[H8crilA]

Yes. Aggregate corporate profits have not gone up at all: https://fred.stlouisfed.org/series/A053RC1Q027SBEA

There's a long way to go down to normalize this situation. I'm not saying this will happen, but the downside potential is enormous.

Also, don't forget about the 50% of US GDP ($11T) that have been loaded into US capital markets (both debt and equity) by foreigners. This is also hugely out of balance: https://fred.stlouisfed.org/series/IIPUSNETIQ

[vimota]

I thought the same, and had to ask some friends to provide another point of view:

If a company like amazon generates very little corporate profit, is that unproductive growth? Aggregate corporate profits are not the only stat that matters when discussing economic growth/value.

[grecy]

> If a company like amazon generates very little corporate profit, is that unproductive growth?

Of course not. There would be more employees, more taxes paid, more buildings being built, more assets, etc. thus more money going into the economy.

I've always dreamed that companies should run with zero profit (like the outdoor store co-ops like REI or MEC in Canada). They could price their products so they don't make any "extra" money each year after all expenses and salaries, etc.

I think we'd live in a better world if a company like Apple didn't exist to make ever increasing profits, but existed just to create the products they create.

[TeMPOraL]

> They could price their products so they don't make any "extra" money each year

Isn't that precisely what you get from competitive pressure in a free market? Things end up priced barely above production costs.

> I think we'd live in a better world if a company like Apple didn't exist to make ever increasing profits, but existed just to create the products they create.

That would be a nicer world to live, true. Unfortunately, we've created a system in which the primary reason for a company to exist is to make profits - and then we pit companies against each other to minimize profits made. The end result is a lot of creativity unleashed in the process of innovating, cheating and defrauding your way into not being a commodity.

[grecy]

> 't that precisely what you get from competitive pressure in a free market? Things end up priced barely above production costs.

Evidently no. Companies are making hundreds of millions in profit every ear, they're paying their CEOs tens of millions as a "bonus".

They're they're making a lot, LOT more than just "barely above production costs"

[krapp]

We don't actually have a free market, though. Free markets don't exist in the real world, only the "perfectly spherical cow in a frictionless vacuum" world of economic models.

[TeMPOraL]

There is no competitive pressure within a company. CEO pay is usually an insignificant fraction of a company's revenue; there's enough inefficiencies both within the system and within the market to allow this to exist, even if the actual product of a company is a commodity.

The other part of my comment also mentioned that companies do everything they can to avoid being commoditized: that's another source of inefficiency/surplus revenue. The market is in flux; commoditizing takes time.

[bawana]

"CEO pay is usually an insignificant fraction of a company's revenue" What is insignificant? For example, the CEO of Aetna walked away with 500million. That's money that should have gone to insured, injured and sick people. What risk did he take that exceeded the risks of the children we sent to Afghanistan and Iraq?

[Jommi]

I really dislike seeing comments like this on HN, just utter lack of foresight into just the basics of economics or even just commenting. What "companies" are you talking about? What does CEO pay have to do with the subject at hand?

[grecy]

I'm genuinely asking questions about why the economy and setup is the way it is, and why can't we change it to something better.

Everything can be improved, and we should strive to improve everything. I'm very aware of companies that operate very well without making a profit. They add a lot of value to society, the employees get paid and they're even expanding (MEC in Canada). But no profit. Nobody who doesn't work there gets richer. So why don't Apple work that way. Why doesn't Comcast work that way.

CEO pay represents a huge surplus of money (profit) that wasn't needed. The products and services offered by the company could have just been discounted that much, or the employees could all have been paid more, not just one person.

[kingludite]

The postal service kinda works like that. It can make some profit in some countries but not much. In the US Amazon accounts for 40% of the parcels. Putting things into boxes and shooting some web is impressive but getting the boxes from A to B also takes some doing.

[gowld]

Dreaming that other people would gift money to other people (including you) is not a sound economics theory.

You are against join stock companies, but not interest bearing loans/bonds or arbitrarily high salaries for managers? Why?

[H8crilA]

This is what the government is. It's a large non-profit, in fact the largest player in the economy, that's always zipped to produce no profits. There isn't even any structure to distribute the profits (there are no "shares" of the government or anything of this sort).

The whole point of profits and investing is to hook up the "skin in the game" of investors to viability of project. That's the definition of capitalism.

[_dp9d]

> That's the definition of capitalism

It's interesting though that there are certainly extremely successful companies like MEC in Canada and REI in the US who don't follow this model.

