Submitted by Jim Quinn of The Burning Platform blog [16],
The chart below from John Hussman tells a story. Do you think the fiscal and monetary policies implemented by Bernanke and Obama since 2008 were designed to benefit you? Do you think scrapping mark to market accounting rules was supposed to help you? Do you think paying Wall Street banks .25% on their deposits at the FED and generating $5 billion of risk free profits per year was going to assist you in any way? Do you think 0% interest rates for Wall Street borrowers and 0% interest rates for Main Street savers was beneficial to your standard of living? Do you think adding $6 trillion to the national debt aided your future or the future of your children? Did war in Iraq, Afghanistan, Yemen, Libya, and Syria benefit you or the corporate arms dealers?
Corporate profits as a percentage of GDP have averaged 6% for the last 66 years. They peaked in the mid-1960s at 8%, and they then plunged by 5% over the next four years. They peaked again at 8% in the mid-1990s, and plunged again by 5% over the next four years. in 2005, at the height of the housing bubble, corporate profits peaked at just under 9% of GDP, with profits crashing by 8% over the subsequent four years. So here we are. Corporate profits are currently at 10.5% of GDP, by far the highest level in history.
Does there seem to be a slight disconnect between corporate America and Main Street America? We have the stock market at an all-time high. We have the lowest percentage of Americans in the workforce in 35 years. We have corporate profits at all time highs. We have real median household income at 1990 levels.
Does any of this seem irrational? Do you think corporate profits can reach 12% of GDP with rising interest rates, record high energy prices, declining household incomes, Obamacare, Europe imploding, China experiencing a real estate collapse, and Japan experiencing a social, economic and environmental collapse? Do you believe this time is different? Do you believe QEternity has fundamentally changed the nature of our economic system for the better? Do you believe profits can be increased while revenue is flat or declining?
If you believe in regression to the mean and a world based on reality, then you should be prepared for corporate profits to decline by 14% to 20% over the next four years. What do you think that will do to a stock market where the PE ratio is already at valuation levels of 1929, 2000, and 2007?