Re-levering a broken economy.
A tale of stagnating economic growth and financial engineering.
A thread (and an article).
seekingalpha.com/article/435411…
A tale of stagnating economic growth and financial engineering.
A thread (and an article).
seekingalpha.com/article/435411…
After the 2008 crisis, the US deleveraged (slightly), led primarily by household debt.
2/n
2/n
The US economy was one of the only major developed countries to delever.
Japan, Europe, Canada, Australia, and China all increased their relative indebtedness after 2008, while the US did not make a new peak.
3/n
Japan, Europe, Canada, Australia, and China all increased their relative indebtedness after 2008, while the US did not make a new peak.
3/n
After the US economy crossed the 275% debt to GDP threshold around the year 2000, we lost a significant portion of our trend growth.
"Core GDP" growth was cut in half.
4/n
"Core GDP" growth was cut in half.
4/n
As a result, "true" corporate profits reported in the NIPA stagnated, in line with the decrease in trend GDP growth.
Since Q3 2011, pre-tax corporate profits have increased by less than 1%.
5/n
Since Q3 2011, pre-tax corporate profits have increased by less than 1%.
5/n
Corporate margins (pre-tax) started to decline in 2014, in line with the stagnation of profits.
For decades, however, after-tax profit margins continued to make higher lows and higher highs.
6/n
For decades, however, after-tax profit margins continued to make higher lows and higher highs.
6/n
Corporations continued to pay fewer taxes as a percentage of total profits, one financial engineering tactic that made up for the lack of underlying profit growth.
7/n
7/n
While profits stagnated, dividends did not.
In Q1, dividends paid increased by $19 billion, while total profits fell $295 billion.
As a result, dividends paid as a percentage of total profits spiked to 75%, the highest level since the depths of the 2008 recession.
8/n
In Q1, dividends paid increased by $19 billion, while total profits fell $295 billion.
As a result, dividends paid as a percentage of total profits spiked to 75%, the highest level since the depths of the 2008 recession.
8/n
Since Q3 2014, pre-tax corporate profits from the NIPA are down 16% while "EPS" has increased by 27%.
This is the financial engineering gap.
9/n
This is the financial engineering gap.
9/n
While profits stagnated, we needed to find a way to boost EPS growth.
Ultimately, stock prices track EPS.
EPS has been able to increase, deviating from underlying profit growth thanks to share buybacks, lower effective tax rates, and more debt in the corporate sector.
10/n
Ultimately, stock prices track EPS.
EPS has been able to increase, deviating from underlying profit growth thanks to share buybacks, lower effective tax rates, and more debt in the corporate sector.
10/n
Financial engineering must continue to keep EPS growth above underlying profit growth in the real economy. The playbook is lower tax rates, more share buybacks, and increased leverage.
11/n
11/n
Ultimately, we are going to be left with a record output gap, starving the real economy of productive resources.
The financial engineering tactics used have a shelf-life and some tricks, like lower effective tax rates, have been pushed to the limit.
12/n
The financial engineering tactics used have a shelf-life and some tricks, like lower effective tax rates, have been pushed to the limit.
12/n
No one talks about this with more depth and clarity than Chis Cole.
It may be time to question the 7%-10% annual return assumptions, unless we can continue to push financial engineering tactics and corporate debt to new(er) records.
13/n
It may be time to question the 7%-10% annual return assumptions, unless we can continue to push financial engineering tactics and corporate debt to new(er) records.
13/n
