Why investors are worried about a profits squeeze in 2022

Bumper earnings are already in the bag. Now costs are rising, and growth could be slowing

It is mid-july, so the football season in England will start soon. 

You probably hadn’t noticed it had ended. 

The earnings season, when listed companies in America reveal their quarterly results, comes round with similarly tedious frequency and also never seems to stop. 

The second-quarter season that kicks off this week ought to stand out, though. 

Public companies in aggregate are expected to reveal the largest increase in profits since the bounce-back from the Great Recession of 2008-09.

Optimism about earnings has driven share prices higher in the past year. 

But financial markets are relentlessly forward-looking. 

And with bumper earnings already in the bag, they now have less to look forward to. 

A rally in bond prices since March and a sell-off in some cyclical stocks point to concerns about slower gdp growth. 

A plausible case can be made that the earnings outlook might worsen as quickly as it improved.

Start with the bottom-up forecasts for profits by company analysts. 

They expect earnings per share for the msci world index of stocks to rise by 40% in 2021, according to FactSet, a data provider. 

That is a good deal higher than at the start of the year, when the forecast was around 25%. 

A slowdown to a growth rate of 10% is expected in 2022. 

Then again forecasts tend to start out at 10%, a nice round number, before being revised upwards (as in, say, 2017) or downwards (as in 2019) as news comes in.

Profits swing around a lot. 

For big businesses, a lot of costs are either fixed or do not vary much with production. 

Firms could in principle fire workers in a recession and hire them back in a boom so that costs go up and down with revenues. 

But this is not a great way to run a business. 

A consequence of a mostly stable cost base is that, when sales rise or fall, profits rise and fall by a lot more. 

This “operating leverage” is especially powerful for companies in cyclical businesses, such as oil, mining and heavy industry. 

Indeed, changes in earnings forecasts are largely driven by cyclical stocks.

If global gdp growth falls, then profits will fall faster. 

There is already some evidence of a slowdown. 

The output and orders readings in the global manufacturing purchasing managers’ index (pmi), a closely watched marker of activity, fell in June. 

Global retail sales surged in March, but have gone sideways since. 

The evident slowdown in China’s economy may be a portent, writes Michael Hartnett of Bank of America. 

China emerged from lockdown sooner; its pmi peaked earlier; and its bond yields started falling four months before Treasury yields did.

Slower economic growth is one part of a classic profit squeeze. 

The other is rising costs. 

A variety of bottlenecks have pushed up the prices of key inputs, such as semiconductors. 

Too much is made of this, says Robert Buckland of Citigroup, a bank. 

Input prices typically go up a lot in the early stages of a global recovery. 

Big listed companies usually absorb them without much damage to profits. 

Rapid sales growth trumps the input-cost effect. 

The real swing factor is wages, which are the bulk of firms’ costs. 

The recovery is barely a year old, but there is already evidence of a tight labour market.

In America the ratio of vacancies to new hires, a measure of the difficulty firms have in filling jobs, reached a record in May. 

Businesses that were forced to close during lockdowns have lost some workers to other industries. 

Others are dropping out of the labour force altogether. 

Thanks to the recent surge in the prices of assets, including homes, some people are choosing to retire early, says Michael Wilson of Morgan Stanley.

An obvious remedy for rising costs would be to raise prices. 

Though inflation is surging in America, that reflects price rises for a small number of items. 

Many businesses tend not to raise prices straight away. 

They are mindful of losing customers to rivals who don’t raise prices. 

And there are administrative costs to changing prices frequently. 

A study publishedin 2008 by Emi Nakamura and Jon Steinsson, two academics, found that the median duration of prices is between eight and 11 months. 

Prices of food and petrol change monthly but those of a lot of services only change once a year.

A profits squeeze is not certain. 

Any number of influences could give fresh impetus to global gdp growth: a bumper infrastructure bill in America; more policy stimulus in China; or some concrete signs that supply bottlenecks are easing. 

Still, while the earnings season now under way ought to be a sunny one, margins look vulnerable. 

The time to embrace central bank digital currencies is now

Money must adapt to an era of new technology— but it has to work for society as a whole

Martin Wolf 

© James Ferguson

How should central banks respond to digital technology? 

This has become an urgent question. 

The answer is partly that both they and governments have to get a grip on the new wild west of private money. 

But it is also that they must now introduce digital currencies of their own.

