Home » Currency War » Welcome to the Currency War, Part 4: Corporate Revenues Plunge

Welcome to the Currency War, Part 4: Corporate Revenues Plunge

by John Rubino on October 25, 2012 · 13 comments

The Eurozone meltdown has sent capital pouring into (temporarily) safe haven currencies like the US dollar, which rose by nearly 12% between October 2011 and August 2012.

This sounds like a good thing for the US but it’s not, because US multinationals lose big when the dollar pops. Assume, for example, that you’re making computers in California and selling them to Germany, and the dollar goes up by 10%. Suddenly your computers are 10% more expensive, which makes it hard to sell as many as you expected. And those that you do sell are paid for with euros, which are now worth 10% less than they were a few months ago. When you convert those euros to dollars in order to pay your bills, your revenues are 10% lower than they should be. Your costs, meanwhile, are mostly in dollars, so your profit ends up being far lower than you expected.

Now combine this margin squeeze with an order slowdown in Europe and China, and extend it to the whole S&P 500 and you get the following:

Firings Reach Highest Since 2010 as Ford to Dow Face Sales Slump

Ford Motor Co. (F) and Dow Chemical Co. (DOW) joined a growing number of companies firing thousands of workers as sluggish U.S. growth and Europe’s deepening recession lead to a persisting slump in sales.

North American companies have announced plans to eliminate 62,600 positions at home and abroad since Sept. 1, the biggest two-month drop since the start of 2010, according to data compiled by Bloomberg. Firings total 158,100 so far this year, more than the 129,000 job cuts in the same period in 2011.

Falling corporate profits and mass layoffs combine to lower federal tax revenues, which puts pressure on Washington to fix its strong dollar problem. As yesterday’s Wall Street Journal explained it:

Some Hard Numbers for the Fed to Focus On

Wags in the market were quick to label the Federal Reserve’s latest open-ended stimulus effort “QEternity,” but all things have to end. Trillions of dollars are riding on when that may be.

If the Fed is taken at its word, it will err on the side of caution before winding down its bond-buying program and will keep interest rates near zero until mid-2015. Traders who track bets on interest-rate futures and swaps say the market began to call the Fed’s bluff last week, implying an earlier, late 2014 tightening of policy.

Instead of when, Wednesday’s statement following the Fed’s latest two-day meeting may shift the dialogue to what it would like to see happening before taking its foot off the gas.

Charles Evans, president of the Federal Reserve Bank of Chicago, said recently that there should be no change as long as unemployment stays above 7% and inflation below 3%.

That presents another problem, though: The market takes official statistics with a grain of salt, and so should the Fed. For example, the unemployment rate fell in two months to 7.8% from 8.3%.

“How can you have an explicit target over data that’s so soft and subject to revision?” asks Jim Vogel, interest-rate strategist at FTN Financial.

Conspiracy theories by former General Electric Co. chief Jack Welch aside, any number of official indicators can look very different well after their initial release. But one number almost never subject to revision is corporate revenue.

That is painting a scary picture, in contrast to a string of positive surprises recently in economic data. Since peaking at more than 20% in the second quarter of 2011, year-on-year growth in collective sales for the 10-largest companies in the S&P 500 has been sliding. Last quarter, it went negative for the first time since the recession, based on preliminary figures, falling by 4%. If not for Apple Inc., the drop would be 6.5%.

More broadly, 63% of S&P 500 companies that have so far reported third-quarter results have missed revenue forecasts, Thomson Reuters says.


Some thoughts
Can an economy grow if its biggest corporations are shrinking? Maybe, but it would take one hell of a housing boom along with a resumption of public sector hiring, neither of which actually make a society richer. A home eats rather than builds capital, no matter what your realtor tells you. And government spending is almost never “investment”. So replacing business profits with personal and public consumption would raise reported GDP but in reality would make us poorer and more indebted, setting the stage for a bigger crisis down the road.

So the dollar has to fall, thus shifting the strong currency burden to our trading partners. Quantitative easing, of course, is designed partly as  a currency war weapon. But we’ve already fired that gun for three years: Federal debt is rising by about $1.5 trillion a year, bank reserves are soaring, historically low mortgage rates have produced a tsunami of refis…and it’s not working. The dollar, though off a bit this month, remains too high for corporate comfort.

But QE is pretty much all that’s left, unless you count capital controls, which are generally a disaster for multinational profits, and mass debt liquidation, which is another word for capital “d” depression. So the next administration will be left with no alternative but more of the same on an even bigger scale.  If $10 trillion doesn’t do it, we’ll try $20 trillion.

This is crazy of course. But when you’re staring into the abyss, crazy becomes a relative concept.


  • QEternity

    QEternity, and Beyond for Super-Printer Bernanke.

    Buy gold.

  • Bruce C.

