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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"?

#91

Post by salawat »

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…

>Otherwise we're just back in a labor economy again where money can't flow where irrational people deem they need to place it.

I find it interesting how in economics, analysis is based on rational actors, but whenever something goes wrong or doesn't agree, it's irrationality's fault.

Maybe there is a rationality to perceived irrationality that simply doesn't agree with the sensibilities of the claimer of other's initial irrationality?

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

#92

Post by TeMPOraL »

klysm wrote: post #5

"When a measure becomes a target, it ceases to be a good measure." (Goodhart's law) Does this apply here? It seems you could argue that profit is the one true number that _is_ a good measure, but it seems even that can be 'hacked' so that it isn't good anymore.

> It seems you could argue that profit is the one true number that _is_ a good measure

A measure of what? As a proxy for social utility, it's been thoroughly gamed and the two have little correlation.

Profit is currently used as a self-serving measure, because you can eat profit (after exchanging it for bread, or drugs, or yachts). In this sense it can't be hacked. Accounting around it can be and is, though.

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

#93

Post by SketchySeaBeast »

spamizbad wrote: post #77
SketchySeaBeast wrote: post #64

Earlier quoted context omitted.

> 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 yea…

Given that the current sentiment seems to be that vast majority of college degrees are either worthless or simple table stakes to be able to participate in a white collar vocation I wouldn't say I follow that view either.

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

#95

Post by eanzenberg »

robmccoll wrote: post #88
eanzenberg wrote: post #65

Earlier quoted context omitted.

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.

> If your costs aren't growing as fast as your revenue, then it's easy to turn a profit if you choose. Doesn't that make a lot of assumptions about assets, expenditures, and business model? If I start a business handing out $0.99 to anyone that gives me $0.90, I think I could easily grow revenue at a 10% loss for as long as investors were willing to fund it.

If your business is selling $0.99 for $0.90, then its costs are growing FASTER than its revenue. You are describing UBER vs. someone like AMZN.

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

#96

Post by john_moscow »

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.

If your revenue grows 100% YoY and the profit keeps declining, your costs ARE growing as fast, as your revenue.

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

#97

Post by bcrosby95 »

TheOtherHobbes wrote: post #75
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.

There's plenty of proof that people in those industries saw it coming. The question was when. Some people in them even thought it would pop years before 2008. If you acted on that then you lost despite being right because you didn't get the time horizon correct.

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

#98

Post by H8crilA »

vimota wrote: post #57
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…

I thought the same, and had to ask some friends to provide another point of view: If a company like amazon generates very little corporate profit, is that unproductive growth? Aggregate corporate profits are not the only stat that matters when discussing economic growth/value.

Amazon is truly exceptional, do not make a rule out of it. Bezos is kinda like Buffett, in their own league of master capital allocators. For example, Amazon got a lot of financial leverage on the "float" between credit card payments and sending the money to merchants. Again, kind of similar to Berkshire which is leveraged on the insurance "float".

Also, heavy CAPEX or any other form of internal reinvestment does not mean there should be no profits. Look at Google, Facebook, Apple, Microsoft - all those companies were bootsrapped mostly through internal cash flow. All of those companies were profitable when IPOing (just look at historic S-1s).

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

#99

Post by shanty »

LatteLazy wrote: post #37

One man's bubble is another man's under valuation. Big moves when there is big news (like a global pandemic say) are normal events. The thing I find concerning is why the FED are "intervening". Dumping cash made sense during a cash shortage. But when there are actual, real, concerns about the future (coronavirus), price falls are perfectly correct. They don't need "fixing". Happy to be corrected if anyone knows?

The fed provides a boost when demand-side goes down; that's one of its roles in emergencies. Their move here didn't make sense since the initial impact was largely supply-side (demand-side drop is coming...). These adjustments were somewhat knee-jerk and somewhat pressure from the public/Whitehouse.

Their moves so far might float us though a short recession, but it's not clear at this point if it will be enough.

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

#100

Post by jimmaswell »

eanzenberg wrote: post #69
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.

People also vastly underestimate how hard it is to produce commodities. Like, if Amazon disappeared overnight then we'd just all switch to something else and no issues would arise. What nuttiness!

Obviously there would be temporary shortages in some areas heavily dependent on Wal Mart, but elsewhere where Wal Mart is one of 20 similar stores, the surrounding businesses would be able to handle increased business. That one Wal Mart suddenly closed to prevent union forming and the town survived. Brick and mortar in general would have growing pains but also adapt.
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