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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"?

#71

Post by spamizbad »

kaesar14 wrote: post #7

I find this scary and telling. "It is too early to say where the bottom is to this recession, but we have reason to believe the Millennials and Generation X do not have the resources to purchase the stock that Baby Boomers want to sell at prior market highs. With Corporate profit growth unmasked and the Baby Boomer’s transition into retirement, it seems unlikely that stocks will make a quick return to their prior lev…

Well fear not: Boomer private retirement accounts don't hold most of the stocks.

What's really going to be challenging for capitalists is losing the whole "It's good for your 401K!" justification when nobody actually owns enough stock to care. Only 45% of millennials have retirement accounts and only 33% of millennials have one they are actively contributing to[1]. The median balance also shows them getting a late start [2].

[1] https://www.businessinsider.com/millennials-saving-for-retir... [2] https://www.investopedia.com/articles/personal-finance/01061...

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

#72

Post by zyang »

skoczko wrote: post #32

Here's what I don't get: this article claims that big (since that's what matters for stock market index levels) business sits on a mountain of debt. At the same time many economists (e.g Yanis Varoufakis) claim that big business sit on mountains of cash kept in tax heavens rather that "working" for the benefit of the economy. Which way is it and are there any confirmed statistics to check it?

Both. Racking up domestic debt using offshore cash as collateral. It's like getting a low interest loan using your 401k.

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

#73

Post by darawk »

LeoTinnitus wrote: post #6

It's certainly more nuanced than that. However, it does point out the fact that corporations focus too much on shareholder value as opposed to just making a good business system...except for the major players that is. These the so called "too big to fail" types of companies which borderline monopolize market sectors like Amazon and Walmart. But they don't care during recessions because they're fine. They essentially…

> These the so called "too big to fail" types of companies > which borderline monopolize market sectors like Amazon and Walmart.

It's somewhat interesting that when coming up with a list of two 'monopolist' companies, you came up with two companies that compete directly.

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

#74

Post by burntoutfire »

eanzenberg wrote: post #65
H8crilA wrote: post #42

Yes. Aggregate corporate profits have not gone up at all: https://fred.stlouisfed.org/series/A053RC1Q027SBEA There's a long way to go down to normalize this situation. I'm not saying this will happen, but the downside potential is enormous. Also, don't forget about the 50% of US GDP ($11T) that have been loaded into US capital markets (both debt and equity) by foreigners. This is also hugely out of balance: https://f…

Profits don't (really) matter. If your revenue is growing 100% YOY, and your profit is -10%, who cares? If your costs aren't growing as fast as your revenue, then it's easy to turn a profit if you choose. Companies choose not to because it hurts them long-term. They choose to grow and enter new markets as fast as possible to get a foothold.

Are blue chips like Coca-Cola entering new markets so much?

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

#75

Post by TheOtherHobbes »

amiune wrote: post #29

The amazing thing about bubbles is that you can only know that was a bubble only after it explodes but you can never predict it before.

Before 2008 it was amazing how many people outside of economics, finance, and politics were able to see a disaster coming, but almost everyone in those sectors was completely blindsided.

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

#76

Post by JackFr »

Issuing debt to buyback stock isn’t ‘financial engineering’ its trying to address the fundamental problem of corporate finance. You have two sources of capital, debt and equity. What is the optimal capital structure of the firm.

There is no moral component as to whether a firm should be financed with debt or equity. While EPS has a smaller denominator, it also has a smaller numerator as earning will reflect the interest payments on the debt.

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

#77

Post by spamizbad »

SketchySeaBeast wrote: post #64
nogabebop23 wrote: post #46

Earlier quoted context omitted.

Your average Gen-Xer is 50+ years old today, so your very bleak picture fails to acknowledge that they've also been the benficiary of all the public expenditures and national debt that funded it. Outside of the US Millenials have enjoyed cheaper (when adjusted) education than ever before and better healthcare. I think you paint an unnecssarily bleak and defeatist future (coming from another in a similar situation)

> Outside of the US Millenials have enjoyed cheaper (when adjusted) education than ever before Do you have a source for this? Considering the disparity between nations, that seems to be painting with an overly broad brush.

I can't find the link, but an economist made the argument that college has gotten cheaper because although costs have gone up so has its utility. So it's a "more for your money" sort of situation. I personally don't subscribe to this view and it's not something one can simply state as a fact.

Similar to how say an automobile's year-over-year price may have increased by 5% but the adjusted value is 2% because last year's models didn't have side airbags as standard or something like that.

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

#78

Post by zuzun »

This reminds me of a paper I read in the Quantitative Finance section on arXiv.org, in which the author claimed stock markets are being manipulated by big portfolio owners, because the gains happen overnight, while the intraday returns are negative. I'm not endorsing this idea, but I consider it a fun conspiracy theory and maybe it's a good time to throw this into the discussion here.

https://arxiv.org/abs/1912.01708

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

#79

Post by snarf21 »

andygcook wrote: post #58

There was an interesting interview with Chamath Palihapitiya on CNBC last week. Whether you like him or not, he made some good points around buy-backs and earnings per share manipulation. Worth listening to the full interview if you have 15 minutes: https://www.youtube.com/watch?v=NvEWez59fbI

Exactly, the Fed has artificially held rates low so companies are borrowing money for practically 0 to keep the price up and keep CEO compensation high. The only way to really fix the buyback problem is to outlaw stock based compensation for the C-suite and BOD. Then they might start focusing on long term corporate health instead of stock price and short-term quarterly numbers.
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