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This chart shows the domestic financial corporate profits (as opposed to non-financial corporate profits) divided by the total compensation of employees as seen in Table F.7 Distribution of National Income in the Flow of Funds Accounts.
The chart clearly turned parabolic and has seemingly stopped its climb. That tends to be the most dangerous part of any parabola. The red 6th order polynomial trend line wants to continue higher. In my opinion though, look out below!
I would also like to point out that the only period on this chart when domestic financial corporate profits fell hard and in a sustainable manner relative to wages was from September, 1978 to March, 1982. I can say with utmost confidence that it was not a deflationary period, using the benefit of hindsight.
Inflation averaged 10.6% annually over that long 3 1/2 year period, narrowly missing the 3 1/2 year record set between March, 1978 to Septmember, 1981 of 11.6% annually. Further, the 1970s housing boom seemingly peaked in January, 1979 as seen here. This might all be a coincidence, but then again maybe it isn't.
One is almost inclined to believe that the Federal Reserve Board is in the banking business and their primary motivation above all others is to rescue the banks. If true, one wonders why they threw the banks such a huge life preserver in 2003-2004. Not only are the banks currently depending on that first life preserver but it seems they are begging for yet another one. There must be a seriously large anchor tied to their feet. Too bad we can't see what's underwater (pun intended).
The Federal Reserve System: Purposes and Functions
The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.
We can't very well have a stable financial system if all the banks go belly up, now can we?
And lastly, my short-term deflationary mood only applies if we actually get a recession (a coin toss at best to me). Otherwise, I'm stagflationary all the way.
See Also:
Flow of Funds Fun! v.7 (Musical Tribute)
Trend Line Disclaimer
Source Data:
FRB: Flow of Funds Accounts
BLS: Consumer Price Indexes (CPI)
10 comments:
Here you go Mark that should make those TIPs look good and he agrees with you the 70's
``It's like the 70s,'' said Jim Rogers, a former partner of hedge fund manager George Soros who predicted the start of a commodities rally in 1999. Rogers said in an interview in Singapore that the rise in oil reminds him of when climbing fuel costs almost three decades ago caused 10-year yields to soar.
``We're in a period of a commodity bull market and inflation,'' Rogers said. ``I would not buy government long-term bonds. We'll be going down for years to come. Commodities are telling you to sell Treasuries. Inflation is everywhere.'' He holds positions that will benefit if Treasuries fall.
http://www.bloomberg.com/apps/news?pid=20601103&sid=arm_1CIybF.Y&refer=bondheads
Kevin
Stag,
Are those pre or post tax corporate profits??? Also, as an investor, I am terrified of parabolas, especially as they apply to entire industries or even worse to diverse markets (think nikkei 225, nasdaq, xhb, perhaps china). The math behind a parabloa is simple, but the implications are scary: self extermination due to consumption of all resources be it food, profits, available interest, etc. Just think of fermentation. Parabola's are a key reason most investors underperform. They embrace the parabola rather than running from it. The past is definitely prologue as it applies to investor behavior. The masses will never learn. Just remember that people saved during biblical times, but there are no resulting infinite fortunes (1.05**2000 = hahahaha, hope you enjoyed the koolaid). While wall street projections have no limits, the real world does and they are always imposed inconveniently on the masses.
Stag,
The federal reserve is a PRIVATE corporation owned by banks. The name itself is a misnomer, no doubt designed to fool the public. It is definitely not "federal" and the "reserves" are simply treasuries placed in the account of the central bank to allow the U.S. Treasury to conjure money into existance. By and large, these reserves (currently around 780 billion) are grown at around 6%/year. It is not a coincidence that the 6% growth rate matches the long term nominal growth of both the economy and the stock market. The notion that masses of people will retire rich by investing in the markets is false. Over time, The market will deliver what our country produces and no more. People are wise to invest, but they are being extremely foolish by saving soooooo little.
Kevin,
Rogers said in an interview in Singapore that the rise in oil reminds him of when climbing fuel costs almost three decades ago caused 10-year yields to soar.
The treasury market seems convinced it has it all under control. IEF (no inflation protection) and TIP (inflation protection) are virtually identical investments in the eyes of the market.
