipper"?

Fri, 08/12/2011 - 16:44 | 1555526 Pay Day Today
Pay Day Today's picture

I'm suddenly more upbeat on the economy than I was a second ago.

Fri, 08/12/2011 - 11:35 | 1554373 onlooker
onlooker's picture

Plentiful and cheap coal in China coupled with no EPA is also a factor. Tax friendly nations that have stolen USA industry is another issue not yet addressed, except by Texas.

Fri, 08/12/2011 - 11:42 | 1554394 V in PA
V in PA's picture

+1. Regulations and taxes are what killed America's manufacturing base. Not wages.

Fri, 08/12/2011 - 11:56 | 1554442 SMG
SMG's picture

Partly, but the real destroyer of the base are the unlimited free trade agreements.  Until we adopt a US national interest trade policy.

That combined with lower taxes and more reasonable regulations would improve all of our lives.



Fri, 08/12/2011 - 13:29 | 1554738 disabledvet
disabledvet's picture

We lost WW 2. That's why mfg got annihilated.

Fri, 08/12/2011 - 13:41 | 1554797 V in PA
V in PA's picture

I would like to read about the 'lost WW2' theory. Please provide a link. Thanks.

Fri, 08/12/2011 - 14:19 | 1554946 Oh regional Indian
Oh regional Indian's picture

Google operation paperclip.

follow that trail.


Fri, 08/12/2011 - 14:30 | 1554995 V in PA
V in PA's picture


Fri, 08/12/2011 - 14:42 | 1555040 Oh regional Indian
Oh regional Indian's picture

Sure thing. ORI

Fri, 08/12/2011 - 18:48 | 1555850 disabledvet
disabledvet's picture

That's easy. 1950 CEO says to Congress in Congress: "what's good for GM is good for America." 2009: Congress says to Pontiac and Saturn: "no it's not." move along...move along.

Fri, 08/12/2011 - 11:36 | 1554375 apberusdisvet
apberusdisvet's picture

As a friend of many small business entrepreneurs, I have been aware of the creeping margin compression for some months now.  The Q2 earning reports of listed companies are probably the last time that cooked books can paper over the problems.  Q3 will produce an epiphany; no place to run; potentially enormous selloff.

Fri, 08/12/2011 - 13:01 | 1554621 Crack-up Boom
Crack-up Boom's picture

Months?  Maybe your friends didn't talk about it at first, but the margin compression started in 2008.  Small businesses have been in crisis mode for three years.  They've already trimmed the fat and some of the muscle.  What's left (to mix metaphors) is a tight ship that still might not weather the storm.

Fri, 08/12/2011 - 11:36 | 1554376 Boilermaker
Boilermaker's picture

Why would the fact that profits are going to fall affect what's left of this pathetic fraudfest of a market?  Clearly, the game is to be on the right side of the 'action' prior to the lift-off or collapse.

It's nothing but a fleecing mechanism for the non-connected.  Period.

Fri, 08/12/2011 - 11:37 | 1554378 Internet Tough Guy
Internet Tough Guy's picture

Uh, the euro isn't collapsing against the dollar, and it isn't going anywhere.

Fri, 08/12/2011 - 12:05 | 1554426 SheepDog-One
SheepDog-One's picture

Nothings really going anywhere, currencies just trade a small blip up or down but remain about the same, stocks even for all the wild gyrations are where they were just weeks ago. And on top of all the totaly calm markets, The Bernank will supposedly make the dire case argument for massive further QE? Im still waiting for anyone to explain exactly how that happens at all.

What if everyone is wrong and there is no QE at all and Ben just says 'we'll wait and see', as he's said recently? Remember the big FOMC let-down statement only days ago? This is all insane, good luck people youll need it.

Fri, 08/12/2011 - 12:18 | 1554503 TruthInSunshine
TruthInSunshine's picture

Uh, the euro isn't collapsing against the dollar, and it isn't going anywhere.


