Saturday, November 18, 2006

Diverted Profits Distorting the CPI?

Sears just revealed that one-third of their before-tax and minority-interest profit "came from investments as sales fell." According to an article by Coleman-Lochner at Bloomberg, Sears is no longer just a retailer, they are now the "Lampert Hedge Fund." This is tongue in check, but there's some truth to it.

[Thanks to Sears for the logo.]

If Sears's and other large companies' profits are not coming 90% from sales but rather from investment activities, and because investments are not included in the CPI, obviously the CPI cannot reflect excessive monetary supply to the degree that money is taken out of the normal production cycle.

Hedging and derivative investing are activities that may be useful to some degree, but they also explode in times of excessive monetary supply. Somehow the excess seems to know how to work its way through the system and make some people very rich for a while, alighting on a few asset sectors, and then much of it just disappears into thin (hot) air -- which seems normal. Could this be because the market senses the hot-air money (Fama's Efficient Market Hypothesis) and channels it directly into speculation, most of it completely bypassing the normal production channels, and thus the CPI remains relatively unaffected? In the Great Depression, general prices were not rising; nor are they rising now.

This Sears example shows how production can take a back seat to profit from other activities, i.e. how capital can be diverted into less productive profit not reflected in the CPI. To take this one step further, this could confirm that the push-the-string Keynesian policies of the Fed may be causing the bubbles after all without their knowledge, because the statistics on which they judge the performance of their policy understate money creation and deform reality. The Fed has become a bunch of mathematicians who believe firmly in the accuracy of their statistical tools. They forget the old rule: "Garbage in, garbage out."

Sears is most likely not the only one doing this. Profits have been huge all over the business spectrum, and the GDP and wage increases seem only moderate in comparison. This could constitute a third source of the "hot bubble money" I've posted about here and here.


Blogger Idaho_Spud said...

Citigroup is pulling some odd stuff too - stuff they won't put in their 10-K report:

2:13 PM  

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