Objects in Motion
Corporate earnings are rising far faster than GDP. But corporate earnings oughtn’t go up faster than GDP, or not for long. In order for earnings to go up, sales must increase and/or costs must go down
Friday, February 21st, 2025
Bill Bonner, writing from Claverack, New York
For years, philosophers have wondered: ‘which came first, the chicken or the egg?’ Now we have our answer:
Dead birds don’t lay eggs.
When bird flu decimates the chicken population, the eggs disappear.
Having solved the chicken/egg conundrum, we move on to another breakthrough..
But first… we have to keep up with the dot-flow… making sense of the headlines as they appear. This from Associated Press:
Defense Secretary Pete Hegseth has directed the military services to identify $50 billion in programs that could be cut next year in order to redirect those savings to fund President Donald Trump’s priorities.
Other reports tell us that the ‘defense’ budget will be cut by 8% per year for five years = 40%.
Really. That’s what they say. Will that happen?
Not likely. Common Dreams:
In a statement issued Wednesday as headlines in major media outlets characterized Hegseth's memo as a striking call for "cuts," Acting Deputy Defense Secretary Robert Salesses described the proposal as a push for "offsets" that could be used to fund other military-related efforts favored by President Donald Trump, including an "Iron Dome for America" that experts have ridiculed as a wasteful "fantasy."
CNN noted Wednesday that "Hegseth himself called for an increase to the defense budget one week ago."
"While visiting Stuttgart, Germany," the outlet reported, "Hegseth said, ‘I think the U.S. needs to spend more than the Biden administration was willing to, who historically underinvested in the capabilities of our military.’"
And this from Dave DeCamp:
Pentagon Says Hegseth’s Order Will Redirect Spending, Not Make Actual Cuts
The Pentagon wants to shift spending to Trump's plan for an 'Iron Dome for America,' which will have a huge price tag and likely start a new arms race.
The whole ‘defense’ Establishment is set up to get bigger budgets, not smaller ones. And it’s very good at what it does — getting more money. That oughtn’t change anytime soon…
So, let’s let that dot metastasize while we resume our story, exploring why chickens (producers). eggs (output), and the people who buy them, should never lose sight of each other.
Also in the news this week is this from Charlie Bilello:
S&P 500 operating earnings are on pace to hit another record high (TTM), up 10% over the last year.
Today, we are in the ‘shoulds’ and the ‘oughts.’ Readers are forewarned: shoulds and oughts are not good ways to invest, at least not in the short-term. You might go broke while waiting for something that should happen to actually happen. But shoulds and oughts are important to understanding which way things are most likely to go, eventually.
A giant $850 billion object in motion (the ‘defense’ Establishment) ought to remain in motion until it is stopped by a more imposing object (such as bankruptcy or defeat in war).
Yesterday, we reported that corporate earnings are rising far faster than GDP. But corporate earnings oughtn’t go up faster than GDP…or not for long. In order for earnings to go up, sales must increase and/or costs must go down. So, we ask: from whom do these sales come? And from whom are these expense items cut?
The world of oughts is a tough place. It’s a place where you can’t have an egg without a chicken. And you must feed the the chicken or it won’t give you any eggs. If you don’t, in a matter of time, you won’t have any chickens either.
As we have seen, most people are getting poorer. How then are they able to spend more money? Corporations must pay employees. And they must buy their ‘inputs’ from other corporations. Employees are an expense item — the biggest one for most businesses.
But employees are also the buyers of US output. How then is it possible to increase sales without also increasing wage expenses? You gotta feed the chickens. And how can you cut expenses without also cutting into other corporations’ sales and profits?
Profits, sales, wages, GDP — these things oughta be self-regulating; they should never get too far out of whack, one with another. And if one goes too high, or too low, it’s a good bet that it will soon get back into line with the others.
Our source, Charlie Bilello, also tells us the chickens are flying high:
Everything is up! Stocks, bonds, Reits, High yield, Low yield, big companies, little companies …cryptos, schmyptos…and…there are now nine US companies with a market cap above $1 trillion: Apple, Nvidia, Microsoft, Amazon, Google, Meta, Tesla, Broadcom, and Berkshire. Seven years ago there were none.
But in the real world of stuff… there is only so much time…so much capital…so many customers and only so many eggs, apartments and automobiles.
If ‘everything’ is up…where does the ‘up’ come from? Who has less so that the owners of ‘everything’ (assets) can have more?
To be continued.
Regards,
Bill Bonner
I'm a pretty simple man with a novice's experience in the things where BPR and most of my fellow commenters excel. But from my roost, it reasons that with every dollar being worth less and inflation on the rise, it would follow that appearances would show everybody's pie is getting bigger, everywhere, when the measuring stick is those same shrinking dollars in an inflationary environment. If the value of the dollar is rapidly contracting and the "cost" of everything is going up, wouldn't the numbers of dollars required to just maintain the status quo on the front-end and back-end of companies (equities), products, payrolls, savings, materials, debt, etc. be greater and seem inflammatory to an observer whose referent is "the way things used to be and have always been?" Am I over-simplifying things?
Regardless - the chickens have the flu, the eggs are cracked and the feed is mostly sawdust. Maybe we can get a big orange rooster to come in and straighten out this hen house...
PS - Trump is down for a physical audit of the Gold "in" Ft. Knox and Musk wants to LIVESTREAM the vault doors as they open them up. Man, it's a NEW day in America and a GREAT time to be alive...
https://x.com/elonmusk/status/1892779555548443116?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1892779555548443116%7Ctwgr%5E2179eb19821d749b5c9416c4d2167df62b004022%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fwww.thegatewaypundit.com%2F2025%2F02%2Fpres-trump-announces-plan-inspect-fort-knox-gold%2F
Bill, don't you read the news? Companies are laying off alot of workers to improve their bottom line. I just read that Biden added over 2 million new government jobs in his first term. That is a big reason our debt jumped so much and those jobs do not help GDP (at least I think so, they keep changing formulas all the time). We likely have been in a recession for a while now and the massive government spending, obviously another reason for the huge debt, also kept the GDP above water.