Right, because the EU will not have to print many, many trillions via the ECB to save the indebted (France, Italy, Spain, Portugal, Ireland, Greece...who'd I leave off?) member states, let alone the banks HQ'd in EU Member States, and because everyone, including Germans, are so enamored with the EU that they'll bleed out financially for the great welfare state experiment.


Fri, 08/12/2011 - 13:03 | 1554628 Crack-up Boom
Crack-up Boom's picture

(France, Italy, Spain, Portugal, Ireland, Greece...who'd I leave off?)

It used to be the PIIGS.  Now it's the "F"ing PIIGS! 

Fri, 08/12/2011 - 13:58 | 1554862 TruthInSunshine
TruthInSunshine's picture

Nice! I was looking for a new Acronym.

As a bonus, yours has a what will soon be a very sickly company, ING, in it!

All is well that ends well, or so some say!

I'm doubling down on my short of The Bernank & The Trichet. I thought I'd sooner see PIIGS fly than Germans, French, Italians & Brits work anything out, over anything resembling a long horizon.

Pip, pip, cheerio.

Fri, 08/12/2011 - 13:34 | 1554766 disabledvet
disabledvet's picture

I agree. That' the round peg in the square hole here. DM is growing 5 pct with nmbr 2 Japan in deep doo doo. EU is toast tho. What do the French say? (such BEAUTIFUL people!) After the deluge a flood.

Fri, 08/12/2011 - 14:44 | 1555045 TruthInSunshine
TruthInSunshine's picture

We're all confirmation bias seeking humans, but your opinion definitely confirms my bias.

In a world of hideous currencies amongst developed, large nations (Yen excluded, which there's no rational explanation for), the EUR will soon have no ALIBI as one of the ugliest chicks in school.

Fri, 08/12/2011 - 18:53 | 1555866 disabledvet
disabledvet's picture

I was commenting while driving so excuse the hiatus and spelling errors. The Euro can become "the German euro" at any time and they represent ferocious competition for the USA. The surging yen terrifies me because it says the USA has serious competitive issues at the macro level. Somebody's come to "fight" in the economic sense and to me that ultimately will be good for Germany, Japan and the USA. Doing so in something other than a "zero-sum" way however will be a real challenge for policy makers in all these governments.

Fri, 08/12/2011 - 11:37 | 1554380 ben_bernanke
ben_bernanke's picture

Seriously, is this blog written by someone in Goldman Sachs? Why does the market generally do the opposite of everything implied by the posts?

Fri, 08/12/2011 - 11:51 | 1554423 fuu
fuu's picture

Goddamit Ben wtf are you reading ZH right now? Get back to the presses so we can stay in skittles and rainbows forever.

Fri, 08/12/2011 - 13:27 | 1554725 tj3
tj3's picture

It has to do more with time-horzions then anything-else. Hours, Days, Weeks, Months, Years, Decades. Your perception of how this thing of ours the market generally does the opposite of everything implied by the posts?

You know how true believers never look at the solid Blue chip stocks they own? Or the gold bugs for that matter. I think Tyler at his best, focuses on that long term view.

tldr, ymmv

Fri, 08/12/2011 - 11:38 | 1554385 web bot
web bot's picture

I'm really starting to like Charles Hugh Smith's writings.

Keep posting them. 

Fri, 08/12/2011 - 11:53 | 1554430 linrom
linrom's picture

Only a few per year, the rest are merely restatements pf positions taken on by the Peterson Institute.

Fri, 08/12/2011 - 11:39 | 1554386 ThirdCoastSurfer
ThirdCoastSurfer's picture

Nice! Especially the toothpaste example. 

Add government overspending, 2 wars, cap-ex & FICA tax breaks & zero Fed lending, and you see that the US has more crutches than Spiderman's nemesis Doctor Octopus. 