The state must not abandon its role in ensuring the safety and usability of money. 

The idea that it should is a libertarian fantasy. 

Moreover, action is now urgent. According to a paper by Gary Gorton of Yale and Jeffery Zhang of the Federal Reserve, innovators have now created more than 8,000 cryptocurrencies.

Gorton and Zhang divide these creations into two main categories: unbacked “fiat cryptocurrencies”, such as bitcoin; and “stablecoins”, backed one-for-one by government fiat money. 

Both are problematic, in different ways.

Writing in the FT, Roger Svensson argued that fiat cryptocurrencies meet none of the criteria for usable money. 

The Bank for International Settlements (BIS) argues in its latest annual report that such “cryptocurrencies are speculative assets rather than money, and in many cases are used to facilitate money laundering, ransomware attacks and other financial crimes. 

Bitcoin in particular has few redeeming public interest attributes when also considering its wasteful energy footprint.” 

In my view, such “currencies” should be illegal.

Stablecoins are different. As Gorton and Zhang argue, money must be usable in payments with “no questions asked”, even in a crisis. 

Historically, there have been runs from banks for this reason: it is why they are backed and regulated by the state. 

The same concern arises with stablecoins. 

In a crisis there may be “runs”, similar to those from money market funds in 2008. 

Thus, either stablecoins must be backed one-for-one by central bank money or their issuers will need to be regulated as banks.

More important than the new “currencies” is the entry of Big Tech into payments. 

This offers benefits, but also dangers. 

Current payment systems are costly, with small cash payments even now cheaper than credit or debit cards and international payments notably expensive. 

Moreover, digital payment systems are not available to all, even in high-income countries. 

In principle, these new players could bring big improvements. 

But this development also threatens fragmentation of the payment system, erosion of privacy and even exploitation of consumers.

It is the job of central banks (with other regulators) to ensure that the revolution in digital payments works for society as a whole. 

There is now the possibility — necessity, in my view — of augmenting cash with central bank digital currencies.

Here, a big issue arises: should CBDCs be used solely in wholesale transactions or also by retail customers? 

The answer has to be the latter. It has always been problematic that the benefit of holding safe government money goes to private banks, not the public (other than via cash). 

Now, this can and should change, to the public’s benefit.

Yet there are further choices to make. 

Should retail customers have CBDC accounts at the central bank, thereby bypassing retail banks altogether? 

Or should there be a hybrid form, in which retail customers’ CBDC accounts are held at the central bank, but administered by private institutions? 

Or should retail CBDC accounts be held by private institutions, with central banks only handling wholesale settlement, as now?

A related choice concerns whether retail CBDCs should be account-based or take the form of a digital wallet. 

The former, which the BIS favours, would mean that the CBDC would not be a direct substitute for cash. 

Additional questions concern systems of identification. 

On this, the BIS favours a system built on digital, not paper, IDs. 

Other important issues concern protection of privacy, the role of private payment networks and, in particular, the facilitation of international payments.

Ultimately, the goal should be faster, safer and cheaper payment systems, available to all. 

It is crucial that the natural monopoly of money and the public good of a payment system does not morph into private monopolies of digital giants. 

The intermeshing of public purpose with the private interests of banks has been bad enough. 

If the same happened on a bigger scale with, say, Facebook, it would be even worse.

A huge question is what the emergence of CBDCs might mean for private banks. 

Evidently, in a crisis, money might run into CBDCs from other liquid assets, including conventional bank deposits. 

Yet one can also argue that the possibility of owning completely safe CBDC accounts could be a good thing. 

The moral hazard created by public guarantees to private banks could then be ended and so the financial system would be reconfigured without it.

Technological revolutions open up new possibilities. 

But they do not determine the architecture of the system. 

It is essential that public bodies ensure a safe and sound payments system available to all. 

It is necessary that they regulate, or even eliminate, dangerous new players. 

It is vital, above all, that they ensure that the promise of new technologies for faster and cheaper payments underpins a better monetary system, while also improving intermediation.

Choices have to be made. 

In the process, old players may disappear and new ones emerge. 

But the fundamental requirement is the same as always, namely, reliable systems in which the public can place their trust. 

Central banks will play a leading role in ensuring this. 

They can do so by embracing the possibilities of the new technologies, while preventing a chaotic free for all. 

The BIS provides an excellent outline of the issues. 

