Home » Currency War » Welcome to the Currency War, Part 3: US Corporate Profits Plunge

Welcome to the Currency War, Part 3: US Corporate Profits Plunge

by John Rubino on August 1, 2012 · 20 comments

The euro is down big lately, which is to be expected. Over-indebted countries have traditionally used devaluation to keep their debts from crippling them.

The problem is that a cheaper currency is only a temporary fix because it invites retaliation from everyone else. For a real-world example of this process in action, consider what just happened to McDonald’s. For the past few years it has been turning crappy food into great numbers, in part by adding new restaurants in hospitable markets and in part because the dollar was relatively weak, which made the euros and yen McDonald’s earned relatively valuable.

But with the euro plunging against the dollar, these trends have shifted into reverse:

McDonald’s second-quarter profit falls, shares slide

(Reuters) – McDonald’s Corp reported lower-than-expected quarterly profit on Monday, hurt by a slowing global economy and the impact of a stronger dollar, and said sales growth at established restaurants would slow this month.

Results from the world’s biggest hamburger chain showed that even the most resilient restaurant operators were being hurt by the weak U.S. economic recovery and persistent financial woes in Europe — which are forcing diners to pull back on spending for meals away from home.

Shares in McDonald’s, which hit all-time highs of over $100 earlier this year, fell 3 percent to $88.83 in midday trading on the New York Stock Exchange.

Net income fell 4.5 percent to $1.35 billion, or $1.32 per share. The impact of the stronger dollar — which lessens the value of sales overseas for U.S. companies — cut 7 cents a share from earnings in the latest quarter, the company said.

Now extend this strong dollar/weak earnings narrative to Boeing, Monsanto, Cisco, and most other US multinationals, and suddenly the stock market, tax revenues, year-end bonuses, incumbent political prospects and everything else that makes life worth living for US elites start to look shaky. This is clearly unacceptable and will require a response. The dollar will have to go back down, and soon.

This will be accomplished with some combination of even lower interest rates, election year tax cuts, publicly-announced asset purchases or secret loans to favored banks, corporations, and political action committees. And it will probably work, lowering the dollar and raising the foreign exchange earnings of McDonald’s, et al.

But by then the Japanese and Chinese will be in full retaliation mode, which will beget even more ease from Europe. And so it will go until ending the currency war by returning to sound money becomes the least destructive option.

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  • Doug

    Exactly as James Rickards predicted. Many point to low interest rates, stocks doing ok and unemployment not appreciably worse as reasons Bernanke won’t embark on another round of QE, but the dollar impact alone will be reason enough before long,. It SHOULD bring down stocks too, but nothing is for certain on that front.

  • Bruce C.

    Here are few more ways to lower the US dollar to get those nominal gains back up there:

    The Fed can preempt the ECB tomorrow and announce that it will buy all new issuances of sovereign PIIGS bonds in perpetuity.

    This Labor Day the burning of an enormous pile of dollars can be broadcast worldwide from the White House lawn.

    The BIS can announce that from now on all commodities can be transacted in any currency.

    Dr. Bernanke can announce his conversion to Islam at Jackson Hole and declare all interest rates to be usurious.

    Start a rumor that the US will default on all foreign-held Treasury bonds after the election, unless Obama wins.

    Obama can also point out that, “You didn’t make your money!…the Fed did!…It’s just borrowed!”

  • Frank

    Why don’t we just print up another 500 trillion dollars and pay for free health care for the whole world?

    • jimbo

      That’s the secret that central banks don’t want people to know. Why work when money printed out of nothing will do?

  • robert ozaaine

    Million,billiion, TRILLION sounds all the same.
    Now in perspective that the average person can understand….
    1 trilliion seconds=32,000 years!

  • Shamus

    Bingo Jimbo! I’ve always said, why work for money, when the guy across the street gets billions of it for free from the central bank, then gets to loan it out and make interest! Who dictates WHO gets free money to be filthy rich from interest, and their children after them, and why? Why should I work and pay taxes so some banking mobster doesn’t have to? Did anyone else take the RED pill with me? Or is everyone on the blue pill?

  • sharonsj

    Lower interest rates for whom? Certainly not for me and my credit cards. Maybe a point or two lower if I wanted a mortgage–but people need to have a steady income to commit to a 30-yr loan. So only the banks are benefiting and they aren’t lending–it’s so much easier to either play speculative games with free money or stash it away to cover up insolvency.