Then there the just the outrageous statements. To listen to Caterpillar's CEO Doug Oberhelman rattle on about hiring thousands and thousands of employees every month without detailing that some people actually leave or retire and thus need to be replaced is beyond bizarre and in itself is worthy of Spiderman's other nemesis "After Dark".  

Fri, 08/12/2011 - 16:29 | 1555443 Escapeclaws
Escapeclaws's picture

There's a guy over on Yahoo finance named Glain who is claiming that over the years the pentagon can't account for 10T dollars.




how much of our national debt is that?

?  duh....

We'll just let that one slide, being good attention deficit afflicted sugar ingesting Americans.

Fri, 08/12/2011 - 16:36 | 1555487 TruthInSunshine
TruthInSunshine's picture

No conspiracy here:

The DoD admitted it can't account for 2.3 trillion in spending.

I'm just reporting the facts.


The War On Waste - CBS News

"According to some estimates we cannot track $2.3 trillion in transactions," Rumsfeld admitted.


More money for the Pentagon, CBS News Correspondent Vince Gonzales reports, while its own auditors admit the military cannot account for 25 percent of what it spends.

Fri, 08/12/2011 - 17:50 | 1555728 Escapeclaws
Escapeclaws's picture

As I mentioned, this Glain fellow, who is a journalist for the WSJ--not exactly a conspiratorial rag--used the figure 10T over a period of years. You can watch it over at Yahoo while it's still there. Also, there are a lot of black ops associated with the pentagon (a fitting symbol), so just saying they can't account for however many trillions of our money they've poured down their gullet is not a necessary condition for no conspiracy. Just sayin'.

Fri, 08/12/2011 - 11:42 | 1554393 snowball777
snowball777's picture


You forgot margin compression from inflation on their inputs and that most of their cash on hand is debt they won't be able to roll shortly.

These are the clowns you depend on to be more efficient than central planners? Hehe.

Best of luck!


Fri, 08/12/2011 - 11:43 | 1554397 alien-IQ
alien-IQ's picture

It was never really a "Bull Market" (at least not since 2001). It's really just been a declining dollar value market.

One of the sharpest that can think of is the Australian dollar. In April of 2001, 1 AUD got you .47 USD' 1 AUD gets you 1.03 USD. and that's down from the high of 1.07. This is nothing short of an astounding reversal in value.

Simply further proof that what's good for corporate America (wall street) is bad for main street.

Can you imagine how thrilled a major US multinational corporation would be to see the USD below 50? Can you imagine how much that would hurt the average guy on the street in America?

Something's gotta give. And it won't be pretty regardless of what that something is.

Fri, 08/12/2011 - 11:59 | 1554449 TruthInSunshine
TruthInSunshine's picture

If you chart the value of equity markets in real dollars, we've had a secular bear since 1991.

We now have a 20 year, firmly entrenched, secular bear market, with NO signs of abating, whatsoever.

Hell, EVEN IN NOMINAL TERMS, the Dow is where it was 11 YEARS AGO, the NASQAQ IS 58% of where it was 11 YEARS AGO, and the S&P 500 is 35% LOWER than it was 11 YEARS AGO.


Fri, 08/12/2011 - 13:40 | 1554791 disabledvet
disabledvet's picture

Replacing one bubble with a dozen. There is much to this young grasshopper.

Fri, 08/12/2011 - 14:50 | 1555083 TruthInSunshine
TruthInSunshine's picture

Tulips ---> Mississippi Bubble ---> the South Sea Bubble ---> Bull Market of the Roaring Twenties ---> Japan, Inc. ---> dot.coms/stocks ---> real estate ---> stocks ---> bonds ---> stocks & bonds ---> Bernankincidal Finale of stocks, bonds, sovereign debt (implosion is going to cause much puking up of blood)

Fri, 08/12/2011 - 18:55 | 1555869 disabledvet
disabledvet's picture

"bankers that are poor." BAD FEELING ABOUT THIS!

