Blog Archives

Our “Prosperity” Is Now Dependent on Predatory Globalization

So here’s the story explaining why “free” trade and globalization create so much wonderful prosperity for all of us: I find a nation with cheap labor and no environmental laws anxious to give me cheap land and tax credits, so I move my factory from my high-cost, highly regulated nation to the low-cost nation, and keep all the profits I reap from the move for myself. Yea for free trade, I’m now far wealthier than I was before.

That’s the story. Feel better about “free” trade and globalization now? Oh wait a minute, there’s something missing–the part about “prosperity for all of us.” Here’s labor’s share of U.S. GDP, which includes imports and exports, i.e. trade:

Notice how labor’s share of the economy tanked once globalization / offshoring kicked into high gear? Now let’s see what happened to corporate profits at that same point in time:

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Connecting the Dots of Big Data, Soaring Corporate Profits and Trade Wars

Let’s connect the dots between these two comments from longtime correspondents: the first is on the model of collecting and selling data (Big Data), and the second on trade:

GFB:

“If I had a lot of money, would I want to do:

A) –invest in the exploration forbidding areas of the globe for oil reserves with a 50/50 chance of no results
–negotiate leases for the areas of the planet I want to extract oil in and have to negotiate with corrupt and unstable governments
–Pay for the oil extracting and transportation infrastructure
–deal with the fluctuating market values – which may make my whole investment worthless

OR

B) set up a low cost trap that has millions of people handing me for free, and with their acknowledged permission, their preferences, tastes, beliefs, and aspirations . . . which I can re-sell at almost no cost to a long list of buyers, with a price that I can set as I have the data.

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There is No “Free Trade”–There Is Only the Darwinian Game of Trade

Stripped of lofty-sounding abstractions such as comparative advantage, trade boils down to four Darwinian goals:

1. Find foreign markets to absorb excess production, i.e. where excess production can be dumped.

2. Extract foreign resources at low prices.

3. Deny geopolitical rivals access to these resources.

4. Open foreign markets to domestic capital and credit so domestic capital can buy up all the productive assets and resources, a dynamic I explained last week in Forget “Free Trade”–It’s All About Capital Flows.

All the blather about “free trade” is window dressing and propaganda. Nobody believes in risking completely free trade; to do so would be to open the doors to foreign domination of key resources, assets and markets.

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The Central Banks Face Unwelcome Realities: Their Policies Boosted Wealth Inequality and Failed to Generate “Growth”

Take a quick glance at these charts of the Federal Reserve balance sheet and bank credit in the U.S. Notice what happened to bank credit after the Fed “tapered” and stopped expanding its balance sheet?

Bank credit exploded higher:

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Why the Corporate Media Hates Sanders (and Has a Love/Hate Thing with Trump)

Everyone who isn’t willfully blind knows that the Corporate (mainstream) Media doesn’t give the same coverage to Bernie Sanders as it does to his opponent, Hillary Clinton. Bernie’s rallies go unmentioned, his victories are given short shrift and his personal narrative–practically ideal for media glorification–is mentioned in passing, if at all.

A media professional clued me into why the Corporate Media hates Bernie and will move Heaven and Earth to defeat him: Sanders is the only candidate who is seriously promoting campaign finance reform.

When a Super-PAC raises $100 million for Hillary, Jeb, et al., where does 90% of that money go? To the Corporate Media. Corporate Media gorges on political media buys every two years, and increasingly depends on this feasting on Super-PAC money for its outsized profits.

As more and more advertising dollars flow to digital media (online search, Facebook, etc.), traditional media dominated by a handful of corporate giants needs the massive influx of campaign dollars to offset its stagnating revenue model.

My source notes that there are rarely any discounts for campaign media buys–the super-PACs and candidate’s campaigns pay full pop, and typically pay in cash: no 90 days receivables for campaigns.

Political campaign buys are almost pure profit, as there is minimal sales effort required and the campaign/super-PAC is paying full freight.

Real campaign finance reform would gut Corporate Media’s profits. No wonder the Corporate Media downplays Sanders’ campaign, his personal integrity and his chances to become president.

As for the firewall that supposedly divides editorial from advertising: it’s there for show, of course, and everyone in the business solemnly declares it’s a Great Wall that is never breached, but the reality is the editorial staff know very well who butters their bread–and it sure isn’t the folks getting free media coverage when their competitors are buying tens of millions of dollars in advertising.

Nobody has to openly state that big advertisers are not going to get negative coverage; editorial staff know better than to even propose such a self-destructive notion. Stories are either buried (“this one needs more research”) or they are never proposed due to self-censorship by editorial staff worried that their head will roll in the next downsizing.

