The tale of this earnings season just ended tells us everything we need to know now about the U.S. - and by extension the rest of the world economy. Revenues at major corporations were flat to down year over year as economic growth is anemic - despite all time unprecedented amounts of fiscal and monetary stimulus. Meanwhile, corporate profit margins reached a new all time record high on a % and overall basis. Meaning companies are continuing to squeeze their workers for more productivity and less wages to boost the bottom line. It's a zero sum game between wages and profits, as it has been for the past 30 plus years. Now however, there is a new twist, because the lack of wage growth - combined with the lack of new household borrowing - is resulting in reduced demand aka. revenue.
The story however, really started back in the 1970s, during the stagflationary era. That was a time of low economic growth and high inflation, as workers still had purchasing power and corporations couldn't just squeeze their work forces into oblivion. Enter the "Supply Siders" - Milton Friedman and his acolytes who realized that the only way to continue to grow economic profits was to open the U.S. up to Third Wold competition and undermine the middle class labor protections. Meanwhile, he predicted an era of disinflation and therefore sought and achieved the abandonment of the gold standard which allowed the unprecedented monetary credit expansion that has occurred since 1980.
As described below, the real (inflation adjusted) median wage for male workers peaked in 1973 and has been falling ever since - even as productivity has risen several times faster than wages.
Straight from the Bureau of Labor Statistics:
"Growth of productivity and real hourly compensation in the nonfarm business sector (which accounts for three-fourths of output and employment in the total U.S. economy) was robust until 1973, at which time growth slowed in both measures. During the 1947–73 period, the annual change in productivity averaged 2.8 percent, while real hourly compensation growth averaged 2.6 percent.
Over the 1973–79 period, the averages were 1.1 and 0.9 percent, respectively.
Real hourly compensation growth failed to keep pace with accelerating productivity growth over the past three decades, and the gap between productivity growth and compensation growth widened. Over the 2000–09 period, growth in productivity averaged 2.5 percent; growth in real compensation averaged 1.1 percent over the same period."
To paraphrase - Reaganomics aka. Supply Side Economics/Friedmanomics/Voodoo Economics
Broke the link between wages and productivity and turned the U.S. middle class into Third World wage slaves to enrich multinational corporations and their small and privileged class of wealthy shareholders.
That breaking of the link between productivity and wages is the story of globalization, the story of the past 30+ years and the story of the annihilation of the U.S. middle class.
The real takeaway at this juncture is that companies today have extremely high operating leverage because ironically, mass outsourcing and downsizing now means most corporate costs are fixed. Look at the PC industry as a primary example. The only company that can make money anymore is the Chinese manufacturer (Lenovo) - even though all of the PCs are made in China. Why? Because the U.S. companies have bloated profit margins which are now being self-cannibalized by the lack of demand. Intel and Microsoft are two more companies now "victims" of high profit margins - both going out of business slowly, as smaller competitors cannibalize their unsustainable profit margins. Look at Apple, their profit margins are 20x higher than their Chinese supplier Foxconn's, yet Apple's stock can't get out of its own way now - the market knows those profit margins are unsustainable. Forget technology, a company like Nike is no different, selling a pair of shoes that cost $20 pair for $100. All U.S. companies now have extremely high operating leverage, which is another way of saying that at the margin, revenues now equate to profits almost 1:1. However, without a middle class there will be no demand and hence no revenues, therefore, soon no profits. The only thing left to go down are the historically bloated profits and profit margins. Anyone owning stocks "for the long run" at this juncture, would do well to understand the mathematics behind this equation.
The other key point I would make is that the Friedmanites have lost control of their monster. Supply Side economics became a deflation importing machine as wage deflation was imported from the Third World. Now here we are and wage deflation combined with inflated debt loads is weighing on this economy like a ton of bricks. Meanwhile, the deflationary forces gain strength with each passing day and the monetary devices invented 30 years ago, now in overdrive, are no longer moving the needle - the Fed is running out of fancy card tricks.
The bottom line is that neither Al Qaeda nor some other external threat can destroy America, only Americans can destroy America, and so far the Supply Siders are doing a bang up job of it...
The bottom line is that neither Al Qaeda nor some other external threat can destroy America, only Americans can destroy America, and so far the Supply Siders are doing a bang up job of it...