Fri, 08/12/2011 - 11:45 | 1554400 SwingForce
SwingForce's picture

Historically, 10 yr Treasury yields have been 3% more than the S&P 500 yield, on average. 2008 was the first time since 1958 that the S&P 500 had a higher yield, and it happened again on Monday. The average dividend yield for the 389 stocks in the S&P 500 that pay dividends is 2.69% vs. 2.25% 10 yr Treas. (Its 2.09% average for all 500).'%20dividend%20yields%20vs.%2010%20yr%20treasury&ei=ckpFTvSUFoicgQetrqy0Bg&usg=AFQjCNGe8x01Hp2YGwXG-rAVeC_51BQYQg

Stocks don't have to go lower to attract buyers.

Fri, 08/12/2011 - 11:50 | 1554420 SheepDog-One
SheepDog-One's picture

Hell no...stocks can go up +450 one day, then the next go up another +200, all based on worse economic news.

But I dont know how Ben wheels this into Jackson Hole and makes the strong case for more QE with euphoric markets, at this point he'd just have to be saying 'Billionaires just need more billions bottom line now sit down and shut up'.

Fri, 08/12/2011 - 12:13 | 1554478 SwingForce
SwingForce's picture


Q&A w/Larry:            


Q: The Dollar, why isn't it going up?

A: Because to go up, you need people to sell out of other currencies and buy the dollar.


Q: That's not happening?

A: Evidently not, the dollar's not going up is it?


Q: Well why not? Treasurys are bid higher everyday, new low yields everyday, who's buying them?

A: Not foreigners.


Q: Stocks are down 18% and bonds are up 18%, is that a coincidence?

A: I think you just answered your last question about who is buying bonds. But that's only half of the story-


Q: While stocks have been going down, their dividend yields have been going up?

A: Yes! Of the Dow 30 Industrials, 28 have higher after-tax yields than the 10 year T-note.


Q: Bonds don't change their payouts, stocks can change their payouts?

A: Yes, and over the past year they have raised the average dividend 10%. Of course, many stocks lowered their dividends in 2008.


Q: People on Social Security and Pension Plans like to see their checks go up each year-

A: Then they should buy top quality dividend paying stocks. Bonds will never increase the payout, and each time you roll them over the yield actually has been going down.


Q: So what's wrong with these people, this defies logical explanation, why are stocks selling off?

A: There's no short answer, except to create fear of some kind. When that fright wears off, stocks will have one hell of a rally. A Buy and Hold Forever rally, because the dividends paid 10 -15 years out will be double-triple what they are today, so you'll never give up that income stream- you won't be able to replace it.


Q: Buy and Hold Forever? Like marriage?

A: Only better, the money comes IN not out.


Q: Seriously-

A: Well think about it, this is not new, this describes the rally from March 2009- Big moves up…


Q: And no volume on the selloffs until recently.

A: Exactly, people don't want to part with their cost basis, or more importantly, their dividend % basis. Dividends were lower in 2009, but stock prices were much lower, so yield % were higher than today.


Q: Treasury yields were higher last year?

A: Yes much higher 3.20% for the 10 yr note.


Q: Stocks are much more attractive on a competing yield basis today than last year?

A: Yes, but part of the fear is that the Bush Tax rate of 15% will be raised to 38% making stocks less desirable, relatively speaking.


Q: Any chance the cuts will be extended and the 15% rate will still apply in 2012 and beyond?

A: Yes, a very good chance- Pres. Obama got the debt ceiling (his credit card limit) extended $2.4 Trillion, and for sure he will use part of that to  make stocks look attractive against bonds.


Q: What about a QE3?

A: There's a very good chance, and this is what it will be. Buy Stocks.


Q: But what happens when rates go back up? Won't people sell stocks and buy bonds again?

A: Ha! Yeah, sure, rates go back up, ahem, after all the work Bernanke has done to LOWER rates? And don't forget, bonds move inversely to rates, Bernanke has a giant portfolio of T-bonds, bigger than China's. He's not going to crush himself.


