Monday, October 31, 2011

Corporate Profits vs. Debt


Click to enlarge.

I've packed a lot of information into this chart. Hopefully you will manage to decipher it all.

Theory #1

Real corporate profits per civilian employed are a constant over the long-term. This theory is shown in the dark green median trend line on the chart.

In 2006:Q1, corporate profits were well above the median ("Epic Bubble #1") and in 2008:Q4 they very nearly reverted to the median. They are now well above the median again ("Epic Bubble #2?").

This theory seemed to hold for 50 years (from 1950 to 2000). Once the economy started to fall apart in 2000 things changed though. That brings us to another theory.


Theory #2

Real corporate profits per civilian employed have grown as debt has grown and will continue to do so. I can't offer much to support this theory, but that's what the data seems to be attempting to show.

The red trend line is based on all of the data. The blue trend line is based on the blue points. The orange trend line is based on the orange points.

One reason I feel that this theory is suspect is because it doesn't pass the common sense smell test. Real corporate profits per civilian employed cannot grow to the sky. At the very least, it would seem impossible that real corporate profits can eventually exceed real civilian wages. Further, surely the drag of excessive debt will eventually also take its toll.

Another reason I feel that this theory is suspect is because of the current direction of movement in the chart. Note that we are sliding down and to the left from the most recent peak in 2010:Q2. If the future is so bright, then why are we trying to move back in time?

I strongly believe that increasing one's debt can make one feel pretty good in the short-term. Over the long-term it has the opposite effect though. As far as corporate profits go, in the short-term they've pretty much never felt better. Epic would be a good word to describe them. One wonders how they will feel over the long-term though. Epic fail? One really wonders that. Seriously.

In any event, both theories support the same conclusion. Real corporate profits per civilian employed are probably not going to be heading up in the intermediate term and are at serious risk of falling substantially. In the first theory, they could fall to the green trend line (or even worse). In the second theory, they could fall to the orange trend line. Either way, the fall could be of similar magnitude.

I was working on this chart yesterday but I did not manage to complete it. I probably should have posted it before today's stock market decline. Sorry about that! On the other hand, it's probably a pretty good chart for Halloween. Trick or treat!

Source Data:
St. Louis Fed: Corporate Profits After Tax
St. Louis Fed: Total Credit Market Debt Owed
St. Louis Fed: Civilian Employment
St. Louis Fed: CPI

20 comments:

In Hell's Kitchen (NYC) said...

is it possible that corporations (being the people they are) also play the stock market casino and mostly win ?

Stagflationary Mark said...

In Hell's Kitchen,

I think it is likely.

MF Global Exposes Prop-Trading Risk That Volcker Wants to Curb

“In the wake of 2008, when we all should have learned a lesson, Jon Corzine told me himself that it was a relatively staid, not risk-oriented firm and he needed to ratchet up the risk,” William Cohan, author of “Money and Power: How Goldman Sachs Came to Rule the World,” said on Bloomberg Television. “Well he does that and it blows up in his face and for the first time he can’t unwind the trade. Honestly I’m still shocked and it should not have happened.”

...

Corzine, 64, learned the strategy of making big trading bets during his 24 years at New York-based Goldman Sachs, which he ran from 1994 to 1999 before being forced out. It was the most profitable securities firm in Wall Street history before converting to a bank holding company in 2008, when smaller rival Lehman Brothers went bankrupt.

Anonymous said...

With $6T in savings, an average fed funds rate since 1954 of 5.35%, and 312,488,000 residents in the US, you could say that each month every man, woman, and child in the US is losing $85.60 in interest income.

Corporate profits...or corporate welfare?

I heard Rick Santelli refer to the EFSF as: Europeans Funding Subsidies Forever.

Our version was simply FSF.

tj and the bear said...

Mark,

Chart the cost of debt service, not debt itself.

Stagflationary Mark said...

Anonymous,

Nice.

FSF could also mean Future Systemic Failure.

December 30, 2009
President Obama: 'Systemic failure has occurred'

When our government has information on a known extremist and that information is not shared and acted on as it should have been, so that this extremist boards a plane with dangerous explosives that could cost nearly 300 lives, a systemic failure has occurred,” Obama said, “and I consider that unacceptable.”

I am reminded of another known extremist.

December 16, 2009
Person of the Year 2009

But Bernanke also knows the economy would be much, much worse if the Fed had not taken such extreme measures to stop the panic. There's a vast difference between 10% and 25% unemployment, between anemic and negative growth. He wishes Americans understood that he helped save the irresponsible giants of Wall Street only to protect ordinary folks on Main Street. He knows better than anyone how financial crises spiral into global disasters, how the grass gets crushed when elephants fall. "We came very, very close to a depression ... The markets were in anaphylactic shock," he told TIME during one of three extended interviews. "I'm not happy with where we are, but it's a lot better than where we could be."

He was person of the year? Apparently what happens in 2005 stays in 2005. Go figure.

October 27, 2005
Bernanke: There's No Housing Bubble to Go Bust

Many economists argue that house prices have risen too far too fast in many markets, forming a bubble that could rapidly collapse and trigger an economic downturn, as overinflated stock prices did at the turn of the century. Some analysts have warned that even a flattening of house prices might cause a slump -- posing the first serious challenge to whoever succeeds Fed Chairman Alan Greenspan after he steps down Jan. 31.

Bernanke's testimony suggests that he does not share such concerns, and that he believes the economy could weather a housing slowdown.