Their customers are extremely happy. Their staff get paid. The y create excellent value for customers. BUT they don't make a profit. Nobody can get rich from owning a slice of it.

Why couldn't more companies be like that?

[H8crilA]

Amazon is truly exceptional, do not make a rule out of it. Bezos is kinda like Buffett, in their own league of master capital allocators. For example, Amazon got a lot of financial leverage on the "float" between credit card payments and sending the money to merchants. Again, kind of similar to Berkshire which is leveraged on the insurance "float".

Also, heavy CAPEX or any other form of internal reinvestment does not mean there should be no profits. Look at Google, Facebook, Apple, Microsoft - all those companies were bootsrapped mostly through internal cash flow. All of those companies were profitable when IPOing (just look at historic S-1s).

[ksdale]

Heavy CAPEX doesn't require no profits, but it can easily result in that.

[H8crilA]

If, over the long term, CAPEX spendings do not produce profits, it means that the purchased assets did not produce enough payoff to compensate for their depreciation charges. You could argue with the accounting depreciation rules (i.e. how much needs to be written off per year, i.e. you think the asset is longer lived than the accounting rules say), but the general idea stands - it is a sign of bad capital allocation.

[ksdale]

If the profits from the CAPEX just get plowed into more CAPEX, though, you could end up looking like you don't have profits for decades, and it isn't necessarily a problem as long as you're growing.

Edit: What I'm saying is that profit is a lagging indicator of CAPEX, and your lack of profit now could be the result of bad CAPEX 5 years ago, or good CAPEX 5 years ago, plus aggressive new CAPEX now.

[H8crilA]

I think you don't know what "profits" are, i.e. don't know accounting.

CAPEX is written down via depreciation charges over many years. I.e. if you buy something for $1M, and it has an accounting life of 10 years, you book $100k losses per year.

What you're thinking about is called "cash flow", not "profits".

[otoburb]

>>If, over the long term, CAPEX spendings do not produce profits, it means that the purchased assets did not produce enough payoff to compensate for their depreciation charges.

Even if CAPEX generates profits, if the returns were lower than your capital cost then company would have been better off not investing and returning that instead to shareholders.

[H8crilA]

Yes, that's the 101 of being a capital allocator, like a CEO or a CFO. Only invest into anything if the returns exceed your cost of capital.

Presentation on this very topic: https://youtu.be/c20_S-QgvsA?t=730

[gowld]

Shareholders would be better off, not company better off. Wage earners in the company got paid.

[alexpetralia]

It is not "unproductive" from the perspective of the economy, but it is "unproductive" (i.e. low-returning) from the perspective of shareholders. We would not expect to see share prices rising if corporate profits in aggregate are not rising (unless there is some financial engineering going on).

[jcfrei]

We would expect it under certain circumstances. One explanation could be falling interest rates. Lower rates on bonds incentivize investors to take on more risk (moving more money into equities) in order to still meet their return targets.

[H8crilA]

Or more directly into valuations: govt bond yields are a component of equity discount rates (discount rate = risk free rate + equity risk premium). Of course low bond yields should also mean a slow economy, and thus lower future cash flows. After all the risk free rate is approximately the nominal GDP growth. So I'm not sure how far should this argument go ...

[sokoloff]

Another is share buybacks (which I think are entirely fine).

Same amount of profits (DCF + discounted terminal value) spread over fewer shares implies a higher share price.

[gowld]

Not fine if the execs get paid bonuses measured in a certain number future shares.

[jcfrei]

I guess this would count as financial engineering though.

[alexpetralia]

This is a good point. I agree.

[zxcb1]

It wont, they just showed that they rather let the system explode than implode; the balance, proper self-organization, invisible hand etc, was lost ten years ago

[lotsofpulp]

History has plenty examples of bailouts. “Invisible hand” was never there to begin with, much less 10 years ago.

[zxcb1]

Sure. The point is that a gardener can not force plants to grow, neither can he create them by himself; only assist in the proper conditions for growth. There is such a thing as too much water and fertilizer which is more problematic than none at all

[H8crilA]

Sadly, I believe you're right, and this scares the shit out of me. To put it bluntly - we will not have capitalism any more. Capitalism must provision for and handle failures, and this is not currently allowed to happen.

[riffraff]

The real question is: was it ever allowed to happen? There have been bailouts in some form since forever, it seems.

[engineer_22]

can you provide a list of examples?