Now is the time for progress.

Jay Taylor: What Gold Volatility, Stanley Fischer, And CBDC Can Tell Us About The Future


Excerpted from Jay Taylor’s MiningStocks.com:

The insights below were gathered from an excellent article by Matthew Piepenburg of Matterhorn Asset Management on “the implications behind central bank gold purchases (rising), negative real yields (falling), and Stanley Fisher’s Fed-speak (cringing).”

Central Banks Are Buying Gold Like Mad! Why?

You really need to watch what central banks are doing rather than what they are saying because, more often than not, their words are designed to get the masses to behave in a manner that best protects their shareholders and governments that depend on them. 

The least of their interests is the public as a whole. 

In the U.S., the Fed’s shareholders are major money center banks. 

So while the Fed and western central bankers show no desire to buy gold (although Germany demanded delivery of what they owned overseas during the last few years), nations that are building their gold reserves are those not aligned closely to the U.S. Empire.

China and Russia are not noted on the above chart, as they have been huge hoarders of gold over the past decade. 

Thailand, Hungary, and Brazil have been the really big buyers of physical metal during the first six months of 2021. 

In the first half of 2021, global gold reserves at the central banks expanded by 333 tons, which is almost 40% above the five-year average. 

These three nations are very familiar with the pain of importing U.S. inflationary policies and thus seeking to store their wealth in real stores of value. 

The current pace of post-World-War-II central bank gold buying is already set to surpass the previous record set in 2018 (651 tons).

Negative Real Rates & the Need to Buy Gold

The mainstream media will attribute the purchase of gold by central banks to COVID rather than to the fact that the Fed and other central banks are caught in a debt vortex from which they cannot escape. 

Starting with Alan Greenspan after the 1987 stock market crash and the creation of the President’s Working Group (AKA the Plunge Protection Team), the Fed committed itself to printing money as a “solution” to keep stock prices elevated. 

The theory was that high asset prices (stocks, real estate, etc.) had a “wealth effect” that would keep the demand side of the economy strong and thus could be used to avoid major market declines. 

Or if one occurred, as in 1987, 2000, and 2008 then the Fed could simply stimulate higher prices with debt-based fiat money.

At first this strategy appeared to work like a charm as the Fed paddled its way to the edge of the debt vortex. 

But keep in mind that fiat money is manufactured with debt, starting with Federal Government debt that is funded either by savers who purchase Treasuries or, in the absence of serious purchasers of U.S. Treasuries like now, by money created out of thin air by the Federal Reserve. 

Had U.S. debt levels stayed below 100% of GDP, the future might not seem so bleak, but in general, the 100% level is considered the point of no return in the vortex in which a country’s currency is likely to get flushed down the drain to its end. 

It is at that point where the burden of interest starts to weigh heavily on a country’s ability to service its debt.

In 2019, Fed Vice Chair Stanley Fischer observed that “It would not take much of a shock to growth…for the debt ratio to balloon and spark concerns about debt sustainability.” 

When Stanley Fischer spoke these words in 2019, the U.S. debt to GDP ratio was at 105%. 

Since then, it has grown to 130%. In other words, the central bankers are running out of time.

Another dynamic that is sucking the U.S. dollar down to the point of “no return” in the vortex are negative real interest rates which must be maintained and actually accelerated now to keep asset prices elevated, which in turn is essential to keep the entire economy from collapsing. 

Forget any kind of meaningful real growth with inflation rates now accelerating with no end in sight. 

So the Fed has paddled its way into the debt vortex from which there is no non lethal way of escape. 

Not only are rates negative now but they also are going to become much more negative, and that is hugely bullish for gold and silver. 

As noted by Mr. Piepenburg, “Looking forward, unless real (i.e., inflation-adjusted) rates rise measurably, gold prices will rise sharply.”

The Battles to Come Over the Benefits of Working From Home

Not having to commute was the equivalent of a big bonus for many employees. In the future, bosses may expect more hours in exchange for remote work, an economist says.

By Austan Goolsbee

               Credit...Danlin Zhang

Millions of Americans have gotten a taste of working from home during the pandemic, and, boy, have they liked it.

Almost two-thirds of U.S. workers in a McKinsey survey at the start of the year said they wanted to work from home at least three days a week when the pandemic was over.

But battles are coming. 

People tend to think the fights will be over whether employers will allow remote work in the future. 