Stagflationary Mark said...

tj and the bear,

That would be an interesting chart if we didn't ever plan to pay off the debt (which I would agree most are not planning to do).

That said, it was the 0% teaser mortgage offers that I was getting in my mailbox in 2004 that helped turned me bearish on the housing market.

So in that sense, what I should probably plot is the future debt service costs. I just don't know what they are going to be yet. Sigh.

tj and the bear said...

Mark,

My point was that increasing debt has only been sustained by falling rates. That's a trend dating back to the 80's that has pretty much run it's course.

The future retracement ought to be "fun".

Stagflationary Mark said...

tj and the bear,

That's a trend dating back to the 80's that has pretty much run it's course.

I'm not sure it has run its course. I'm undecided.

Pikers' Peak v.2

Exponential decay can last infinitely long, at least in theory. For all I know, the whole fiat currency world may catch the Japanese low rate disease. This clearly does not apply to countries which have Euro debts without also having a Euro printing press though.

I also bought EE Savings Bonds a few days ago. I can't say I was thrilled to do so, but it seemed better than the alternatives.

I wasn't thrilled when I bought them last year either, but hindsight is treating me fairly well on that.

As you know, I prefer I-Bonds though (mainly because I am undecided and would therefore prefer the inflation protection).

Stagflationary Mark said...

Put another way, if much higher interest rates would seriously cripple our economy then perhaps much higher interest rates will not appear.

At the very least, I don't think it would take anywhere near the 15% interest rates of the 1970s/1980s to get inflation under control.

I suspect we'd suffer another round of deflation if Bernanke simply removed the "extended period" wording from his speeches. Heck, we might get it anyway. I didn't think oil could hold the $100 level back in 2009 and I don't think it can now. Here's what I said then.

That doesn't mean that I think oil can't make it to $100. Who knows? I don't think it will stay there if it does though, any more than it could stay at $140 the last time.

Stagflationary Mark said...

Yet another thought.

If the government offered me (and only me) a 0% 5-year loan to buy as much stocks as I would like, then I would still choose to buy none at these prices.

I think that shows how bearish I am and how much I value capital preservation.

However, if the government offered me (and everyone else) a 0% infinite-year loan to buy as much stocks as I would like, then I guess I would pretty much be forced to buy stocks, seriously increase the size of my basic necessities hoard, AND get a good therapist specializing in stress reduction techniques, lol. Sigh.

I sure hope we don't go there!

Anonymous said...

I've often thought to myself that your best posts are the ones in the comments section.

"He wishes Americans understood that he helped save the irresponsible giants of Wall Street only to protect ordinary folks on Main Street."

It would have been quite appropriate to have bolded this sentence.

We Americans simply don't understand. That's leadership talk for you.

Anonymous said...

"So in that sense, what I should probably plot is the future debt service costs. I just don't know what they are going to be yet."

Do you remember that chart that was floating around in late 2007, the one by, I think Credit Suisse, that showed the mortgage rate resets out into the future?

Knowing what we now know, namely that we've all FSF'd the losses, do you really think charting future debt service would matter?

We're only going to FSF that too.

We're in a whirlpool to nowhere...

Speaking of Whirlpool, did you see their latest guidance reductions?

Stagflationary Mark said...

Anonymous,

For what it is worth, although I enjoy making charts, I do enjoy the comment section the most. It's the most interactive.

It would have been quite appropriate to have bolded this sentence.

So many things to bold. So little time. Sigh.

Knowing what we now know, namely that we've all FSF'd the losses, do you really think charting future debt service would matter?

It would take a crazy world for your question's answer to be no. Now all we have to do is determine just how @#$%ing crazy our world is, lol. Sigh.

We're in a whirlpool to nowhere...

Speaking of Whirlpool, did you see their latest guidance reductions?


I was shocked, shocked I tell you.

tj and the bear said...

Mark,

By "run it's course" I meant it's hard to go much lower than here -- I mean, really now, we're at ZIRP! They can try and push long rates down further, but given how low they already are it's just pushing on a string at this point.

Otherwise, yes, low rates can continue for quite some time. I'm not in that camp, though. ;-)

Stagflationary Mark said...

tj and the bear,

I'm not in that camp, though. ;-)

It takes two camps to make a market. I try to straddle both camps keeping a foot in each. :)

Stagflationary Mark said...

Put another way, I seem to be a deflationary stagflationist more often than not. Go figure!

Anonymous said...

"I was shocked, shocked I tell you."

Here's looking at you kid. ;)

$11M in debt, and apparently 2/3rds of its creditors signed off on the re-org. ~$8M lost more or less I'm guessing.

Another case of frittering away OPM.

Word ver.: "CONwave" - a fiscal disturbance that travels through space and time.

Stagflationary Mark said...

Anonymous,

Another case of frittering away OPM.

There's a bull market in frittering!

Reeceloui said...
This comment has been removed by a blog administrator.
Tiago said...

Economics evolution shows that after the rocket grown of financial activities in the 70´s workers has loose power and their salaries has deteriorated strongly. Of course, that allows companies to have extraordinary profits. The American economy have being growing thanks to inhabitants debt and consumption while the State has taken the world biggest debt. Thought, speculators are the big winners of this combo and the real economy has suffer for that. Real State market gives to the larger cities thousands of buildings but no one will ever live in, then there are empty
apartments in buenos aires, Madrid, NY, Dubai, etc. Moral risk has become a constant for banks, and unions don´t seem to care about the workers bad situation. And this is a world wide situation.