I'm bearish on IEF and bullish on TIP as you can imagine (based on my name if nothing else).
http://finance.yahoo.com/q/bc?t=1y&s=IEF&l=on&z=m&q=l&c=tip
MAB,
Those are pre-tax profits. I didn't want to muddy the effects of lower corporate tax rates helping to (in my opinion) boost the net profits, since corporate taxes are probably not going to continue to fall.
As for the Federal Reserve being a private corporation, next you'll be telling me that the Federated Lending Corporation isn't part of the U.S. Government!
Federated Lending Corporation
http://www.fedlend.com/
My entire world is collapsing before my eyes.
I'm thinking of changing my blog's name to Grand Illusion of Federated Prosperity before it is too late. What do you think? It might add a certain sense of authority.
Federal Stag,
You just can't trust MSM of wall street info regarding profits or profit growth. Financials are the the most opaque of all earnings. NIPA data makes it pretty clear that over the long term U.S. corporate profits increase at a 6 % rate. Its easy for shills to take 2 year growth rates of 12% and project them forward. The fee/sales machine of wall street loves this. As for sustainability? Don't ask, don't tell. Also from NIPA: profits are generally 4.5 to 6.0 % of GDP. Currently, corporate profits are at record levels near 8% of GDP. Try this to stress test/normalize current S&P earnings of $85.00. 1480/((5.5/8)*85). It ain't the 16 operating p/e they're selling for sure.
One more thing, it seemed that the street had been discounting the earnings of financials even prior to the recent sell off. That squares with your chart. Part of me is considering bottom fishing (aka betting on red). The yields are great and even if profits fall by 50% the dividend could be mostly maintained.
MAB,
Also from NIPA: profits are generally 4.5 to 6.0 % of GDP. Currently, corporate profits are at record levels near 8% of GDP. Try this to stress test/normalize current S&P earnings of $85.00. 1480/((5.5/8)*85). It ain't the 16 operating p/e they're selling for sure.
Yeah, no joke there.
Part of me is considering bottom fishing (aka betting on red). The yields are great and even if profits fall by 50% the dividend could be mostly maintained.
Just don't forget that banks can and have lost money (for example, Chase lost serious money in 1987, 1989, and 1990). That would put a serious damper on both earnings and dividends. I've owned Citigroup and Chase off and on over the years (including over the dotcom bubble) and they've treated me quite well. However, I'm in a much more bearish mood these days.
Check out Chase during our last consumer recession (~1990) for how bad things could conceivably get.
http://finance.yahoo.com/q/bc?s=JPM&t=my
Stag,
All good points. You are ahead of the curve. I'm still unsure of the stagflation theme, but I will give it some thought. Also, that S&P 500 p/e stress test I mentioned gets really ugly if financials over shoot on the downside. The stress tests & discounted cash flows from the Russell 2000 and Nasdaq are REALLY scary. You need monster growth across the board for the Russell and Nasdaq and It just doesn't seem worth the high risk. The Fed model is a simplistic joke when you consider the volatility of earnings.
MAB,
I'm still unsure of the stagflation theme, but I will give it some thought.
Everyone is, myself included. However, I will simply say that the investments that worked best during the last period of stagflation have been working for many years so far (gold, silver, oil, commodities). Stagflation still isn't a popular concept though. I think excess credit/money pumping blurred the picture by making almost ALL investments do well.
I'm not a 100% stagflationist though, which is evident by the fact that I don't own gold or silver any longer. I'm more of an anti-productivity miracle investor right now.
I think the paper version of the stagflationist path is relatively safe bet, when factoring in risk vs. reward.
As seen in my last poll, there are four main investing environments and three of them can help the paper stagflationist.
"Stagflation" clearly works.
"Growth inflation" with a loose monetary policy works.
"Recession disinflation" with a loose monetary policy works.
"Productivity miracle" would really hurt me in the short-term though, as it would imply growth AND a tight monetary policy. That's what we thought we had heading into the dotcom bubble. Real rates of return were extremely high and ruined stagflationary style investments.
Rather than attempt to put my finger on what will happen, I'm actually trying to put my finger on what won't happen. I'm not a believer in the productivity miracle coming to rescue us anytime soon.
Just opinions though. There is no sure thing.
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