Monday, September 28, 2009

The Minsky Cruise (part 3, Business)

After all, the chief business of the American people is business. President Coolidge

Gotta' love Google.

I was all set to open with the more familiar "the business of America is business" and decided to find the source. A quick search and I discover my error, and the correct quote. The speech containing the quote, The Press Under a Free Government, is worth a read if only to recognize the parallels to today.

But I digress.

The business of America is no longer business, but finance- as I discovered perusing the Flow of Funds data.

I've written previously about the increasing share of US domestic corporate profits earned by the financial sector so I'll just cut to the graph.

While non-financial domestic corporate profits have shrunk from a Korean War inspired 11% of GDP to average around 5% of GDP since 1970, the financial sector's profits have been growing.

As a % of equity market value the financial sector's stock is rising as well. The graph below depicts the ratio of non-financial corporate equity market value divided by that of the financial sector.

Just as we have voted in politicians who have facilitated the shift to Ponzi finance, we voted (with our money) for the institutions which make it possible.

The love affair with finance and disdain for what, during the tech boom, we called the "bricks and mortar" industry- and admittedly a failure, by some in those industries, to accept the transition to maturity- has inspired, for want of a better word, envy in the non-financial sector. While financial sector stocks seem to levitate on their own, non-financial sector stocks, if intent can be inferred from behavior, are believed to require a boost. I suspect the use of options as payment has something to do with this as well.

In the aggregate data, depicted below, non-financial stocks seem to disproportionately love the "stock buy-back" sufficiently that aggregate issuance is quite negative for the sector.

Additionally, the non-financial sector, since the mid-80s has- a true sign of envy- opted to copy finance, by breaking into that field. GE Capital and GMAC Financial are two prominent examples. The aggregate data for the sector, depicted below, shows the shift towards the increasing use of financial assets relative to tangible assets.

This, as Minsky predicted, increases the beta of the entire corporate sector to changes in financial variables.

To paraphrase Nixon, "we're all Ponzis, now."

Coming up, hopefully in the next day or two, a look at the financial sector alone, with a focus on commercial banking and a final post (for this series) on government and the missing $4.5Tln.