But a more vexing struggle may be over whether employers take most or all of these newfound benefits for themselves — not by prohibiting remote work but by expecting more hours from employees once the labor market is not as favorable to workers as it is right now.

Yes, some employers will probably fight the remote work trend. 

David Solomon, the Goldman Sachs chief executive, called remote work an “aberration,” and the firm’s bankers returned to the office in June. 

Across town, James Gorman, the Morgan Stanley chief executive, announced that his company’s employees would return by September and said, “If you want to get paid New York rates, you work in New York.”

But more frequently, employers seem desperate to find workers and unlikely to want to anger them. 

The Labor Department reported that the number of open positions reached a record of 9.2 million in May. 

With offers of signing bonuses, higher wages and expanded benefits, many workers are in the driver’s seat right now. 

It’s easy to see employers agreeing to these workers’ desires. 

Indeed, many commentators have declared that the United States is entering a “golden age” for remote work.

Many economists believe that increased work from home will last because it can raise the productivity of employees, thanks in part to fewer pointless meetings, less distraction and, most of all, a lack of commuting.

Think about how big a deal this is for a typical worker. The saved gasoline and forgone restaurant meals, work clothes and dry cleaning sessions can add up to thousands of dollars a year.

Skipping the commute is the biggest prize of all.

According to the Census Bureau, Americans spent, on average, a record 55.2 minutes a day commuting in 2019, before the pandemic.

One in 10 spent more than two hours a day traveling to and from work. 

In dollar terms, not having to commute five to 10 hours per week is like getting a 10 to 20 percent raise. 

For someone with average hourly earnings in 2021 (over $30), that time is worth $7,000 to $15,000 per year. 

Looked at another way, the monetary value of the saved commuting time would be one of the biggest tax cuts the middle class had ever received. 

If your pay is higher than average or your commute is longer, your benefit is worth even more.

No wonder so many people want to work from home.

But will workers who get to stay home receive the full value of this bounty, or will employers take it for themselves?

It’s not hard to see how employers could. 

With all the commute time freed up, what is to stop them from simply asking employees to work longer from home — to prepare that report before the meeting starts in the morning or to answer emails or contact clients or file those forms at all hours of the day or night? 

Blurring the lines between work and the rest of life does not have to benefit workers in the end. 

Indeed, it was the thing that worried people about working from home before the pandemic began.

Economists call this an “incidence” question: who ultimately benefits from a windfall. 

It’s just like a tax incidence question: Economists routinely analyze whether consumers or sellers truly end up paying when, say, a state raises its sales tax.

The first rule of incidence is that it depends on the conditions in the marketplace. 

The incidence of the working-from-home bounty will depend on whether labor remains scarce over the long run and on how powerful the employers are. 

Who needs the other side more? 

If workers have many options and can quit jobs that encroach on their time, they will tend to keep the bounty. 

If employers can choose among lots of workers, working from home may end up being much less favorable than it first seems.

The job market seems tight right now, and if employers put extra burdens on workers, it would probably be a serious error. 

They would have a hard time attracting people and would probably face a wave of resignations. 

But will that still be true in a few years, when things are back to “normal”?

The last 40 years of wage growth in the United States provide a note of caution. 

For decades, median pay tracked average worker productivity — the output generated by the typical worker — quite closely. 

Then, starting in the 1970s, this correlation began to break down. 

From 1979 to 2019, the average productivity of workers rose 72 percent, but median pay rose less than one quarter of that — only 17 percent.

There is considerable debate among economists about why pay and productivity seem to have diverged. 

Some think the relationship remains strong despite the shift in the general aggregate numbers. 

Some cite one or more of these factors: globalization, technological change, or a change in the balance of bargaining power due to the declining strength of unions or the rising concentration of employers.

Beyond the subtleties, though, the basic issue is simple. 

Corporations claim a greater share of the national economy than ever before. 

If the last 40 years of productivity growth ended up benefiting shareholders and corporate profits more than it did wages, the same thing could very well happen with the newfound productivity benefits and time savings of working from home.

So now may be the perfect time to savor the little things — reading the newspaper in your pajamas, having an extra cup of coffee and simply not having to deal with traffic. 

Just know that even if you aren’t wearing real pants, your employer may soon be telling you to get back to work.

Austan Goolsbee is a professor of economics at the University of Chicago’s Booth School of Business.