[H8crilA]

Everything the Fed, the BOJ, the ECB, the SNB and what have you are doing, reducing all the rates that they can:

  - starting from short riskfree rates [all since 1981, but problems surfaced only in 2008]
  - to long riskfree rates [all since 2008]
  - to corporate default rates [ECB since 2012, the Fed since 2020]
  - and in some cases, even to equity risk premium rates [BOJ and SNB since 2008]

Also China, but China is special, and has a much more fine grip on things that goes far beyond the general rates (they can target sectors specifically, or even individual companies).

Expect more alphabet soup of pump facilities to materialize. I don't bother listing them here, it's all the same (reduce this or that rate).

[jazzyk]

Yes, but it all started in 2008 (to me, the starting point was really the 1998 government bailout of a private business - a hedge fund LTCM [1]). It was all downhill from there.

Still, not "since forever", only since 1998, or so.

1. https://en.wikipedia.org/wiki/Long-Term_Capital_Management

[riffraff]

the example I was directly thinking of was Italy's IRI from 1933[0] which was a conglomerate directly aimed at restructuring failing public companies through nationalization, it kept doing it for decades. AFAIK other countries had similar national behemoths.

The US set up the Home Owners' Loan Corporation[1] during the great depression to refinance loans saving a lot of banks from disaster (tho helping common folks too), and there were also the savings and loan bailout in the '80s and '90s[2]. Chrysler was bailed out in 1979[3] and Lockheed in 1971.

[0] https://en.wikipedia.org/wiki/Istituto_per_la_Ricostruzione_...

[1] https://en.wikipedia.org/wiki/Home_Owners'_Loan_Corporation

[2] https://en.wikipedia.org/wiki/Savings_and_loan_crisis

[3] https://www.investopedia.com/articles/economics/chrysler-bai...

[pfraze]

If we assume that corporate value is relatively unchanged from 2014 and then assume that the government bails out the companies by paying off the debt, then the stock market's growth from 2014 would be a form of inflation, wouldn't it?

[alexpetralia]

Yes, asset inflation. Which we've seen (in corporate & startup valuations). We have not seen similar inflation of goods in the wider economy (except real estate, health care and higher education).

[jrs235]

>(except real estate, health care and higher education).

All also being assets. (Health care equating to health). Who has benefited the most from asset inflation? Those well off or the lower working class?

[jazzyk]

Real-estate is assets, of course.

But I think the inflation in health-care/education is caused by lack of competition.

As in - you can choose to not buy a new coat this winter, but you HAVE to buy health insurance. You HAVE to buy college education for your kid or otherwise s/he won't be able to ever start a family (working as a barista, or some such).

Also, none of these services were outsourced to cheaper location (because they can't. although a good number of people have been going abroad to get their medical degree, etc.)

[georgeecollins]

Not only inflation. Certainly earnings increased in many cases due to tax cuts and tax forgiveness, such as allowing US tech companies to repatriate money at reduced tax rates. If you assume the tax cuts will continue, the stocks are more valuable.

[eanzenberg]

Profits don't (really) matter. If your revenue is growing 100% YOY, and your profit is -10%, who cares? If your costs aren't growing as fast as your revenue, then it's easy to turn a profit if you choose. Companies choose not to because it hurts them long-term. They choose to grow and enter new markets as fast as possible to get a foothold.

[bulletsvshumans]

Growth only matters to the degree that it will eventually lead to higher dividends though, from the perspective of shareholders. At some point companies (or the companies that acquire them) need to yield a dividend or else it's all a Ponzi scheme.

[eanzenberg]

Yep, and some stocks are priced for a date decades away.

[robmccoll]

> If your costs aren't growing as fast as your revenue, then it's easy to turn a profit if you choose.

Doesn't that make a lot of assumptions about assets, expenditures, and business model?

If I start a business handing out $0.99 to anyone that gives me $0.90, I think I could easily grow revenue at a 10% loss for as long as investors were willing to fund it.

[eanzenberg]

If your business is selling $0.99 for $0.90, then its costs are growing FASTER than its revenue. You are describing UBER vs. someone like AMZN.

[john_moscow]

If your revenue grows 100% YoY and the profit keeps declining, your costs ARE growing as fast, as your revenue.

[burntoutfire]

Are blue chips like Coca-Cola entering new markets so much?

[eanzenberg]

People who invest in Coca-Cola are interested in dividend growth. People who invest in Amazon, Apple, Google, MSFT are interested in them entering new markets.

[mathnovice]

Profits do not need to go up for the value of a business to go up.