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Was corporate profit growth a bubble inflated by "financial engineering"?

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Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#161

Post by grecy »

TeMPOraL wrote: post #157
grecy wrote: post #108

Earlier quoted context omitted.

> If a company like amazon generates very little corporate profit, is that unproductive growth? Of course not. There would be more employees, more taxes paid, more buildings being built, more assets, etc. thus more money going into the economy. I've always dreamed that companies should run with zero profit (like the outdoor store co-ops like REI or MEC in Canada). They could price their products so they don't make an…

> They could price their products so they don't make any "extra" money each year Isn't that precisely what you get from competitive pressure in a free market? Things end up priced barely above production costs. > I think we'd live in a better world if a company like Apple didn't exist to make ever increasing profits, but existed just to create the products they create. That would be a nicer world to live, true. Unfor…

> 't that precisely what you get from competitive pressure in a free market? Things end up priced barely above production costs.

Evidently no. Companies are making hundreds of millions in profit every ear, they're paying their CEOs tens of millions as a "bonus".

They're they're making a lot, LOT more than just "barely above production costs"

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#162

Post by krapp »

grecy wrote: post #161
TeMPOraL wrote: post #157

Earlier quoted context omitted.

> They could price their products so they don't make any "extra" money each year Isn't that precisely what you get from competitive pressure in a free market? Things end up priced barely above production costs. > I think we'd live in a better world if a company like Apple didn't exist to make ever increasing profits, but existed just to create the products they create. That would be a nicer world to live, true. Unfor…

> 't that precisely what you get from competitive pressure in a free market? Things end up priced barely above production costs. Evidently no. Companies are making hundreds of millions in profit every ear, they're paying their CEOs tens of millions as a "bonus". They're they're making a lot, LOT more than just "barely above production costs"

We don't actually have a free market, though. Free markets don't exist in the real world, only the "perfectly spherical cow in a frictionless vacuum" world of economic models.

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#163

Post by kqvamxurcagg »

abakker wrote: post #63
kqvamxurcagg wrote: post #27

The bubble has been enabled by the Federal Reserve. Quantitative easing and money printing has served to inflate asset prices over many years. For some reason markets going up is fine but when they inevitably decline sharply this is viewed as 'disorderly' and the Fed prints money to keep asset prices high. The Fed ensures that hedge funds have counter-parties to buy their toxic overvalued assets. It's now clear that…

Everyone always seems to knee-jerk forget that corporations are employers...the economy is run for people. People work for companies. Companies compete, and the financial gymnastics they do to get there is done by people also. Companies are not sentient. (you could argue that they have some meta-sentience, but it is pretty unspecific)

The corporate vehicle is a fantastic invention. The problem is that when fortune 500 companies fail by taking on too much risk (debt, acquisitions, regulatory breaches) they are bailed out. These bailouts prevent their competition from taking their business or competing fairly. Or prevents new companies springing up from their ashes.

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#164

Post by TeMPOraL »

grecy wrote: post #161
TeMPOraL wrote: post #157

Earlier quoted context omitted.

> They could price their products so they don't make any "extra" money each year Isn't that precisely what you get from competitive pressure in a free market? Things end up priced barely above production costs. > I think we'd live in a better world if a company like Apple didn't exist to make ever increasing profits, but existed just to create the products they create. That would be a nicer world to live, true. Unfor…

> 't that precisely what you get from competitive pressure in a free market? Things end up priced barely above production costs. Evidently no. Companies are making hundreds of millions in profit every ear, they're paying their CEOs tens of millions as a "bonus". They're they're making a lot, LOT more than just "barely above production costs"

There is no competitive pressure within a company. CEO pay is usually an insignificant fraction of a company's revenue; there's enough inefficiencies both within the system and within the market to allow this to exist, even if the actual product of a company is a commodity.

The other part of my comment also mentioned that companies do everything they can to avoid being commoditized: that's another source of inefficiency/surplus revenue. The market is in flux; commoditizing takes time.

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#165

Post by abakker »

ej3 wrote: post #109
abakker wrote: post #63

Earlier quoted context omitted.

Everyone always seems to knee-jerk forget that corporations are employers...the economy is run for people. People work for companies. Companies compete, and the financial gymnastics they do to get there is done by people also. Companies are not sentient. (you could argue that they have some meta-sentience, but it is pretty unspecific)

Honestly I've always shared a perspective much like this until yesterday someone mentioned that through the stimulus (I'm not sure of the figures, but what I roughly recall is) each citizen gets $1200 they're then taxed on, and companies get the balance as an interest free loan. If the balance of the stimulus had been simply evenly distributed to individuals, everyone would have received nearly $10,000. I can't imagi…

competition == unemployment. corporate failure == unemployment. innovation == unemployment.