    I’ve been wondering how many years it would take for corporations to realize that their greed was killing consumers. After all, you can’t have an economy that’s 70% based on consumerism if nobody has any extra money to buy anything. That’s why we’re toast.

  • paper is poverty

    Just saw a report that US export orders have just plunged at a rate only exceeded in the aftermath of Lehman, falling to levels last seen in 2008. We’re all going deeper into recession and manufacturing is falling and so on, but I’m sure the strong dollar isn’t helping.

    Still, I’m not sure how easy it will be to get the dollar lower, with Europe going from bad to worse. Short of Bruce C’s suggestions, anyway!

  • hjb

    i am in my 70’s my new philosophy: never vote again …its all a joke never buy anything new like a car or a stove ..old works better, pick up junk sell it in a flea market, dont bank anything cash your ss check right away …pay cash …dont be afraid to say i am poor,i can t afford it ..always ask for a discount …dont donate to charity… …be poor and they cant get you-to exploit you…when the crooks in all forms of govt realize that since they want us broke …they wont make money from broke people and start getting worried about it like we used to before we all went broke and stopped worrying about things …the debt crisis is not my problem ..i can walk away from my debt and/or my house ..drive my 9 year old car …andthen buy another clunker for $500 when this one dies …and then when all my credit cards are maxed out file chapter 13 and begin renting another dump they want to play this game lets give it to them

  • Jason Emery

    Unleaded reg. gasoline now back to $4/gal. ‘In season’ fruit, which for years was $1/lb, is now $1.50/lb. That is a 50% increase.

    This drought is destroying a lot of wealth. I don’t know what good it will do to print a lot of new money. I suppose they will do it anyway, though.

    I have an idea. Instead of spending a trillion on defense every year, why not plow that into wealth building activities, either through government programs, or indirectly, by cutting taxes and letting business owners develop new products.

  • Rachael

    I expect instead of returning to a stable monetary system, the solution will be to ‘move forward’ with an exponentially larger supra-national debt-based fiat currency that our children will have to deal with exploding in their faces.

    This is, after all, the track record of a plurality of adults in this country…..make it someone else’s problem if at all possible.

  • Jason Carter

    Earnings per share collapse and forthcoming recession should be no surprise to any readers here. It’s part of the business cycle and is about due late this year or 1st half of next year. The dollar will become stronger for a while until the Fed’s tipping point has been reached. With QE3, we will be starting from a higher baseline price in commodities than we did in 2008/09. Food/fuel/energy prices in the next few years will make the middle class feel poorer than they already are.

  • Ronald

    Hurry up,please, on the currency wars! I’m gearing up for a great celebraton. The sociopaths attached themselves to the intelectual prostitutes; the prior to pull off the “perfect” crime, and the later to climb up the food chain. They deserve eather other and they are destined to rot. Let’s hope that their future has similarities to that of Alexander Hamilton.

  • http://ronwagnersrants.blogspot.com Ron Wagner

    Help me out. The Euro started out at equal value to $1.00. It has been to almost $1.50. It is now about $1.23. So how is the dollar strong? How is the Euro weak. How is Europe in trouble, and we are as bad or worse? Please help me out here!

    • Willy2

      Think of this. Oil went up from about $ 20 in 2001 to over $ 140 in mid 2008. In the same timeframe Eur/USD doubled from 0.80 up to 1.60. That meant that in EURO oil did not go up sevenfold but a “mere” 3.5 fold.

  • Willy2

    Currency wars ?? What a crock !

    Yes, the US can try to print lots of money but it won’t help. The USD will get stronger in the coming months. In spite of all the printing the FED will do.

  • jmarshall74

    Hello. This is a cool way to see if this plugin is working properly.

  • Clem

    I think Rachael has it right. These international bankers feed off of the radical shifts in currencies and the ability to print at will. This is the ultimate usury. Metals are actively suppressed for this reason. I believe that the SDR or some derivative, will play an active roll in the future. Who knows what the exchange rates will be when a new reserve currency is deployed. My guess is that we will all suffer huge losses to these internationals as that is their nature.

    Real assets, that you can secure, will be worth more than the paper that it takes to purchase them now and in the the years to come.

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