The Corporate Media has a love/hate thing going with Trump: the editorial side (i.e. the newsroom) loves Trump, because readers /viewers /listeners will tune in just to see what new outrageous, offensive verbiage Trump has blurted in the last 12 hours, but the advert-revenue side hates him with a passion because thanks to his non-stop media coverage, he doesn’t need to advertise much in the Corporate Media.

According to this estimate, Trump spent $10 million on advertising and received $1.89 billion in free coverage. Deep State Darling Hillary Clinton spent $28 million (is that all?) on adverts and skimmed $746 million in free coverage; Bernie Sanders also spent $28 million and received less than half of Hillary’s free coverage ($321 million)–no bias here, folks, everything is fair and unbiased–and drop-out Jeb Bush spent $82 million and scored $214 million in free coverage.

Measuring Donald Trump’s Mammoth Advantage in Free Media

So the editorial side concerned with attracting eyeballs loves loose-cannon Trump, but the real ruler of the media, the revenue side, hates him most passionately: this skinflint spends almost nothing and gets more free coverage than the rest of the candidates put together.

As you consume the coverage and the advertising this election cycle, always remember that 1) the mainstream media in the U.S. is all corporate-owned, 2) corporations exist to maximize profits, 3) profits flow from advertising, not free coverage, and 4) real campaign finance reform will negatively impact Corporate Media profits.

Always remember who’s selling whom, and who’s in charge: who is the Deep State selling? Who is the Corporate Media selling? Recall that the the Deep State gives the Corporate Media its marching orders: Hillary regains the momentum (New York Times, et al.)

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The Managerial/ Professional Class Is Burning Out

If you work for Corporate America in a managerial or professional capacity, you know all about burnout, because you see it all around you or are experiencing it yourself. Readers describe what they are seeing in the top ranks of S&P 500 corporations, and the stories (anonymous because everyone knows the truth will get them fired/blacklisted) are all about the high personal costs of earning big paychecks by making the numbers–not just revenue but the all-important profits that power the multi-trillion-dollar valuations of U.S. corporations and the stock market that glories in their magnificent and ever-growing profits.

Corporate America depends on this class of workers to reap its stupendous profits: the attorneys, physicians and nurses who churn out the billable work; the CPAs who either cook the books or look the other way when others rig the books to make the company look more profitable than it actually is; the managers who squeeze the line workers to produce more; the software engineers and project managers who are always under deadline and always pressured to use cheaper temps; the Wall Street work-hounds who have to use uppers and other dangerous stimulants to function for 70-80 hours a week, week in and week out; the multitudes addicted to painkillers or other prescription drugs to manage their psychological and physical pain; the working parents whose family life is imploding under the demands of their employers; social workers burdened with ever-larger case loads–the examples are endless.

Even if you don’t work in this class, you see burnout all around you: people burned out by crushingly long commutes, by juggling two jobs, or small-business owners resorting to self-exploitation, i.e. working ridiculous hours for little or no pay, just to keep their enterprise (and dream of self-employment) alive.

What no financial analyst dares confess is the corporate profits they cheer every quarter have come at a cost that many Americans will soon be unable to bear. Millions of highly experienced, essential employees of Corporate America, from physicians and nurses to top managers and technologists are either planning to quit, retire, cut their hours or file a workers compensation claim for stress related to their work.

There is a growing body of medical and business-management literature on occupational burnout: Occupational burnout–Maslach Burnout Inventory

A growing body of evidence suggests that burnout is clinically and nosologically similar to depression. In a study that directly compared depressive symptoms in burned out workers and clinically depressed patients, no diagnostically significant differences were found between the two groups; burned out workers reported as many depressive symptoms as clinically depressed patients.

Working Parent Burnout Costing Employers

Check out the burnout rate in the most profitable sector of the economy, finance and financial services:

Though no one dares connect rising workloads and corporate profits, isn’t it more than coincidence that U.S. corporate profits soared not just when production was offshored and financialization took off, but when workloads increased and “work-life balance” became a buzzword for what was no longer possible?

Many people are lauding corporate efforts to ease stress at the workplace with onsite yoga classes and the like. I call B.S.–what people want is less pressure, more time with their families, and to be treated as human beings rather than interchangeable units of production. Yoga classes and the occasional corporate party don’t provide these essentials.

Guess what happens when corporate profits tumble: all the wealthy people at the top of the pyramid lose a lot of money: the executives counting on huge gains from stock options, hedge funds who’d bet the farm on this corporation’s “outperformance,” and the big institutional owners of the company’s stock.

