The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
Subscribe to the Flinchum File
View Archives

Bad Good-News ?

03/30/2014

During the 1990s, corporate profits averaged 5.4% of GDP.  Today, it has doubled to 11.1%  How can you not be happy that corporations are doing so well?  CNBC great Larry Kudlow likes to say that “profits are the mother’s milk of stock prices.”  It is good for stock prices!

From a historic standpoint, during the global financial crisis of 2008/9, banks shut off the flow of money, which badly frightened corporations, especially those who immediately faced a liquidity crisis.  Survival depended on slashing costs and increasing short-term profits.  From many C-suites, there were loud cries of “never again!”  The behavior of corporations has been totally reasonable.  Unfortunately, no level of liquidity is now unreasonably high.  This is not good.

From the standpoint of the corporations, they are still under increasing pressure to keep increasing profit margins and liquidity even more.  At some point, there is too much pressure.  There is more to valuing a stock than the latest quarterly earnings report.  It encourages short term thinking — to defer capital improvements and to postpone training new workers.  This is not good.

From the standpoint of society, this pressure to keep expenses low — by keeping unemployment high and by allowing inflation to continue eating away at the pay of employees — continues to squeeze the already shrinking middle class.  This is not good.

From a political standpoint, these “excess profits” could create a backlash, citing the increasing share of GDP going to companies and decreasing share going to people.  Likely, this would mean delaying badly needed cuts in the corporate income tax rates and encouraging additional regulation.  This is not good.

Aristotle is usually given credit for saying “moderation in all things.”  That should include corporate profits and liquidity as well.  I just pray that, when profit margins do start decreasing, that the resulting bear market will be both short and moderate.

We are a fee-only advisor providing best interest fiduciary services to clients
in Chesapeake, Newport News, Norfolk, Suffolk, Virginia Beach, Williamsburg, and the surrounding areas of Hampton Roads.

CONTACT BAY CAPITAL ADVISORSWe Will Respond Promptly

Contact Us Bottom