Will this be a lost decade for profits? – Macrofugue 07-28-13

Salient to Investors:

Matt Busigin writes:

Corporate profits are going to be weak over the next decade, but it won’t matter very much to assets, and even be beneficial to labor.

Consensus analyst estimates call for S&P 500 EPS in 2014 of over $123, 20% above the present value.

Corporate profits are high; fueled by a unique combination of tech-boosted productivity, stabilized end-demand funded by large deficits, and an explosion of foreign profits from growing export demand and strong foreign exchange rates.

The balance between labor and capital is most regulated through corporate taxes, which are near all-time lows.

Future profits are governed by present investment, so the change in American corporations from investors to rentiers is not just bad for present-day employment but the ultimate limiting factor on future profit growth.

Profit level is well-known to be anti-correlated with future profit growth.  Fat profits, declining labor, real capital and financial intensity of production, technology enables competition to chip away at high profit levels.

Foreign revenue is unlikely to provide the same boost as it has before, along with the companion foreign exchange gains, as emerging markets digest their rapid growth, and the Eurozone continuing to decline.

If profit growth does not come from trade, then it can only come from government deficits or household spending.  Neither party wants to increase the deficit – it has already cut in half to 4.89% of GDP, and household demand for credit remains nearly zero despite record low interest rates.

The weak labor market will not last forever.  The Japanese, despite decades of balance-recession, have seen unemployment rates drop through scarcity of prime-aged workers.

The Levered Equity Risk Premium of +0.78% indicates that the capital markets have already discounted this scenario, but if profit growth does remain tepid, investment grade corporate bonds are likely to at least beat equities on a risk-adjusted basis.

Read the full article at  http://www.macrofugue.com/will-this-be-a-lost-decade-for-profits/

Click here to receive free and immediate email alerts of the latest forecasts.