Guest Post: What Happens When Phantom Profits Vanish?

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

What Happens When Phantom Profits Vanish?

As the U.S. dollar strengthens against other currencies, the phantom corporate profits generated by a devaluing dollar will vanish.

One of the dirty little secrets of the stock market rally is that the rising corporate profits that powered it are largely phantom profits. Why are they phantom? Because they are artifacts of currency devaluation, not an increase in efficiency or production of goods and services.

Though few domestic observers make mention of it, the large, global U.S.-based corporations are now dependent on non-U.S. sales for about 40% of their revenues (50% and up for many companies) and virtually all their profit growth. Overseas sales are made in the local currency: the euro, yen, renminbi, Australian dollar, Canadian dollar and so on, and the profits are stated in U.S. dollars on corporate profit and loss statements.

In 2002, 1 euro of profit earned by a U.S. global corporation equaled $1 in profit when converted to U.S. dollars. That same 1 euro profit swelled to $1.60 in 2008 as the U.S. dollar depreciated against the euro. That $ .60 of profit was phantom, an artifact of the depreciating dollar; it did not result from a higher production of goods and services or greater efficiencies.

This is why profits earned in non-U.S. markets have risen so dramatically even as domestically earned profits have stagnated. The U.S. dollar has declined dramatically against the currencies of our major trading partners, boosting phantom profits across the board when the non-U.S. profits are converted to U.S. dollars on corporate profit and loss statements.

The Federal Reserve has actively pursued a policy of devaluing the dollar, supposedly in the hopes of expanding exports as it became cheaper to buy goods and services denominated in U.S. dollars. While exports have nudged up as the dollar lost value, the truly significant result of this policy was boosting foreign exchange-generated profits of global U.S. corporations.

Now that the Federal Reserve has lowered interest rates to zero, trying to depreciate the dollar further is like pushing on a string. Short of direct foreign exchange (forex) intervention--buying other currencies in bulk and selling dollars to flood the market with USD--there is little the Fed can do to manipulate the $2 trillion-a-day foreign exchange markets.

The strengthening dollar is putting these vast phantom profits at risk. Were the U.S. dollar to return to its 2002 relative value in other currencies, virtually all the phantom (forex-generated) corporate profits that have justified the stock market rally will vanish.

Though very few consider it possible, much less likely, the U.S. dollar could actually rise significantly as other currencies price in the currently understated risk to their economies. Were that to happen, U.S. corporate profits earned in other currencies would actually decline, even if revenues remained constant.

If the global economy is indeed sliding into recession, then maintaining revenues will be a challenge. More likely, sales will drop and so will profits as the dollar reverses and overseas profits plummet when converted to dollars.

In other words, if the dollar continues strengthening against other currencies, say good-bye to rising corporate profits--and the stock market rally based on ever-expanding corporate profits. Is it any wonder that the Powers That Be look upon a strengthening dollar (recall a rising dollar increases the purchasing power of all who hold it, i.e. U.S. residents and those holding dollar-denominated bonds) with fear and loathing? Alas, the Federal Reserve is not all-powerful in forex markets, despite its gargantuan hubris and absurdly inflated reputation.

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Don Birnam's picture

The fella' on CNBC said to stay with what's working. Actionable.

Mercury's picture

The Race To The Bottom...sponsered by fiat?

Careless Whisper's picture

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trav7777's picture

Magic Johnson???  LOL, another channel nobody will watch.

Another example of an artificial black middle class, they will subsidize people who don't get jobs in hollyweird because either they aren't particularly creative or they're not jewish or both.

forward ho's picture

C.W. Thanks for links. the argentina article does not boad well for us. Any uprising will be quashed before it begins. not even smoke signals will be secure. since 30.000 drones will soon be scouting for any signals at all.

TruthInSunshine's picture

I love 'cash' but only when there's more of it than the debt offsetting it:

Gotta love how they keep talking about 'record cash' when every company has been rushing 24/7/365 to issue debt via incredibly low yielding corporate bonds, thanks to the window of opportunity The Bernank's pernicious ZIRP monetary policy and federal reserve voracious sovereign bond buying has offered these corporations.

