Corporations Face The Double Whammy
Producer prices are increasing faster than consumer goods. We have more excess capacity for consumer than producer goods.
In response to earlier bouts of commodity-price deflation, many industrial material plants were shut down in the late 90's, high tech was in, making widgets was not.
When the economy picked up, the demand and price for raw materials increased. Due to the shutdowns, there was so little capacity, manufacturers were able to raise their prices.
Companies have been able to pass along some of these price increases to consumers. Alas, there is too much competition in the retail end. When you compete with Wal Mart and Home Depot, the margins are thin.
The falling dollar has caused the price of some imports to rise, particulary, raw material inputs, but not those from countries whose currency is pegged to the dollar.
If retailers can't pass along the price increases, corporate profits will be severely squeezed, which would be mostly bad for stocks.
Whether jobs are created or not, stagflation will take its toll on the producer prices. In addition, the dollar must strengthen and bonds must be sold to finance our debts. Therefore, interest rates will rise.
When rates rise, the net present value of future earnings, cash flow and dividends automatically falls, and this generally causes the market to decline.
Compounding this situation, no job or real wage growth means less consumption, no pricing power, profits get squeezed, more downward pressure on stocks.
Looks like someone better wake up in the board room, stop spending money on M&A, stock buy backs and outsourcing. The green needs to be spread around at home, creating jobs and higher wages.
Otherwise, its a double whammy on Corporate America.
In response to earlier bouts of commodity-price deflation, many industrial material plants were shut down in the late 90's, high tech was in, making widgets was not.
When the economy picked up, the demand and price for raw materials increased. Due to the shutdowns, there was so little capacity, manufacturers were able to raise their prices.
Companies have been able to pass along some of these price increases to consumers. Alas, there is too much competition in the retail end. When you compete with Wal Mart and Home Depot, the margins are thin.
The falling dollar has caused the price of some imports to rise, particulary, raw material inputs, but not those from countries whose currency is pegged to the dollar.
If retailers can't pass along the price increases, corporate profits will be severely squeezed, which would be mostly bad for stocks.
Whether jobs are created or not, stagflation will take its toll on the producer prices. In addition, the dollar must strengthen and bonds must be sold to finance our debts. Therefore, interest rates will rise.
When rates rise, the net present value of future earnings, cash flow and dividends automatically falls, and this generally causes the market to decline.
Compounding this situation, no job or real wage growth means less consumption, no pricing power, profits get squeezed, more downward pressure on stocks.
Looks like someone better wake up in the board room, stop spending money on M&A, stock buy backs and outsourcing. The green needs to be spread around at home, creating jobs and higher wages.
Otherwise, its a double whammy on Corporate America.
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