Q: That's a good point, I'll have to ask myself that question.

A: Feel free, I'll wait.


Q: Well, if rates stay low forever, than the Treasury rolls all their debt over at lower cost to them, right?

A: Exactly, and theoretically, if your credit card is charging you 0.000001% rate, why would you ever pay them off? Just roll the debt.


Q: If $14 Trillion in T-bonds never have to be paid back....well, what are we worried about?

A:  We should be worried about missing the boat again. Look at a chart of the S&P 500- this is a correction of the 2009 rally.


Q: How can we buy stocks if all our money is tied up in T-bonds?

A: Easy- open a margin account and borrow the money. Use those bonds as collateral, they will lend up to 90% face value.


Q: Could you be wrong?

A: Have I ever been right? It could happen. Listen, Bernanke can borrow at a margin loan rate of 0% I think he’ll be buying more bank stocks. And I think he’ll let the banks buy S&P 500 stocks, as long as they pay a dividend.


Q: With everybody buying stocks, there won’t be any left!

A: Great point, Bernanke has been trying to “corner” the bond market for years now, but he can see the future- he won’t get repaid, he’ll roll into new bonds at lower yields. Becoming an investor is the best part of his experiment that could have happened- now he wants to corner stocks.


Q: But again I ask, won’t rates go up and clobber bonds?

A: Rates won’t go up unless the economy gets better and house prices begin to rise- good luck with that.


Q: Its all about the buyers...

A: Yes, and no sellers. Lock up the bonds, use them to buy stocks, let the dividends pay the margin loan interest, and watch the income stream increase over the years. It locks up the stocks, too. Nobody will want to sell.


Q: Brilliant?



Q: Past performance is not a prediction of future results....

A: Thank goodness for that-Hey, I think my watch is broken.


Q: Our guest today has been Larry, thank you Larry.

A: You're welcome, Larry.


Fri, 08/12/2011 - 13:13 | 1554658 slaughterer
slaughterer's picture

Ben can point to all the bad economic data that has recently come to light that directly cuts Q2 GDP to less than 1% to justify QE3 at JH while the market ignores that data.  Best of both worlds. 

Fri, 08/12/2011 - 13:44 | 1554806 disabledvet
disabledvet's picture

With a BIG PHUCKIN car.... ENTOURAGE! That's how u 'wheel in' brother.

Fri, 08/12/2011 - 11:46 | 1554405 linrom
linrom's picture

The obvious observation about all these corporate profits is that they need to be repatriated in order to make them whole. But a far better observation about corporate profits comes from UBS Andy Lees who keenly makes a point to show that corporate profits are nothing short of a Ponzi scheme because if combined with DEBT, it's a wash.

Fri, 08/12/2011 - 13:50 | 1554835 disabledvet
disabledvet's picture

Actually that's called a "lie." let us not soil such simplicity with the word "scheme." we like..."scheming people" a way.

Fri, 08/12/2011 - 11:49 | 1554406 iNull
iNull's picture

"Oooh, ooh, ooh, Mr. Kotter."
"Yes Arnold."
"It's because of the Jews, Mr. Kotter."
"That's right Arnold. The Jews."

"Now Barbarino, do you know what they call a Quarter Pounder in Europe?"


Fri, 08/12/2011 - 11:58 | 1554447 Hugh_Jorgan
Hugh_Jorgan's picture

Vincent: A Royale with cheese.
Jules: A Royale with cheese! You know why they call it that?
Brett: Because of the metric system?
Jules: Check out the big brain on Brett! You're a smart motherfucker. That's right. The metric system. What's in this?
Brett: Sprite.
Jules: Sprite, good. You mind if I have some of your tasty beverage to wash this down?
Brett: Go right ahead.
Jules: Ah, hit the spot...


Fri, 08/12/2011 - 12:14 | 1554494 fuu
fuu's picture

You seem to like Marking people.

