James Saft

A look at company earnings implies it is a great time to be a corporation in America, but for investors a rising savings rate and the threat of deflation mean that, ugly and risky as they are, government bonds looks good in comparison to stocks.

So far it has been a pretty remarkable earning season in the U.S. Almost 80 percent of companies reporting have beaten analysts’ estimates and profits among the largest companies are up more than 40 percent on the same period last year.
Perhaps even more remarkably, companies are managing to trouser a record 10.2 cents in every dollar of revenue after operating costs, according to Standard & Poor’s.

That’s the rub – profitability growth is outpacing revenue growth, which has been 9.0 percent, implying that the gangbusters pace of profits is more due to cost cutting and efficiencies than a sustainable expansion in anyone’s business model.

So far, stock market investors seem to like it. The S&P 500 is up nearly 10.0 percent since its early July lows and has gained about 4.0 percent since the reporting season kicked off in earnest. Then again, earnings seasons are usually kind to stock, suspiciously kind.

It is almost as if someone pulled the plug on the feed of economic news to stock investors while allowing the earnings beat stories to keep on coming.

Apparently, the U.S. economy is being held back by massive uncertainty over new regulation, future taxation and the deficit and how it will be handled, a state so frightening and confusing that investors won’t invest, businesses won’t hire and nervous consumers have taken to their beds.

That, at least, is the account of Dallas Federal Reserve President Richard Fisher, who, in a speech last week, blamed fear of the arbitrary exercise of power by those in government for slowing the economy and putting those who make, employ and spend in a “defensive crouch.”

“For some time now in internal discussions with my colleagues at the Fed, I have ascribed the economy’s slow growth pathology to what I call ‘random refereeing’ — the current predilection of government to rewrite the rules in the middle of the game of recovery,” Fisher told business leaders in San Antonio.

We may just possibly have an explanation for how British property prices have held up so well though the crisis: fraud.

One of the puzzles of the past year is the way in which British house prices have managed to recover in value despite still being extremely expensive relative to both British earnings and historical precedent. While house prices are down a bit more than 15 percent since their peak, on the Halifax measure, they have actually risen 6.3 percent in the past year, not the best vintage in British economic history.

Even more astounding, a British house now costs 4.76 times average earnings, down from the silly 5.85 times in early 2007 but still 20 percent above a historical average which itself is inflated by two bubble periods. How, you must wonder, do these people afford those houses?

An interesting contrast is shaping up in global trade, where some indicators of the movement of raw materials are crashing even as exports from China and air traffic continue to show outstanding strength.

Depending on your reading of the data you could decide that the threat of a double-dip recession is overblown or, perhaps more simply, not a threat but a promise.

First, the good news, at least if you are exposed to Chinese exporters. China said last week that export sales rose a stunning 43.9 percent in June from the year before, taking the trade surplus to $20 billion, its highest in eight months.

How are European officials orchestrating the bank stress tests like Pacific islanders speaking into coconuts and waiting for cargo to drop from the skies?

They both make the elemental error at the heart of all cargo cults; they mistake necessity for sufficiency and hope that imitation and affect will make up for a lack of substance.

Most often associated with the south Pacific after World War II, cargo cults are religions whose practitioners try to use magic to produce the results of more powerful technologically sophisticated cultures.

Join us for a live chat today at 1 p.m. ET with James, who will be taking questions about his piece.

Call me a default-ista.

For a huge number of borrowers, be they U.S. homeowners or the sovereign nation of Greece, a default or radical rescheduling of debt might just be the best, most practicable option.

More to the point, default in many of these situations may be not just in the best interests of the debtor but of the economy as a whole.

If you are trying to decide whether to fret about inflation or deflation, don’t bother: you may just get both.

Yes, in the spirit of these austere times, it is a two for one offer; deflation comes first, followed by an almighty inflation after central banks press the “go nuclear” button on the quantitative easing machine.

It seems clear that, at least in the near term, the stars are aligned for deflation. Rather than lancing a massive debt bubble, policy-makers have added to it and the intense pressure to clean balance sheets has spread from corporations and households to nations.

Banks around the world must refinance more than $5 trillion of debts in the coming three years, a massive rollover that poses threats to financial stability and growth.

The need to replace these debts, which are medium and long term, will place pressure on bank profit spreads and in turn may either prompt deleveraging, where banks sell assets that they can no longer economically finance, or simply lead to a bout of credit rationing, where borrowers must pay more to borrow, thus crimping investment and economic growth.

For banks in the UK, according to the Bank of England Financial Stability Report, the refinancings amount to about $1.2 trillion by the end of 2012.

Asked about 175 years after the fact what he made of the French Revolution, Chinese Premier Zhou Enlai is said to have thought for a moment and concluded: “It is too soon to tell.”

Tell a U.S Congressman up for reelection or an unemployed auto parts worker in Ohio the same thing about China’s new policy to give the yuan more latitude in how it trades against the dollar and, once you’ve picked yourself up off the ground, you’ll have a different answer.

China on Saturday said it would end the yuan’s currency peg to the dollar, allowing it to trade more freely. It also made clear that no big move was forthcoming, preparing the way instead for “gradual” appreciation.

China’s massive supply of cheap labor may at last be drying up, a development that in time will bring higher wages, inflation, a stronger yuan and help to right dangerous global imbalances.

If these trends hasten financial liberalisation they could eventually set the stage for a broader Chinese bubble.
The formerly extremely unequal balance of power between workers and employers in China appears to be shifting.

Workers for a Chinese company which supplies Honda with auto parts have struck and successfully won large wage increases. Other strikes have followed, and firms have often been quick to compromise.