Oh what a misnomer we have floated out into the ether by sell-siders (the kind that always bites naive investors hard).


Banks not lending? Corporate borrowing soars in 2011 - ABC News › Money You +1'd this publicly. Undo

Dec 26, 2011 – Consumers may be cutting debt and banks may be tightening up their balance sheets, but borrowing by U.S. corporations is in full swing.

Law of Unintended Consequences: Corporate Borrowing Binge

So far in 2011, syndicated loan volume has increased a whopping 56% compared to 2010, according to Dealogic. The total of $1.76 trillion is the highest single-year sum since the pre-financial crisis days of 2007...



This is yet another unintended consequence of zero percent rates.  Investment grade companies increasing their borrowing by 68% year over year has certainly not led to hiring.  Maybe we can just say that perhaps it stalls the pace of further layoffs, we seem to have gotten good at merely accepting "saved jobs" these days anyhow.


And so the Balance Sheet Recession continues apace for the deleveraging consumer while those with the greatest ability to borrow (and, god forbid, spend) continue to pad their balance sheets with fresh cash.  That they have no need for.

Nicely done.


Here's the problem the sell-siders and even many innocent observers never mention or don't understand:

This trillion plus of 'borrowing' IS NOT CASH. It's debt that has to be rolled over or repaid.

trav7777's picture

answer to OP:  just invent other phantom profits.  That's the good thing about phantoms, you can manufacture them for cheap.

nope-1004's picture

That $ .60 of profit was phantom, an artifact of the depreciating dollar

Which is why Benocide intentionally devalued the dollar to try to fool everyone into believing the whole Green Shoots memo.

Now, he's forced to monitor social media sites because his lies are being exposed.  Fooling the public has been policy for a number of years and its now being exposed.


Jay Gould Esq.'s picture

Risk-on. Where's Bill Griffeth with my d--m "Dow 13,000" ball cap ?

Hugh_Jorgan's picture

Pay me now or pay me later...


"Reality is not optional"  ~Thomas Sowell

withnmeans's picture

Makes me want to reminisce about the old day's "you know, a penny saved was a penny earned". It was something tangible, something real I could put in my hand, feel the weight of it. Better yet it was something that was still able to buy a piece of gum or the such.

I think we should turn back the clocks to a time when there wasn't all this useless paper, a time when real hard assets were king. No I.O.U.s no C.D.S. or some of the other hundreds of acronyms to hide what it really means "useless paper". To bad were living in a time where CRAP is KING!!

JennaChick's picture

But what if we get a  hyperinflation. Stocks will skyrocket then. So we still have a good moment to buy, buy, buy. At the end of the day we are dead anyway so let's disco on.

fajensen's picture

Well, the last place I was "working" they initially made a budget with projected expenses risning 12%, then when expenses turned out to have grown by only 4% they booked the "surplus" 8% as "growth in profitability exceeds expectations" ... management ... the art of looting and fraud!

pkea's picture

Can anyone tell me what would stop them from devaluing even further....

Archon7's picture

Hmmm...  if the "ctrl" and "p" buttons fell off the bernank's keyboard?

Smiley's picture

What, you mean we can't make more money from nothing and bullshit!?!  Sounds like a recipe for a Zombie Apocalypse.  Hollow points on deck; LOCK AND LOAD BITCHEZ!


Seriously, if you believe in the stock market is a sound and viable market medium you need LOTS of psychotropic drugs.

dwdollar's picture

All it takes is one flash crash without a rebound and all these "gains" made over the past few months will be gone in less than 60 seconds. No thanks.

Zola's picture

Of course the fed is all powerful to devalue the dollar, it could send out tomorrow a check of 1b USD to each american and guess where the value would go ???...

Convolved Man's picture

Dollar manipulation is not paranormal activity, it's positively magical!