Fri, 08/12/2011 - 11:50 | 1554421 treemagnet
treemagnet's picture

The fifth pillar:  nobody goes to jail.

Fri, 08/12/2011 - 11:54 | 1554431 Hugh_Jorgan
Hugh_Jorgan's picture

It is only a matter of time. For those of us with situational awareness; we need to continue to prepare and encourage others to prepare. This time is a gift and we best not squander it. Remember the 4 G's...

Fri, 08/12/2011 - 14:42 | 1555036 Oh regional Indian
Oh regional Indian's picture

Grace, gentleness, generosity and remind me of he 4th?


Fri, 08/12/2011 - 11:55 | 1554437 nantucket
nantucket's picture

caveat: reporting profits that way is not smoke and mirrors, it's gaap rules,...okay we get that.  Here is what is the crappy thing to do: if the elevated profit level/margins are discussed by analysts or management as sustainable, or from operating efficiency gains, then it is midleading.  And it is also misleading if a company doesn't go out of their way to point out what portion of revenue growth and profit or margin growth are from currency.  some companies break out that info on a quarterly basis.  many don't.

Fri, 08/12/2011 - 11:55 | 1554441 SheepDog-One
SheepDog-One's picture

serious question here, how does Ben wheel this euphoric all-is-well market into Jackson Hole and deliver the big QE trillions that are ALREADY baked into this market a few times over? WTF? Now we're just going to plan on a few $trillion QE yearly as normal economic policy? If thats true, I may as well pack my bags for Bora Bora today and say 'bye!'

Fri, 08/12/2011 - 11:58 | 1554446 Scarecrow
Scarecrow's picture

Corporate profits are also rising because large corporations are feasting on zero interest rates, and profits are going up as their old debt matures and they refinance with debt at much lower interest rates. If the average duration of their debt is 5 years, then this effect should continue to reduce interest expense and boost profits for at least a couple more years, all else equal.

Fri, 08/12/2011 - 13:53 | 1554844 disabledvet
disabledvet's picture

Effectve tax rate more than offsets

Fri, 08/12/2011 - 12:00 | 1554456 Hannibal
Hannibal's picture

Money was created against an asset that was then burned (fossil fuels). The debt against which the money was created remained in existence. This is a large part of the global debt today. 

As there is no asset tot sell in order to raise the cash (not considering the interest burden for a moment) the debt can not be repaid and those that own it will get nothing.

This is a result of the adoption of fiat currency to enable the oil/credit based financial system. 

Follow the link below to read about Roboeconomics, the logical bugfix to our economic and financial system as to overcome our current woes. Forever.

Fri, 08/12/2011 - 12:40 | 1554565 narnia
narnia's picture

here's a synopsis of corporate profits.  

everyone is enjoying artifically low interest rates at the expense of the currency, which is an across the board subsidy to speculation. 

the government sector is booming well beyond its means on an illusion its future promises have value.  those living indirectly off the unsustainable government sector are growing.  the financial sector (which accounts for 30+% of all corporate profits) is really losing money (in a true mark-to-market sense), but posting GAAP earnings.  the barrier to entry to everyone else is very high.

overall, output & savings per person is contracting in real terms, but posting a profit by form over substance.


Fri, 08/12/2011 - 13:00 | 1554614 Use of Weapons
Use of Weapons's picture

Remember Tyler stating to 'watch out for Roubini saying that...'?

Well, just happened:


"Marx was right: capitalism can fail" and "50% chance of permanent recession [aka global crisis time]"


Enjoy pumpkins, it's one minute to midnight, apparently. Are you mice or scullery maids? DSK's mates want to know...

Fri, 08/12/2011 - 17:00 | 1555590 Escapeclaws
Escapeclaws's picture

Terrific interview. He was very blunt and clearheaded. In terms of stimulus proposals, I notice he used the word "fiscal", which is good. However, basically, there's no hope things will get better.

