It’s a long way down folks. S&P 500 earnings are already down 12% from their all-time highs. They reached these heights due to the Federal Reserve ZIRP and QE, along with the pocket protector wearing accountants at the FASB knuckling under to Bernanke and Geithner and allowing the Wall Street banks to report fake profits. Reversing hundreds of billions in loan loss reserves booked in 2009 while “earning” billions from parking money at the Fed has allowed Wall Street banks to report $700 billion of fake profits since 2010.
The massive corporations that make up the S&P 500 have generated increasing profits by refinancing their debt at the artificially lowered rates from the Fed, raising prices, moving jobs to foreign countries, and giving their workers 2% raises. Revenue growth among the S&P 500 has been non-existent. The game is up. There are no more employees to fire. There are no more loan loss reserves to reverse. There is no more debt to refinance. QE is done. The Fed can’t lower interest rates below 0%.
Profits are falling and will continue to fall. The stock market will follow.
With Q2 earnings largely in the books (over 97% of S&P 500 firms have reported), today’s chart provides some long-term perspective on the current earnings environment by focusing on 12-month, as reported S&P 500 earnings. Today’s chart illustrates the dramatic nature of the earnings plunge during the financial crisis as well as the recovery that followed — a recovery that took earnings from levels not seen since the Great Depression to a new record high. Over the past two quarters, however, S&P 500 inflation-adjusted earnings have declined by a significant 12% from their record highs — a significant concern going forward.
Thank you!
The press, or rather MSN, doesn’t covers the reality of the FASB decision. It was a stunning move but one few people outside the banking/investment world at the time understood – the outright suspension of something theretofore so deeply entrenched in the banking world that it was akin to defying gravity. It just wasn’t possible in the investment universe, and yet…they did it anyway!
Un-effing-believable!
The effect was to alter all preconceived notions of financial law – up was down, black was white, and it was the beginning of the end of reliance on ANY “official” rules, period. Why would anyone trust TPTB after that? Hell, they made it abundantly clear they could change any rule, anytime, to fit their needs. Utter b*llshit, because prior to the Elites getting their asses in a sling in 2008, these same rules were ruthlessly enforced as though handed down from God-on-High.
It also signaled “The sky’s the limit, Fed’s got your back!” to the same crony bastards who created the entire cluster f*ck in the first place! Anyone involved in the suspension of FASB who can sit with a straight face and act as though their “superior know-how” conveys them the gravitas and respect commanded by their position, is a poser. A f*ckijng sham con-artist.
Guess that pretty well includes all of the Fed and the Wall St. higher-ups, for starters.
Corporate Sales have generally plunged since the Great Recession – in order for earnings not to fall off a cliff, the Corp’s engaged in share buybacks, with the compliant gov’t providing next to nothing interest rates.
Interest Rates – they can go negative.
In all likelihood, rates will go negative. Once the SHTF, the world will pile into T-bills, a la 2008 all over again, desperately seeking safety and willing to take a known loss versus versus an unknown one.
400 point intra-day reversal. Ouch. That’s gonna leave a mark.
They lured in some muppets over the last two days and then slaughtered them.
Bear markets sure are fun.
Up against the limits of physical reality. The same is true for main street, the everyday world of the plebs. Can’t shrink package sizes much more. Can’t add more pink slime. Can’t lower interest rates, extend lease periods, or water down the Jack Daniels further. Historically when this point is reached off comes the velvet glove to reveal an iron fist.
OT: Does anyone know why anyone would tolerate negative interest rates? Why would you take the risk to pay someone to loan money off you?
The only cases I could understand would be 1) institutions who think bond prices will rise even further (but doesn’t negative rates mean the bond price is already above parity?) and want to sell them later at a small profit, or 2) financial institutions who think other assets are too risky, and can’t legitimately hold billions in cash so they take a slight penalty in return for greater liquidity.
Guy:
US Government debt is auctioned to the bidder willing to accept the lowest yield. If you bid 1.0% and I bid 0.5%, I win the auction.
If there are too many buyers at auction, as can be the case in a crashing economy, “offers to sell” in the secondary market will yield the buyer a negative return by virtue of having to pay more than the face value for the T-bill (plus accrued interest). At maturity the T-bill pays out less than was paid for it, thus the “negative yield.”
In banking, the equivalent would be a depositor paying the bank a fee to keep money liquid for them, instead of the bank paying interest to the depositor for the privilege of using it.
Anyone investing under these conditions is so frightened of losing money that they’ll accept a “known loss” in a T-bill or savings account, for an uncertain one elsewhere.
Backtable nails it.
We likely face a reconciliation of 80+ years of continuous, compounded monetary inflation, the rate of which went vertical during the Great Asset Mania. During the reconciliation, simply holding onto dollar-denominated wealth should prove extremely challenging.
One can absolutely imagine that, among dollar credits, T-bills are the very last thing the US government would allow to collapse before the entire monetary system underwent a do-over.
If this is the case, at a time when bank depositors might be pleading for 30 cents on their dollar deposit, and anyone whose “money” was still parked in stocks has pennies on the dollar left, getting a near-certain 90 cents on the dollar returned from T-bills yielding -10% (annualized) would seem like a pretty good deal.
This condition seems unlikely to be sustained for long, however, should it even materialize.
The entire world rests on the back of a vast Hindenburg of explosive, volatile credit-dollars and the asset prices they sustain. The ephemeral condition of all this “wealth” (it’s only “valuable” because the herd believes it to be, at a particular moment) may be revealed in coming years.
Or not. No one knows the future.