No wonder the pressure on the managerial class is so unremitting and intense: the whole rickety structure of wealth in the U.S. stock market is poised to collapse once profits crater.

There are a couple of ways out for burnouts fleeing Corporate America, but each has its own trade-offs and costs. One is early retirement, another is early retirement plus a low-paying, low-stress part-time job. Another is self-employment in the cash-only economy (One Part of the Economy Is Booming: The Underground/Cash-Only Sector October 9, 2015) or in other sectors open to self-employment.

Financial independence is the American Dream because it gives us the freedom to say Take This Job And Shove It (2:31, Johnny Paycheck).

Unfortunately, the costs of starting and operating a small business are risingdue to junk fees imposed by local government, higher taxes, soaring healthcare insurance costs, etc.:

The Troubling Decline of Financial Independence in America (August 28, 2015)

The Fading American Dream of Working for Yourself (October 2015)

Many refugees from Corporate America would love to quit tomorrow but as they explore the alternatives, they find that their income will drop from $90,000 or $100,000 to $30,000 or less outside the fortresses of Corporate America and Government.

That means completely reworking the cost structure of one’s household: paying off all debt, downsizing expenses not by hundreds of dollars but by thousands, and figuring out ways to develop multiple income streams that the household owns and controls.

It can be done, but it requires a revolution in understanding and financial arrangements. Longtime readers know this is what I have written about for ten years in the blog and in books like Get a Job, Build a Real Career and Defy a Bewildering Economy, which can also be read as a primer for those seeking self-employment.

Of related interest:

In a culture where work can be a religion, burnout is its crisis of faith (from 2007, but even more valid today)

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A Profitless Recession

The basic idea of a balance sheet recession (attributed to Richard Koo) has been well-publicized: when the liability (debt) side of household and business ledgers reach danger heights, stakeholders respond by reducing debt and increasing savings rather than increasing spending and debt.

The result is a slowdown, a balance sheet recession.

What do we call a recession triggered by a collapse in profits? Corporate profits have soared to unprecedented heights in the “recovery” of 2009-2015: it’s certainly been more than a recovery in terms of corporate profits:

What’s left to push profits even higher? The mainstream answer is: just more of the same: more global growth, more expansion in emerging markets (EM), renewed monetary and fiscal stimulus in the developed markets (DM), and the tailwind of lower energy costs.

The possibility that the era of unprecedented profits might have been an aberration and is now drawing to a close does not register in the mainstream financial media. If we look at the red line I drew on the chart, it’s easy to see the incredibly abnormal rise in corporate profits in the era of rapid globalization and financialization, both driven by cheap-money policies of central banks.

Note that profits literally exploded once central banks opened the credit spigots, and lending standards were loosened to the point there were no real standards (2002 onward).

This globalized flood of nearly-free money pushed asset valuations to absurd heights everywhere. These insanely high asset valuations supported additional debt, which then fueled higher asset prices, a virtuous cycle of expanding debt pushing asset prices higher, when then enabled more debt, and so on.

The problem with bubble valuations is revealed when participants must sell to pay down debt. When the debt-monkey can’t be dislodged from the debtor’s back, assets must be sold. And in the thin, rarefied air of most markets, any real selling quickly crashes valuations, which were predicated on more buyers, not more sellers.

The initial wave of selling assets to pay down debt has already crushed emerging markets. Relatively modest selling in developed markets pushed many markets into Bear territory (down 20% or more).

Since stock markets are ultimately underpinned by corporate profits, let’s ask: What factors could crush profits in 2016?

1. stronger U.S. dollar: as many of us foresaw, the stronger USD has pummeled U.S. corporate profits, much of which are earned overseas in other currencies:

The USD Bull in the Global China Shop (February 4, 2015)

Anyone who thinks the USD will give up its gains is dreaming:

Why the Dollar May Remain Strong For Longer Than We Think (September 17, 2014)

2. Emerging markets consumption is weakening. Crush a nation’s currency and stock market, and spending atrophies. When spending sags, so do profits.

3. Oil exporters are reducing their spending. Tightening belts means fewer imported luxury goods and fewer profits for exporters who feasted off oil-exporting wealth for years.

4. China. Imports to China are cratering. Profits will crater, too.

5. Diminishing returns on cost-cutting. All the low hanging fruit has been plucked; shipping manufacturing overseas–done. Reducing head-count: done. Buying software to increase productivity: done. What’s left: slash payroll (again), cancel company 401K contributions, etc.–in a word, devastate employment.

6. Diminishing returns on lower interest rates. Refinancing old debt at super-low rates boosted profits wonderfully the first time around, now, not so much: rates have been low for so long, there’s no juice left in that lemon.