Maybe all in the short term, but, this stimulus is specifically looking to avoid short-term discontinuities.

That said, I'm a big fan of corporate stress tests and capital buffers as well. I'm not a fan of debt-fueled share buybacks, but, I understand them as a response to a system that allows them.

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#166

Post by ej3 »

jonnycoder wrote: post #121
ej3 wrote: post #109

Earlier quoted context omitted.

Honestly I've always shared a perspective much like this until yesterday someone mentioned that through the stimulus (I'm not sure of the figures, but what I roughly recall is) each citizen gets $1200 they're then taxed on, and companies get the balance as an interest free loan. If the balance of the stimulus had been simply evenly distributed to individuals, everyone would have received nearly $10,000. I can't imagi…

Jordan Peterson makes a clear point about how the right is for stable hierarchies but they can destabilize and become corrupt, and that's where the left comes in to balance them. Wanting to see the best doctor if you get cancer or seeking out the best construction worker to remodel your kitchen IS a hierarchy and it's a good thing.

I'm not sure I completely understand your comment, but I think hierarchy is a structure that is useful for a society when the exchange of information is naturally constricted. Accreditation, status and authority are strong signals in a setting with limited bandwidth, but when communication becomes more robust.. it's more attainable to construct a heuristic to find utility unique to a specific instance or situation. Aspects of what I think represents the best cancer Dr may not jive with what you think the best cancer Dr is (locality? alternative medicine? cost vs probable outcome?)

Hierarchies are still important, but now they're just training wheels in many instances.

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#167

Post by entee »

vimota wrote: post #36

OSAM has a great data-driven analysis of this question and end up on the other side in the conclusion: https://www.osam.com/pdfs/whitepapers/_2_Commentary_Buybacks...

So many problems with this analysis. 1.) main paper cited is from 2006, 2.) article is from 2016 3.) much of the data is older, several plots go to 2014 4.) almost no analysis that looks at long term profile of companies that do this over and over

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#168

Post by derision »

supercanuck wrote: post #48
jimmaswell wrote: post #17

Earlier quoted context omitted.

> They essentially are the government as they have a larger impact on your daily life than the actual government! Amazon and Wal Mart could disappear overnight and I would just shop elsewhere. Amazon isn't in charge of my water quality or road maintenance.

Are you sure about that? All the people in your town would also have to shop at those alternatives as well. Do you think that there is enough inventory and stock to go around? Would those alternatives replenish their inventory in a timely fashion? Would you seek alternatives to your normal shopping? I think people vastly overestimate the capabilities of their local options.

So people didn't buy things before Amazon?

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#169

Post by jcfrei »

sokoloff wrote: post #156
jcfrei wrote: post #135

Earlier quoted context omitted.

We would expect it under certain circumstances. One explanation could be falling interest rates. Lower rates on bonds incentivize investors to take on more risk (moving more money into equities) in order to still meet their return targets.

Another is share buybacks (which I think are entirely fine). Same amount of profits (DCF + discounted terminal value) spread over fewer shares implies a higher share price.

I guess this would count as financial engineering though.

Re: Was corporate profit growth a bubble inflated by "financial engineering"?

#170

Post by danaris »

derision wrote: post #168
supercanuck wrote: post #48

Earlier quoted context omitted.

Are you sure about that? All the people in your town would also have to shop at those alternatives as well. Do you think that there is enough inventory and stock to go around? Would those alternatives replenish their inventory in a timely fashion? Would you seek alternatives to your normal shopping? I think people vastly overestimate the capabilities of their local options.

So people didn't buy things before Amazon?

Of course they did—the same way they bought things at the local mom & pop stores before Walmart came in, undercut them, and drove them all out of business.

Companies like Amazon and Walmart massively distort the market, and do so quite deliberately. It's hopelessly naïve to think that if they vanished tomorrow, everyone would be able to just shrug and switch their purchasing to a drop-in replacement.

That's only possible in, as someone else described it, the "spherical cow in a vacuum" type of hypothetical free market. We live in the real world, where an arbitrary number of fully equivalent businesses can't actually continue to compete perfectly for everyone's money.

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