-The Bernank Papers (expert'd from Turbo Tim Memoir)

Convolved Man's picture

After looking at the photo, I couldn't help but google "The eyes of an idealist"

...didn't link to his Facebook page.

Don Birnam's picture

You may have some success cross-referencing "John Law."

Convolved Man's picture

Didn't recognize him without the wig.


Sandmann's picture

It is worse than that with FAS 52 because of the different measures used on Balance Sheet items and Period Adjustments on the P&L. Depreciation of the US Dollar will inflate Balance Sheet valuations of overseas subs and Inventories at Reporting Date but the fluctuations in Exchange Rates could make the P&L look good or bad depending on volatility and hedging. This is why a lot of corporates warehouse their overseas exposure in tax-mixers to group relieve before repatriating or equity accounting to parent balance sheet. I bet a lot of US corporates are not consolidating or not repatriating but leaving funds on deposit offshore anyway.


I thought the Dirty Dollar float was to constrain Chinese exports to the US but it now appears they are boosting tax incentives to export to the US with the EU hitting the skids. It is probably safe to say that ultra low borrowing costs are flattering corporate P&Ls until they try to rollover Debt


A Lunatic's picture

Who needs profits when there's bailouts?

riphowardkatz's picture

Close but no cigar.

Who needs profits when there is growth(in the money supply). Focusing on profits in this environment is nuts, You have to play the hand you are dealt.

Plow it all back in, borrow a ton and get that market cap and market share up. Buy customers/users, Margins be damned. When the time is right(maybe 10 years down the road or longer) lay off 50% of work force, outsource key business processes and rake in the dough.

A Lunatic's picture

Way too much work. Take phantom profits,( or better yet, taxpayer funds) buy vampire lobbyists, make yourself indispensable through bribery, blackmail, nepotism or debauchery.........Presto! Rake in billions.

Archon7's picture

Who said this is a zero-sum game?  You can have profits *and* bailouts!

southerncomfort's picture

couldn't reverse argument be made that if asian currencies were adjusted (raised) to a real normalized global value, these same corporations would enjoy unexpected gains with fair USD adjustment to asian currencies?  and since the foreign bidness is running 30% asian, 30% europe, 40% US/Canada/Mesico rest of world this could prove a boon to US corp profits.  This article seems 1-sided only using europe view, and seems even more stilted ignoring nullifying/positive action adjustment of asian currencies could yield if USD value remains the same. 

BigJim's picture

 if asian currencies were adjusted (raised) to a real normalized global value, these same corporations would enjoy unexpected gains with fair USD adjustment to asian currencies?

"fair"? All's "fair" in love and currency war.

The main thing is, so what if US corporations book an increase in profits, if those profits are in dollars that buy commensurately less?

It would be nice to see these 'profits' plotted against a basket of commodities vs time.

Panafrican Funktron Robot's picture

You're forgetting that China has no incentive to float, and every incentive to debase the renminbi.  Guess who else has an incentive to debase their currency?  The Eurozone!  

Dr. Engali's picture

"As the U.S. dollar strengthens against other currencies, the phantom corporate profits generated by a devaluing dollar will vanish."


The bottom line is all currencies are devaluing. Once one currency gets "too strong" (relative to other fiat),it will be that countries central banks turn to print in this globally coordinated cluster fuck. I'll stick to gold and silver in this environment thank you very much.

silverbullion's picture

Soon we're all going to be billionaires in one sense or another.

MarcusLCrassus's picture

A rising tide lifts all boats. 

Except those boats that did not get a COLA increase on pace with this rising tide.  I.e. most people. 


The one crucial flaw in the Bernanks cunning plan. 

Dermasolarapaterraphatrima's picture

“Canadian business website Macleans summed up the overall figures nicely in September last year:  

'Meanwhile in the U.S., where rates are virtually zero and the Federal Reserve recently vowed to hold them there until 2013, the suffering inflicted on the saving crowd is especially severe. In a recent analysis for the American Institute for Economic Research, William Ford, a former president of the Federal Reserve Bank of Atlanta, estimated American savers have seen anywhere from US$256 billion to US$587 billion in potential income vanish.

