In response to an FT Blog by Larry Summers on 30th March 2016, entitled 'Corporate profits are near record highs - why is that a problem?'
"...the rate of profitability in the US is at a near-record-high level"
Corporate profits dropped by 3.1% in 2015, which is the biggest drop in seven years I.E. The most since 2008...ring any bells?
"The stock market is valued very highly by historical standards. Available proxies for risk have not been especially high in recent years"
Inflated asset prices are a result of money borrowed at ZIRP:
1. Leveraged up and invested in stocks by speculators
2. Used by management teams for share buy-backs, over-valued acquisitions and other financial engineering activities that combine to boost EPS in the short term and trash the balance sheet in the long term
The Vix is low because the market has been 'trained' to rely upon, and front-run the Federal Reserve. There is a new generation of traders who have only ever experienced one rate hike...we saw how well they responded to that in January...and we are now seeing how they have seemingly recovered their senses...or as I prefer to call it - 'gone back to sleep'
“Third, it could be that higher profits do not reflect increased productivity of capital but instead reflect an increase in monopoly power...(iv) new business formation has declined”
a) As I already noted, these 'higher profits' are heading south - further confirmation of that will be forthcoming this week
b) Productivity of capital is heading down - there is no 'could be' about it
c) New business formulation has been declining for years, as any business person with half a brain would expect it to, and as many said it would - given the warped economy created by 8 years of 'trickle up' and the 'stealth effect'. In a nutshell, when you distort the most fundamental price in the market, the cost of money, AKA the interest rate, there is not a reliable indicator to be found anywhere. Hence the increase in share buybacks, decrease in entrepreneurial start-ups etc. etc.
'The combination of the fact that only the monopoly power story can convincingly account for the divergence between the profit rate and the behavior of real interest rates and investment, along with the suggestive evidence of increases in monopoly power, makes me think that the issue of growing market power deserves increased attention from economists and especially from macroeconomists'
The 'monopoly power' that is most responsible for the pigs ear economy we find ourselves in, is to be found sitting around a table in the Eccles building, except when one of it's members is out rushing for a microphone to dial back on their previous week's pontifications. It's starting to wear a bit thin, however, when even Steve Liesman asks Janet Yellen if she's losing credibility.
The markets that you think you are analysing Professor Summers, do not exist except in the bowels of the spreadsheets and equilibrium models that you use to analyse them. The map is not the territory, and your maps are rubbish.
The real economy of people, ideas, resources and personal responsibility for creating wealth...has been distorted out of all shape by the monetary insanity of the past few years.
But by all means gather a team of economists and macroeconomists to give increased attention to this latest theory. Go play. Just don’t touch anything real.