Profits on US large firms goes up as does debt, what gives?

[LAM]

This question is a quiz. The graphs below shows that US corporate debt from non-financial firms has steadily increased since the 50's but really took off after the 80's. Even as taxes have been dropped and profits have increased to record levels.

Don't worry this isn't another LAM blaming Reagan post, it's a real problem that effects the future of the US economy in general and investments.

US large corps are reporting record profits the past couple of years and taxes on corps and capital is at a 60 year low. and the US does host 25% of the Global 500's.


Debt Outstanding Domestic Nonfinancial Sectors - Business Corporate (Nonfarm) Sector (BCNSDODNS) - FRED - St. Louis Fed


Corporate Profits After Tax (CP) - FRED - St. Louis Fed


Graph: Federal Government: Tax Receipts on Corporate Income (FCTAX)/Corporate Profits After Tax (CP) - FRED - St. Louis Fed

 

[Big Pimpin]

While I'm not sure what the reasoning is, my theory is the corporate tax code doesn't reward those who are debt free and sitting on piles of cash so maybe there's tax implications behind this?

 

[oufinny]

My thought is debt is so cheap right now with interest rates help artificially low, companies are taking on more debt and hording cash. Also, there has been so much debt restructuring because there is cost savings in moving from 6-10% rates to half that now. I know my company did that and once it was restructured, immediately purchased a $500m asset. It is a problem but it won't reverse until interest rates are allowed to raise as they should. My sympathy is limited for companies though, they make record profits, pay less and less in taxes, have extremely low cost and high borrowing power... so what if they have to suffer? Where are the wage increases while the hoard all this cash? Look at Apple, company is printing money and has $80 BILLION in cash, how about you give some of that to the people who made that possible, the workers...

 

[charley]

.........with much discomfort

 

[LAM]

I was racking my brain trying to figure out what is going on with this recent trend and this is what I have come up with.

common stock is no longer a permanent source of capital at least not in the 20th century and certainly not the past 50 years. equity in the form of dividends is being payed out to shareholders in cash and retained earnings are being replaced with debt all made possible with the increase in off-balance sheet financing that began to take off in the 80's as the result of financial deregulation. so basically future corporate profits are being spent today with future returns going to pay off creditors that now hold that debt.

this being of importance to those that have vested their savings into stocks via 401K's etc. you need to make sure the company's you are investing in DO NOT have a large portion of their transactions in financial markets or you will get screwed down the road.

 

[ebn2002]

If I can issue debt at 6% and make a return on that money of 20% I will issue debt and my profit and debt will continually go up to the point of diminishing returns at which point you stop issuing new debt.

 

[oufinny]

If I can issue debt at 6% and make a return on that money of 20% I will issue debt and my profit and debt will continually go up to the point of diminishing returns at which point you stop issuing new debt.

This, the classic reason to put debt to work for you.

 

[LAM]

This, the classic reason to put debt to work for you.

hence the exploding US deficit, public and private debt and the investment bankers that cycle in and out of all presidential administrations the federal reserve system, IMF and World Bank, etc..

if my above analysis is correct then this means that a lot of people that have their savings "invested" in stocks in certain company's will never see those monies.

 

[oufinny]

hence the exploding US deficit, public and private debt and the investment bankers that cycle in and out of all presidential administrations the federal reserve system, IMF and World Bank, etc..

if my above analysis is correct then this means that a lot of people that have their savings "invested" in stocks in certain company's will never see those monies.

It is a reasonable suspicion but you are assuming these companies become insolvent. Otherwise they stand to possibly make money unless the dollar continues to plummet.

 

[LAM]

what you are forgetting is that the equity being extracted/pulled out as cash are future profits, since company's aren't actually reinvesting monies to fuel future growth. basically long term gains are being exchanged for debt in exchange for short term profits today. basically shareholders monies being used to pay creditors. and if there is no real equity in the company where do their profits come from?

and the next major financial collapse is inevitable. remember all the banks that were too big to fail in 2008 are even bigger now and growing...not even sure how many US banks are even close to implementing the standards required for Basel III.

 

[oufinny]

what you are forgetting is that the equity being extracted/pulled out as cash are future profits, since company's aren't actually reinvesting monies to fuel future growth. basically long term gains are being exchanged for debt in exchange for short term profits today. basically shareholders monies being used to pay creditors. and if there is no real equity in the company where do their profits come from?

and the next major financial collapse is inevitable. remember all the banks that were too big to fail in 2008 are even bigger now and growing...not even sure how many US banks are even close to implementing the standards required for Basel III.

The same economist that predicted the housing bubble and bank failures in 2006, I just read a nice article saying EXACTLY that same thing. You are trying to plug a massive hole with pebble, I choose to not worry myself to death about it but I know it is invertible. That and so many nations covered in debt so high you can't see the top of the pile, we really shit the bed in the last 30-40 years.

 

[LAM]

I don't worry myself about it at all, I have no monies in stocks that I paid for. just trying to warn those that think all of these investments that may be profitable for some today might not be so in the future once you peel the layers away. regardless of how bad the economy gets in the future individuals and corporations that are in debt will fare the worst.

as the graph shows if there is no equity than there is no value left...

 

[ebn2002]

you know you can short the market too... or sell puts...

full disclosure I am all cash right now and agree that there is a good potential for another bad year in 2013 because all the world economies are slowing down and the governments have used almost all of their powers to try and fuel growth and don't have many tools left to use. Chinas GDP was bad today, they are the growth engine for the world along with south America. But I'm not a doomsday guy I just use it as a buying opportunity.

 

[LAM]

you know you can short the market too... or sell puts...

full disclosure I am all cash right now and agree that there is a good potential for another bad year in 2013 because all the world economies are slowing down and the governments have used almost all of their powers to try and fuel growth and don't have many tools left to use. Chinas GDP was bad today, they are the growth engine for the world along with south America. But I'm not a doomsday guy I just use it as a buying opportunity.

I don't consider myself a doomsday guy but more of a realist. when bad economic policy or legislation is enacted and allowed to remain, it's proof positive that the powers that be don't really want to "fix" anything.

as David Harvey has stated in the past "capitalism doesn't solve any of it's problems, it only moves them around"...as the working class no longer sees wages that increase with either productivity or the costs of goods and services the government absorbs the difference in debt.