    JR writes, “If $10 trillion doesn’t do it, we’ll try $20 trillion. This is crazy of course. But when you’re staring into the abyss, crazy becomes a relative concept.” As soon as I read this it occurred to me that perhaps this is why the Japanese were the first to initiate QEternity. Not because they were the first industrial economy to become over indebted, but because their currency units are so small. Could be primarily a psychological thing. Isn’t a yen worth only about a penny, or is that not until next year? Seriously, Japanese economists are sounding like astronomers these days and the rest of us are just catching up. Finally, the Fed and the US Treasury are using fractions of trillions on their balance sheets instead of unwieldy billions. That provides a lot more breathing room now, because 20 seems a lot less than 1,000.

    Perhaps the Fed’s desire to lower the dollar is why Bernanke keeps warning Congress to avoid the “fiscal cliff” by not reducing spending or raising taxes. Congress couldn’t be more craven and irresponsible if they do that (well…I don’t want to exaggerate) so that’s probably a sure thing. I wonder if global investment flows will pile into Treasuries again if that happens, or if they will go directly into gold instead.

    If Romney wins then he will get to implement his one idea that’s different from Obama’s, which is to officially declare China to be a “currency manipulator”. I can hardly wait.

    If the Fed would just transmit a few extra zeros to all the personal checking accounts in the US then both domestic consumption would increase AND it would lower the dollar.

    • Reality_check

      Bernake (or any other Federal Reserve board member past, present, or future for that matter) is promoting actions he’s not using in his own household if he said not to reduce spending and to raise taxes. Spending by the goverment should absolutely be reduced! Taxes should be frozen at a flat rate of 20% of income so that its fair for everybody.

  • Tom

    The superliner USS America is losing forward momentum. Corporate profits are stalling out and QE merely operates the bilge pumps. All that’s left now is to send checks to everyone. Mr. Bernanke said he’d do it and he will spend another $10T if he must. Buy what you need now and get your lifeboat ready.

  • Michaelprotects

    “We expect to see 5% GDP growth next year….no really, we mean it this time.”
    LOL@ all the companies that banked on promises like this the last few years and got hammered.

  • ContrarianView

    The assertion that a strong currency is bad for exports is as overused as it is wrong. Yes, it makes senses logically, that a strong currency is bad for exports because it makes them nominally more expensive.
    Yet, observations of the real world yield an entirely different picture. Germany, before the introduction of the Euro, had a strong currency and yet experienced second to none export strength. The USA has had a weak currency for decades. If conventional wisdom was correct, US exports should be strong. Yet, the USA runs increasing trade deficits year after year.
    It seems to me that nominal corporate cash-flow increases from exports are insufficient to support required, productivity boosting capital investment. Or in simple terms, a falling currency erodes savings. What purchasing power remains does not buy enough stuff.

    All the falling currency provided was inflation and misery.

    • http://www.facebook.com/people/Dan-Buckles/100000913763806 Dan Buckles

      Trade deficits are created with bad trade deals, not currency wars………….

      • ContrarianView

        Trade deficits arise when an entire contry lives above its means! It consumes more then it produces – plain and simple. ‘Bad trade deals’ are sympton of the underlying sickness at best.

  • Reality_check

    Barring all the fancy economic terms like QE, GDP, and Fiscal Cliff? Everybody needs to balance their checkbook. Its simple math. If you spend more than you make your debt will pile up on your back until your back is broken. Right now the economic giants are feeling the hurt in their lower back and are popping some QE pills in hopes of feeling some relief. Things are not going to improve until all the major economies face their debt for what it truly is. Debt is only an asset (or puts money your pocket) to the banking world. For everyone else big or small its a liability (or takes money out of your pocket). Goverments of the world! Balance your checkbooks!

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  • http://www.facebook.com/people/Dan-Buckles/100000913763806 Dan Buckles

    Either you go in and nationalize the banks now and break them up, or you wait for one of them to fail, and watch the cascade effects of that. But too big to fail is going to fail again, as sure as the sun sets in the west. You know the saying when the government shows up, run, well it’s now when JP Morgan shows up, run, and fast the other way. As fast as the FED Bails them out, their debt grows even faster with their rent seeking, fraudulent, behavior.

  • Godzy

    “If $10 trillion doesn’t do it, we’ll try $20 trillion.”

    Or just stop giving money to banks for them to sit on, and actually make QE4 a popular quantitative easing by giving the money to the ones who will use it: the people. Sure, there’ll be inflation (this time), but it will restore part of the US internal economy. As for international trade, yes it will be harder, which means Americans will buy more US products. Who says it’s bad?

    Now, on the long term, QE is a monetary trick. It applies to a broken monetary system. Tricking the economy (or finance not, as this money doesn’t go to the real economy) will not do for actually having a reliable monetary system. Once the monetary system isn’t fixed, we’ll have booms and busts of growing magnitude.

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