'None of the supposedly favourable effects [of low interest rates] are actually happening, and instead it's having a very strong negative impact on savers," Ford told Maclean's. "It's killing savers. Retirees are getting negative returns on their life savings.'


The same retirees who were burnt when asset markets blew up in 2008 are now being burnt by low interest rates.”


from The Daily Reckoning. Savers and pensioners are getting killed (literally in some cases) since COLA does not keep pace with real inflation. Savers do not even get COLA benefits.

Internet Tough Guy's picture

Don't fight the fed on the monetary plane. That's a nominal world, and they own it. Stick with the real world, and win.

walküre's picture

Stick with the real world, and win.

Haven't you heard?


That is the real world for the Greeks.

We're all Greeks!

forward ho's picture

It seems rather self explanitory, if the overall value of the dollar is decreasing. thus more is spent for same services = more dollars (though worth less) to count as profits. inflation is not the same across  the board. temporary profits will be offset by higher, future, inflated prices. if, in the near future a baker can sell his loaf of bread for $100.00 while useing his old pre-inflated flour. he will make great profits! then again his next purchase of raw materials (flour) is likely to be much more expensive. in the long run inflation always wins.

walküre's picture

In a world of austerity pain, the foreign exchange gains or losses on corporate profits will matter very little.

_ConanTheLibertarian_'s picture

The dollar will strengthen also because of countries dropping the Petrodollar. Nice.

blu's picture

The ultimate arbitrage up to recently was not forex -- but energy. The latter was played out a while back, forex stepped in to fill the gap.

There is no Plan C. They will have to innovate or die.

q99x2's picture

A more prominent view these days is that the value of stocks are the outcome of central planning. Also not to worry enforcement of accounting rules has been dropped. And, if two machines can agree what the price of a stock is worth - BTFD!

haskelslocal's picture

"Phantom"? Using a fixed date Euro/Dollar conversion to make it look like a 60% spread as if every Euro earned converted into a 60% dollar profit is misinformative. You take the cake though by saying "The U.S. dollar has declined dramatically against the currencies of our major trading partners".

So I'm left to assume you were either too lazy to give readers the actual percentage of "dramatic decline" which than could be converted into real dollars. Or, you are instead  manipulating language to make your fear story look good. Yeah, I think you're too intelligent to be lazy. 

Next time just say it like it is. The extra profits are earned by monetary exchange and not the production of goods or the ongoing business concern of American companies.



falak pema's picture

You are visiting the Louvre museum and you are Belphegore, the egyptian phantom that haunts the ancient museum; ever since they stole the treasures of the Nile civilization!

Napoleon you thiefffff! Give me back my obelisk!

BaggerDon's picture

Lets not forget a few CFO's and CEO's looking to cash out big out of this ponzi gama, and buy back some of their shares, then post stellar EPS and cash those options..............Mandrake the magician would be proud.............smoke and mirrors........

bobbydelgreco's picture

ben has 1 club in his bag but he is smart and he knows how to use it; that 1 club is dollar devaluation;don't underestimate ben he will keep it going a long long time; but of course in the end it will fail because the world's a mess

SwingForce's picture

Quote" Were the U.S. dollar to return to its 2002 relative value in other currencies, virtually all the phantom (forex-generated) corporate profits that have justified the stock market rally will vanish."

Incorrect. The Phantom Profit vanished the quarter after it was reported, it does not linger to be reported over & over.

Your point is spot-on, however, and it occurs immediately as a reported quarterly LOSS. Even better!

antidisestablishmentarianismishness's picture

But I thought the dollar was going to zero.  That should mean corporate profits would be going to infinity.  Is the dollar now not going to zero?  I'm confused, I thought this was the solid foundationary belief of the ZH community.