Corporate earnings are expected to resume their rapid rise after the "summer soft spot." Zero Hedge recently published The Impossible Earnings Season Stepfunction which included this chart of profit growth expectations:

If we look at corporate profits, we notice they have skyrocketed since late 2009. Can they continue this trajectory into the stratosphere?

Correlation isn't causation, but it probably isn't coincidence that profits rose as savings plummeted, consumer credit expanded and the dollar weakened. Here is another look at corporate profits. Note they shot to unprecedented levels in the 2000s as debt rose and the savings rate dropped to near-zero.

Corporate profits plunged in 2008 when savings jumped higher.

Household debt broke away from wages in the early 1980s, and the gap widened until 2009.

The debt was not evenly distributed; the bottom 95% loaded up on debt to compensate for stagnating earnings while the top 5% saw their relative debt burden fall as their earnings rose smartly.

Virtually all the earnings growth in the past 40 years flowed to the top 10% and the majority went to the top 5%, so the rise in wages shown in the above chart is deceptive: most of that increase flowed to the top 5%. (See Financialization and Crony Capitalism Have Gutted the Middle Class July 13, 2012)

As I have often noted, a weakening dollar greatly boosts the overseas profits of U.S. multinational corporations. One euro in profit in 2002 = 1 dollar of profit. A few years later, 1 euro in profit = $1.60 in profits when stated in dollars. That 60% increase was entirely the result of currency valuations.

Now that the dollars is in an uptrend, what was a tailwind since early 2010 is now a stiff headwind to overseas profits for American corporations. Since many major corporations book 40%-50% of their revenues overseas, this is a non-trivial influence.

Is it coincidence that year-over-year earnings growth declined as the U.S. dollar gained against the euro and other currencies? If it boosted profits on the way down, it must suppress them on the way up.

Can corporate profits shoot to the moon in a global recession? Given the headwinds of a bottomed-out savings rates, moribund consumer credit and a rising dollar, it's difficult to imagine profits maintaining the trajectory imagined by analysts for late 2012 and 2013.

The conditions that drove profits to record heights have weakened or reversed, so it's quite a stretch to conjure up continued quarterly gains above 10%.


Corrected link: my apologies for the dead link published in the latest Musings Report. Here is the correct link: Is the Web Driving Us Mad? New research says the Internet can make us lonely and depressed—and may even create more extreme forms of mental illness.

Read the Introduction (2,600 words) and Chapter One (7,600 words) for free.

We are like passengers on the Titanic ten minutes after its fatal encounter with the iceberg: though our financial system seems unsinkable, its reliance on debt and financialization has already doomed it.

We cannot know when the Central State and financial system will destabilize, we only know they will destabilize. We cannot know which of the State’s fast-rising debts and obligations will be renounced; we only know they will be renounced in one fashion or another.

The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.

Rather than being powerless, we hold the fundamental building blocks of power. We need neither permission nor political change to liberate ourselves. A powerless individual becomes powerful when he renounces the lies and complicity that enable the doomed Status Quo’s dominance.

If this recession strikes you as different from previous downturns, you might be interested in my book An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One. The solution in one word: Localism.


Readers forum: DailyJava.net.



Order Survival+: Structuring Prosperity for Yourself and the Nation (free bits) (Kindle) or Survival+ The Primer (Kindle) or Weblogs & New Media: Marketing in Crisis (free bits) (Kindle) or from your local bookseller.

Of Two Minds Kindle edition: Of Two Minds blog-Kindle

---

"This guy is THE leading visionary on reality. He routinely discusses things which no one else has talked about, yet, turn out to be quite relevant months later."
--Walt Howard, commenting about CHS on another blog.

---

NOTE: gifts/contributions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Thomas B. ($100), for your outrageously generous contribution to this site--I am greatly honored by your steadfast support and readership.

---

Or send him coins, stamps or quatloos via mail--please request P.O. Box address.

Subscribers ($5/mo) and contributors of $50 or more this year will receive a weekly email of exclusive (though not necessarily coherent) musings and amusings.

At readers' request, there is also a $10/month option.

The "unsubscribe" link is for when you find the usual drivel here insufferable.

Your readership is greatly appreciated with or without a donation.

---

For more on this subject and a wide array of other topics, please visit my weblog.

                                                           

All content, HTML coding, format design, design elements and images copyright © 2012 Charles Hugh Smith, All rights reserved in all media, unless otherwise credited or noted.

I would be honored if you linked this essay to your site, or printed a copy for your own use.

Terms of Service:
All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.