You never realized how powerful accountants can be when instructed by scumbag CEOs and CFOs to make the numbers work. In the real world, profits are generated by increasing revenue. You can marginally increase profits through efficiency gains, but you must increase revenue to increase profits over the long haul. This chart shows the power of accounting shenanigans and “creativity”. Since 2009 Earning Per Share of S&P 500 companies has increased by an astounding 230%. This is the highest jump in history after a recession. Meanwhile, Sales increased by a pitiful 26% over this same time frame.
Guess what happened in March of 2009? The FASB caved in to Bernanke & Geithner and agreed to let the Too Big to Trust Wall Street Banks value their toxic debt at whatever they chose. Mark to fantasy was born. The financial industry has produced hundreds of billions in fake accounting profits ever since. No revenue was required to book billions in profits. The $3 trillion of free Bennie bucks used by the Wall Street banks to produce billions of risk free profits negated any need for banks to actually lend money to real people in the real world. That is so 1998.
The titans of industry have also used their company’s cash to buy back their own stock at record highs. Boosting EPS through reducing the number of shares is much easier than increasing sales. That requires a strategy, along with execution. Who has time for that?
Then we have Uncle Ben and his zero interest rates allowing debt saturated corporations to refinance loans at a much lower rate. Extend and pretend does wonders for EPS.
Then we had Obama and his Keynesian acolytes doling out hundreds of billions in subprime student and auto loans to artificially boost consumer spending, while the bad debt losses accumulate on the government books for future generations.
But even accountants aren’t God. Eventually you run out of reserves to relieve and ways to hide your losses. That time has arrived. Zero Hedge provides the facts:
The first quarter GDP data revealed a $213bn, 10% annualized slump in the US Bureau of Economic Analysis’s (BEA) favored measure of whole economy profits, defined as profits from current production. Also known as economic profits, the BEA makes adjustments to remove inventory profits (IVA) and to put depreciation on an economic instead of a tax basis (CCAdj). Edwards shows the stark difference between the BEA’s calculation for post-tax headline profits (up 5.3% yoy) and economic profits (down 6.8% yoy) in the chart below. In short: the plunge in actual corporate profits in Q1 was the biggest since Lehman!
You gotta love a government that can report a 5.3% increase in corporate profits when they actually fall by 6.8%. What I notice in this chart from Albert Edwards is the discrepancy between the headline number and the true number usually track each other closely. It seems they deviated greatly during the last bubble from 2005 through 2008, and then we enjoyed a massive dose of reality in the 2008/2009 crash. It seems we have had another huge deviation from 2011 through until today. Real corporate profits are plunging. I wonder what happens next?
Look out below!!!!