At a Loss over Profits

Apparently, there are two Americas.

In one, corporate profits are soaring, the economy is booming and jobs are available for the asking.

In the other, corporate profits are dismal, America is in or close to a recession and more than 100 million Americans have left the labor force.

In one America, more people approve than disapprove of the job President Obama is doing (49.2% approve, 46.8% disapprove, according to Real Clear Politics).  In the other America, more than two thirds of the country believe the country is on the wrong track.  Real Clear Politics found that 69.3% of Americans believe the country is on the wrong track, while only 22.5% believe it is on the right track. Profits

While media are increasingly reporting that the economy is at or near full employment, that America is at odds with reality.  As we’ve written, participation in the labor force has dropped to 62.6%, which is near a four-decade low.

The America where the economy is booming is even more delusional.  Some may say that it’s all relative.  They may concede that U.S. growth in gross domestic product (GDP) is sluggish at best, but typically add that it’s better than GDP growth in the rest of the world.

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The Flim-Flam Economy

The absurdity of today’s flim-flam economy can be summarized when the events of the past week are considered together:

  • The U.S. economy grew at an annualized rate of just 0.5% during the first quarter
  • Corporate profits are the lowest they’ve been since 2009
  • The current bull market is now the second longest in history
  • The Federal Reserve Board, to no one’s surprise, elected yet again not to raise interest rates

The conclusion that can be drawn is that, while the U.S. is not yet a socialist country, it is no longer a capitalist country, either.  There is a seeming collusion between political leaders and central bankers with the net result being more and more government control over our lives amid the illusion that all is well, because, after all, the stock market moves in only one direction. Equities

Mainstream media, with few exceptions, reinforce the illusion, cheerleading for the Obama Administration as it continues to break records for its ever-increasing volume of new regulations.  Burdensome new regulations reduce corporate profits, which should result in lower stock prices.  But the Fed has somehow managed to circumvent reality and juice the market ever higher. 

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The End of the Road

The problem with kicking the can down the road is that sooner or later, the road ends.

Evidence of this can be found in recent stock market performance.  Quantitative easing created a mirage, boosting demand for stocks and sending the market soaring close to its highest level ever.

However, the QE boost can’t last forever.  Sooner or later, market fundamentals have to take over.

Unfortunately, the fundamentals aren’t looking too good.  Claims of an improving economy appear to be overblown, as corporate profits are underachieving.  According to Bloomberg, for every public company that expects earnings to exceed expectations for the most recent quarter, 4.3 companies say profits will be below expectations. read more

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