Umair Haque / Bubblegeneration
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Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.


 
Wednesday, November 24, 2010

Macro Perspective: Record Profits? Try Global Ponziconomy


Here's a suggestion. Today's so-called record corporate profits aren't. They're financial fictions, meaningless to people, socially useless, mostly illusory, from the perspective of representing authentic economic gains. In other words: today's global economy is creating thinner and thinner value.


Consider, for a second, a curious juxtaposition. The second chart represents (nonfinancial) corporate profits. The first, business sector debt outstanding. Though they might look similar, the scale of of the Y-axis in the first chart is an order of magnitude higher: trillions, vs billions. The scale of debt swamps the scale of "profitability".

So: what's immediately clear is that while "profits" are rallying back, debt never really diminished: deleveraging never sparked into a conflagaration. So while corporate income statements might be flush with "earnings", corporate balance sheets are still hung over with the debt of last decade's binge. What does accounting 101 tell us? That those earnings are going to be diluted by more and more onerous interest payments--especially in an environment where the real cost of debt is likely to spike (hi, Ireland).

(Sidenote: uh oh--that's also eerily like the story of corporate zombie Japan, where incentives for investment in innovation totally dried up, because forestalled deleveraging destroyed not just cashflow to invest in productivity enhancements, but, more deeply, investors' and managers' appetite to profit from it. Intuitively: if you owe the pawnshop your Dad's watch, you're probably not gonna take the risk of founding Google. Hence, (toxic) debt (never fully written off by banks or boardrooms) never ceased to come first.

Let's put that economically. In terms of returns, today's corporate profits aren't. If we juxtaposed earnings against debt for a moment: $800 billion of profits against $11 trillion of debt. That's a pretty poor return, by any standard (and, as John Hagel has pointed out repeatedly, it's one that's been falling for decades).

If we wanted to better it, how would we do it? Well, one way is to increase the numerator: to squeeze the last dribs and drabs out of our existing assets, and grow the $800 billion a little bit. The second is to attack the denominator, and bring down the $11 trillion of debt. Which do you think might be smarter, more productive, more sustainable, and yield a more explosive advantage? The iron law of diminishing returns might suggest in no uncertain terms: the second.

Hence, "profits" rallying back against debt never having deleveraged simply say: all we're doing is improving yesterday's abysmal marginal returns marginally, by squeezing a little bit more blood from an already weathered, beaten stone.

That's the macro picture. Let's examine the micro picture for a moment, to draw out the contours of thin value--what happens when it grows.

Which industries are growing the most strongly? Well, apart from the Fed (think: bailouts), the industries with the sharpest growth this year have been Petroleum, Transportation & Warehousing, and Machinery (and, to a smaller extent, Autos, but that's driven by bailouts, and likely unsustainable).

So here's a sharper picture. Not only are corporate profits illusory in an economic sense--but perhaps also in a strategic one, in terms of growth. The industries above aren't exactly bellwethers of a better tomorrow, aren't exactly textbook examples of the industries that will power the economy of the 21st century--they're the titans of the industrial age, propped up on their last legs.

If, in fact, you were really cynical, you might even say: they're the industries that are global dumb growth: the debt-driven hyperconsumption of toxic, transient trinkets produced, transported, and marketed in self-destructive, prosperity-defeating ways--with the resultant overleverage, unemployment, instability, and decline.

Hence, I'd suggest: rising so-called "corporate profits" are what I call thin value: low-quality profit. It's profit that's worth less than the paper it's printed on, to people, communities, society, and shareholders alike (unless you think investing in GM's a great idea).

If you want an intuitive feel for that, apart from Ireland, consider the following:

"...almost 40% of households have been affected either by unemployment, negative home equity, arrears on their mortgage payments, or foreclosure."

So here's my tiny suggestion. We've built a global ponziconomy: one that creates largely thin value. When thin value grows, the result is dumb growth: not prosperity, but it's mirror image, austerity.

*Welcome to the 21st century. It's not about making slightly better stuff. It's about making stuff radically better.

-- umair // 4:11 PM // 5 comments


Comments:

I hope the 21st century will be less about “stuff”; more about realizing the infinite (very thick) value of what is already inside us all; and the desire to give it to others.
 
The ghost of Jacob Marley said it best: “Mankind was my business. The common welfare was my business; charity, mercy, forbearance, and benevolence were, all, my business. The dealings of my trade were but a drop of water in the comprehensive ocean of my business.”
// Anonymous @stevencpotter // 1:24 PM
 

I hope the 21st century will be less about “stuff”; more about realizing the infinite (very thick) value of what is already inside us all; and the desire to give it to others.

The ghost of Jacob Marley said it best: “Mankind was my business. The common welfare was my business; charity, mercy, forbearance, and benevolence were, all, my business. The dealings of my trade were but a drop of water in the comprehensive ocean of my business.”
// Anonymous @stevencpotter // 1:32 PM
 

How would you place advanced biotech in such a landscape?
- I'm thinking: In a few years, we can spend all our savings on the body as we grow older, to buy more GOOD years (grow a new heart/lung/liver/tooth/etc). As these products and services get better and cheaper, more people will do more body repair, to have a good life for as long as possible.

As a result, the material product value will literally be incinerated as we die. - And each generation will have to start from closer to scratch, for better or worse.

Isn't there a paradox here?
Are such businesses essentially "radically better" or "slightly better"? Or is this just a curse for everybody but the single individual customer in each case, and the biotech company?

- Will businesses like this at all fit in your picture?
// Blogger Ivar Mykland // 1:52 PM
 

Interesting: I've read articles pointing out the gap between "record" corporate profits and stagnant wages, but this is the first I've seen pointing out the comparison between corporate profits and business debt. It's sad and depressing, and given the issues with Ireland, Spain and Portugal, the theme of massive debt and financial restructuring isn't going away soon.
// Anonymous Taylor Davidson // 6:15 PM
 

Umair, I'm going to buy your book. You are onto something real, and you seem like a really smart guy. But do yourself a favor--"it's" is a contraction for "it is." "Its" (no apostrophe) is an impersonal possessive. You're making a common mistake in your usage.

It's a small thing, I know, but its presence in your otherwise brilliant sentences undermines your credibility.

I will follow you on Twitter.
// Anonymous Jim Sullivan // 1:59 AM
 
 

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