Was corporate profit growth a bubble inflated by "financial engineering"? • Hacker News Board

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

#201

Post by riffraff » Sun, Mar 29, 2020, 7:54 AM UTC

engineer_22 wrote: post #137

riffraff wrote: post #122

Earlier quoted context omitted.

The real question is: was it ever allowed to happen? There have been bailouts in some form since forever, it seems.

can you provide a list of examples?

the example I was directly thinking of was Italy's IRI from 1933[0] which was a conglomerate directly aimed at restructuring failing public companies through nationalization, it kept doing it for decades. AFAIK other countries had similar national behemoths.

The US set up the Home Owners' Loan Corporation[1] during the great depression to refinance loans saving a lot of banks from disaster (tho helping common folks too), and there were also the savings and loan bailout in the '80s and '90s[2]. Chrysler was bailed out in 1979[3] and Lockheed in 1971.

[0] https://en.wikipedia.org/wiki/Istituto_per_la_Ricostruzione_...

[1] https://en.wikipedia.org/wiki/Home_Owners'_Loan_Corporation

[2] https://en.wikipedia.org/wiki/Savings_and_loan_crisis

[3] https://www.investopedia.com/articles/economics/chrysler-bai...

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

#202

Post by hanley » Mon, Mar 30, 2020, 6:38 PM UTC

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…

> each citizen gets $1200 they're then taxed on

The $1200 that people are getting is tax-free.

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

#203

Post by Enginerrrd » Mon, Mar 30, 2020, 7:04 PM UTC

JackFr wrote: post #82

Enginerrrd wrote: post #66

Earlier quoted context omitted.

My guess is that the answer to that is cheap debt from the fed keeping interest rates so low for so long. The stocks had value beyond what you'd expect from P/E ratiosand assets alone because there was added future value in the form of anticipated stock buy backs.

If debt is that cheap it would be irresponsible to finance the firm with equity.

That really depends on your timelines and risk tolerance assessment including externalities.

To use poker as an analogy: if you aren't sufficiently bankrolled, the correct play (most positive EV) can involve an unacceptably high risk of ruin. ....and BTW are you also factoring in the probability of fraud or a government seizure in your calculations?

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

#204

Post by ksdale » Tue, Mar 31, 2020, 4:59 PM UTC

H8crilA wrote: post #187

ksdale wrote: post #159

Earlier quoted context omitted.

If the profits from the CAPEX just get plowed into more CAPEX, though, you could end up looking like you don't have profits for decades, and it isn't necessarily a problem as long as you're growing. Edit: What I'm saying is that profit is a lagging indicator of CAPEX, and your lack of profit now could be the result of bad CAPEX 5 years ago, or good CAPEX 5 years ago, plus aggressive new CAPEX now.

I think you don't know what "profits" are, i.e. don't know accounting. CAPEX is written down via depreciation charges over many years. I.e. if you buy something for $1M, and it has an accounting life of 10 years, you book $100k losses per year. What you're thinking about is called "cash flow", not "profits".

Is this not basically what Amazon did? Massive capital expenditures with cascading depreciation that wiped out profits while increasing cash flow until they got to a certain size and decreased CAPEX and recognized profits?