This week, rather than focusing on inflation in the form of prices rising around the globe, I thought we’d focus a specific form of inflation, namely, that of inflated earnings.
Indeed, with earnings season fully underway, we’ve already seen some stellar results from the likes of General Electric (GE) (see earnings call transcript here), JP Morgan (JPM) (see earnings call transcript here), and Citigroup (C) (see earnings call transcript here).
- JP Morgan: All time record earnings of $17.4 billion, earnings growth of 48% from 2009’s results.
- Citigroup: Annual earnings of $10.6 billion. First full year of positive earnings since 2007.
- GE: Total earnings of $13.2 billion, an increase of 15% from 2009’s results.
These three companies, despite their supposed differences, all have a common theme in their results. That theme is:
Making money by lowering loan loss reserves.
I realize this sounds like mumbo-jumbo. It is. In plain terms, what this means is that these companies are writing off the money they’ve kept in the proverbial rainy day jar to cover any losses that might occur from the loans in their lending portfolios (yes, GE continues to lend money via its financial arm, GE Capital - the same arm that nearly took the company under in 2008).
Let me give you an example. Let’s say that my rainy day jar contains $10,000 to cover any unforeseen problems. Now let’s say that one day I decide that I only need $5,000 to cover unforeseen expenses. Does this random mental calculation mean I’ve made more money and need to report $5,000 more on my tax return that year?
However, this is exactly how GE, JP Morgan, and Citigroup generated their “stellar” earnings. In JP Morgan’s case, the bank did this with $2 billion, roughly 11% of its 2010 earnings. This was on par with GE’s gimmicky $1.4 billion, or 10% of annual profits. In contrast, Citigroup pulled out all the gimmicky accounting stops, lowering loan loss reserves by $2.2 billion, or 20% of 2010 earnings.
Put another way, $1 out of every $5 that Citigroup reported in earnings was non-existent. And $1 out of every $10 GE and JP Morgan reported was non-existent. Thus, the message Big Business is sending to the world right now is clear:
If you can’t actually MAKE the money, just MAKE IT UP.
I continually hear arguments that stocks are somehow cheap at today’s levels. Just skimming over the results for JPM, C, and GE, I don’t see how anyone can claim to have an accurate valuation of ANY of these companies. To value a company you need some clue as to its earnings potential. All of these companies are black boxes.
This is just another layer of the great financial Ponzi scheme that is the US stock market. Bogus earnings, fictitious accounting, outright fraud, insider trading, backroom deals - the whole thing is just one huge house of cards propped up by one thing and one thing only…
The Fed’s liquidity.
Take this away and the whole thing comes crashing down. Some commentators see this situation and claim that the market will never collapse. I couldn’t disagree more. Liquidity has a price. And that price will ultimately be the US Dollar.
Remember, the US's Federal debt is now at $13+ trillion. And if you include unfunded liabilities like social security and Medicare, you're talking about $70+ TRILLION in total debt on the US balance sheet.
Let's be blunt here: the US will NEVER pay these debts and liabilities off. And once the financial world finishes pummeling the Euro, we're going to see the US Dollar and Federal debt markets implode.
I cannot tell you when this will happen. All I can say is that it will happen. And when it does, inflation hedges across the board will EXPLODE higher.