7. Energy savings have been banked. Airlines have feasted on record profits resulting from plummeting fuel costs, but the big gains have already been banked. If oil drops below $30/barrel, a few dollars can be picked up, but they won’t match the gains reaped when oil fell from $100 to $30/barrel.

8. Risk-on borrowing is drying up. The global booms from 2002 – 2008 and 2009- 2015 were both driven by trillions of dollars of new (borrowed) money being dumped into risk-on assets–real estate development, stocks, junk bonds, shadow banking loans, etc.

This tide is now receding.

9. Much of the profit was accounting gimmickry. Jim Quinn recently dismantled the illusory nature of corporate “profits,” drawing upon John Hussman’s analysis:Corporate Profits Vaporizing: (excellent job, John and Jim):

Elevated corporate profits since 2009 have largely reflected mirror image deficits in the household and government sectors, as households have taken on debt to maintain consumption despite historically low wages as a share of GDP, and government transfer payments have expanded to fill the gap, with 46 million Americans now on food stamps – a five-fold increase in expenditures since 2000.

Essentially, corporations are selling the same volume of output, but paying a smaller share in wages, with deficits in the household and government sectors bridging the gap. As households and government have shoveled themselves further into the hole, corporate profits have climbed higher on the adjacent pile of earth. Deficits of one sector emerge as the surplus of another.

If you think all this is a solid foundation for ever-higher profits, by all means go buy stocks with all four feet. But don’t be surprised if the rest of the market disagrees at some point–for example, when even flim-flam accounting can’t hide the fact that profits are in a free-fall back to “normal” levels 60% below current levels.

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Our Crazy-Making Economy’s Endgame: Festering Frustration Seeking an Outlet

The consequence of policies that exacerbate injustice, inequality and double-bind demands is a madness that will find a social and economic outlet somewhere, sometime.

We all know crazy-makers: people who make contradictory claims about reality, who say one thing and do another, who change their stories constantly to justify their own pursuit of self-interest, who demand the impossible of others while giving themselves unlimited excuses.

When they can’t change reality to suit their purposes, they change their accounts of reality, and stick with the revised stories even when they are contradictory.

This describes the entire financial structure of the U.S.: crazy-making.

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No Wrongdoing Here, Just 6,300 Corporate Fines and Settlements

Despite the PR about how corporate profits benefit widows and orphans, this vast wealth is concentrated in the top 1% and the top 5%.

I am honored to share a remarkable data base of Corporate Fines and Settlements from the early 1990s to the present compiled by Jon Morse. Here is Jon’s description of his project to assemble a comprehensive list of all corporate fines and settlements that can be verified by media reports:

“This spreadsheet is all the corporate fines/settlements I’ve been able to find sourced articles about, mostly in the period from the 1990’s up to today (with a few 80’s and 70’s). This is by far the most comprehensive list of such things online. At least that I could find, because the lack of any decent list is what made me start compiling this list in the first place.”

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What Happens to Sales and Employment When Corporate Profits Fall?

Corporate profits are back at the levels reached in 1990, 1999 and 2008 that presaged recessions and a sharp downturn in sales and employment.

It really isn’t a surprise that corporate profits are falling: not only is the stronger U.S. dollar (USD) crushing the overseas profits of U.S. global corporations when reported in USD, but both the U.S. and global economies are slowing.

Since corporations have slashed every possible cost to the bone in the past six years, slowing economies lead to lower sales which lead to declining profits.

Head-count has been slashed, suppliers have been squeezed, high-interest loans have been refinanced, under-performing stores have been shuttered, high-cost properties have been sold–there really isn’t much left for Corporate America to slash and burn to skim more profit.

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The USD Bull in the Global China Shop

The long-term consequences of primary FX trends may be entirely unintended.

Indulge me two “I told you so’s”:

1. That the U.S. dollar (USD) would rise a lot, confounding those busily digging the dollar’s grave

2. That the stronger dollar would crush U.S. corporate profits earned overseas, negatively impacting U.S. stock valuations and markets.

My call for a significantly stronger USD goes back four years:

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The Underbelly of Corporate America: Insider Selling, Stock Buy-Backs, Dodgy Profits

The hollowing out of corporate strengths to enable short-term profiteering by the handful at the top leads to systemic fragility.

Anonymous comments on message boards must be taken with a grain of salt, but this comment succinctly captures the underbelly of Corporate America: massive insider selling, borrowing billions to buy back their own stocks to push valuations to the moon so shares granted as compensation can be sold for a fortune, and dodgy accounting strategies that boost headline profits and hide the gutting of investments in long-term growth.

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