What Happens When Phantom Profits Vanish?
by Charles Hugh Smith
As the U.S. dollar strengthens against other currencies, the phantom corporate profits generated by a devaluing dollar will vanish.
One of the dirty little secrets of the stock market rally is that the rising corporate profits that powered it are largely phantom profits. Why are they phantom? Because they are artifacts of currency devaluation, not an increase in efficiency or production of goods and services.
Though few domestic observers make mention of it, the large, global U.S.-based corporations are now dependent on non-U.S. sales for about 40% of their revenues (50% and up for many companies) and virtually all their profit growth. Overseas sales are made in the local currency: the euro, yen, renminbi, Australian dollar, Canadian dollar and so on, and the profits are stated in U.S. dollars on corporate profit and loss statements.
In 2002, 1 euro of profit earned by a U.S. global corporation equaled $1 in profit when converted to U.S. dollars. That same 1 euro profit swelled to $1.60 in 2008 as the U.S. dollar depreciated against the euro. That $ .60 of profit was phantom, an artifact of the depreciating dollar; it did not result from a higher production of goods and services or greater efficiencies.
This is why profits earned in non-U.S. markets have risen so dramatically even as domestically earned profits have stagnated. The U.S. dollar has declined dramatically against the currencies of our major trading partners, boosting phantom profits across the board when the non-U.S. profits are converted to U.S. dollars on corporate profit and loss statements.