Fri, 08/12/2011 - 13:03 | 1554627 JohnFrodo
JohnFrodo's picture

Everything important in life outside of family and friends has been proven to be a lie. Every institution is a massive fraud, read the mission statement carefully. Success in life comes from gauging the lies, projecting the motivation and acting with native cunning.

One small but telling example is the lottery. The $220 million dollar power ball was won on Wed. But no it was not $220 million; it was the present value of $220 million over 25 years. Next there will a whack of tax so most winners will come home with $60 million. We know why they don’t advertise a $60 million lottery, but it is a billboard for what is wrong.

Fri, 08/12/2011 - 13:17 | 1554681 antidisestablis...
antidisestablishmentarianismishness's picture

But, but, I thought the dollar was going to zero???  Shouldn't that mean overseas profits (and gold of course) will go to infinity?  I'm confused.

Fri, 08/12/2011 - 14:54 | 1555104 TruthInSunshine
TruthInSunshine's picture

The Bernank is smart, did well on standardized testing, went to Hahhhvad & MIT, got very good grades, taught at Princeton, studied the causes of Great Depression I (even as he now is sowing the seeds for Great Depression II) and will save the economy and world financial markets.



Fri, 08/12/2011 - 17:32 | 1555616 Escapeclaws
Escapeclaws's picture

The thing about places like Harvard is that they are more concerned about not admitting incompetent people. But they probably don't have any more brilliant people than any big state university--just fewer bozos. They basically end up with second rate people who were able to jump through hoops and have a lot of connections. So it is entirely fitting that Bernanke is basically a hack. Anyone who trades off his certifications, pedigrees, and diplomas is basically a hack. If someone is good, you don't even care where they went or what their certifactions are. They use being good rather than certifications to hold your attention. Let the mediocre rich populate the student bodies of the Ivy League and then go on and get their MBAs and JDs. You know people like George Bush are pretty much the norm at Harvard, Yale, and Princton, not the exception because his old man is a big shot and that's why he got in. You would be amazed at the low intellectual caliber of these people and the total lack of intellectual culture at these institutions, other than for window dressing. Once we're going down the drain, rather than just circling it, hopefully their day will be past. Meanwhile they can laugh at us through a porthole as we take our showers in the FEMA camps.

Fri, 08/12/2011 - 19:57 | 1555969 Sylvia Plath
Sylvia Plath's picture

So then what about all the profits overseas? Dollar strength will play to that in the inverse as well...

Fri, 08/12/2011 - 22:47 | 1556298 Jovil
Jovil's picture

Rising profits are easy with a depreciating dollar. Try it on percentage of net earnings basis and one can tell if they are rising or not.

Sat, 08/13/2011 - 09:34 | 1556931 tradewithdave
tradewithdave's picture


Thank you for your work. You focused in on what has been on my mind. Is it possible that the next round of earnings comes from increased margins via reduced competition as the Russell 2000 is consolidated or rolled up into the Dow... the non-globals become grist for the globalization mill. If bonds are levered to buy stocks in pursuit of dividends doesn't this turn the DOW into a Western currency for the consolidation of competition. Doesn't that set the stage for a new East vs. West see-saw that pivots on gold via the new HKMex and new Eastern spot market.

My sense is we have China right where we want them and the new Occidental merger of Germany, the U.K. and U.S. is established. Yes earnings have come from the falling dollar. They can now come from the collective decline of the new Occidental/divorced SDR fueled by liquidation of PIIGS and tar sands all while our military watches over the Saudis. To force the Chinese into the reset switch we need them to force gold up which is to force the new emerging SDR down. Isn't that why the Bernank is channeling money into large cap dividend paying stocks. It's classic direct marketing. He is cutting out the Fed as the middleman. He's turning bonds into a defacto levered currency forcing them onto the street to fuel the Russell roll-up.

Going to be a great time to be an investment banker if I am right.

Dave Harrison

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