Too Fast and Too Furious

According to the May 4^th Fortune, the Fortune 500 (top U.S. corporations) had aggregate profits in 2006 of $785 billion, a plump but not as phat $645 billion in 2007. In 2008, the number fell to $98.9 billion, a staggering 87% fall from two years before. And we all know that this rapid fall really accelerated in the final quarter. Effectively for every dollar of profit in 2006, there was 13 cents in 2008. At its current pace, the 2009 profit decline should make that number even worse.

Great, big companies doing stupid dog tricks with idiotic financial structures. Who cares? We know that the biggest money losers fell into two categories: financials (duh) and, here’s the one most folks don’t see in the headlines directly, “consumer cyclicals.” Fortune defines this sector as “anything your normally like to do or buy but can be put off.” This would include cars, trips, appliances, remodeling, clothing, sporting goods, tickets to events, restaurants, etc. The obvious.

And one of the reasons the profits in non-financials also fell so fast and so hard is that with new and improved manufacturing equipment and computer controls, American productivity had soared like an eagle before this meltdown, generating per-worker profit margins that produced exceptional earnings… but when consumers stopping buying, the workers were still there, and the margin per worker fell like a stone off a bridge. In short, corporate America couldn’t lay people off fast enough to keep up with the crash in consumer demand.

When the layoffs began to accelerate (still behind the falling profit curve), a swinging sword of fewer people left with jobs to buy, fear of job loss or wage cuts from those who remained and actual cuts income for almost everybody, began slicing and cutting at the economic cords that hold us together. All this as the credit markets collapsed and the financial sector literally disintegrated beneath our feet. A dust swirl turned into a tornado.

This reality also shows you why hitting bottom, much less recovery, takes so long to “fix.” With 70% of the American economy based on individual consumers, and with unemployment the last part of hitting bottom (the trailing economic indicator), trying to rebuild consumer confidence in their future, restore their willingness to buy delayed “consumer cyclical,” is a Catch 22. Hence the government throws a few stimulus bones (tax credits, etc.) to the consumers, but it really has to fix the structures that provide the jobs first. But the structures that provide the jobs don’t fix until the consumers are ready to participate again. Americans saved with the “equity in my house,” but that value has evaporated. And those who had 401k plans lost value there by the ton.

It’s a long arduous trail back to any semblance of stability. We’ll get there, but we will see a lot of “false starts” – easily spotted in bear market rallies. The fact is that we all need to figure out how to survive in this new “reset” world. There’s a place, but we just have to work hard to find it.

I’m Peter Dekom, and I approve this message.