April 1, 2022

US Companies Lost Real Money In 2021.

We're living in a world which, frankly, I thought I left behind some 40 years ago. That was the last time that inflation ravaged our country.

I hoped that we had moved beyond this scourge. And that better financial management created an economy that had banished inflation like the plague.

Unfortunately, that's not the case.

Perhaps the greatest issue that inflation brings is that it obscures, and distorts reality. You may think that financially we're all doing just fine.

When the reality is it's all just an illusion. As ephemeral as a thick fog.

Now, this week we got the third and final estimate of the Nation's Gross Domestic Product for 2021. Likely the country's most extensive financial report. Literally thousands of inputs, hundreds of pages of data.

But there is one number we need to focus on, the GDP Price Index. Their measure of inflation. It came in at just a smidge over 7%. Essentially we're saying that in 2021 the US had an inflation rate of 7%.

All the other numbers in the GDP Report reflect that inflation rate. So circle that number, underline if, and write it in red. Inflation for the US in 2021 was 7%. We will now use that inflation rate to measure literally every financial number that we see.

And here's where it gets so deceptive.

We're used to taking our financial reports at face value. If a company reports net profits of X. Well by golly, that's what it is: X Profit. But no more. Now we must first compare any financial number, with the rate of inflation to get a real number.

This is because we're dealing with a steadily declining currency. It's declining by the rate of inflation. That's what inflation really is. A measure of how much value your currency is losing each year.

Look at it this way. Suppose you began 2021 with $100 dollars, or $100 thousand dollars, or $100 million dollars. What was their comparative worth at the end of the year? Answer $93 dollars, or 93,000 or $93 million.

You lost 7% of your purchasing power in just a year. Gone, vaporized, disappeared, vanished.

That's what inflation really means. Stolen like a thief in the middle of the night.

So you simply can not compare those end-of-the-year dollars with the beginning of the year dollars. The end of the year dollar is only worth 93 cents.

And here's where it really gets interesting. And you'll see that what you hear in the media, is an awful long way from reality.

Now in today's discussion, we're just using rough numbers. And in rough numbers our economy last year grew by 7%. And you probably heard the media extol what a great growth rate that was.

No, it wasn't.

In fact, it really stunk. Adjusted for inflation, the economy didn't grow at all. That 7% growth, minus 7% inflation is exactly zero growth.

It gets even deeper when talking about last year's corporate profits. Headline: Corporate Profits in 2021 increased (by a fraction) to an all-time record of 21 trillion dollars.

But now let's adjust for inflation. Corporate Profits, that 21 Trillion, less the inflation rate of 7%. This means that in 2021 the real (after inflation) profits were approximately 19 ½ trillion. About 1 1/2 Trillion BELOW the year before.

That's the real number.

Corporate Profits in the US in 2021, in real terms, declined by 1 ½ trillion dollars from the year before. That may come as a shock. But such is the delusion that inflation brings.

All this couldn't happen at a better time.

We are just now starting the “Annual Report” Season. The time when most corporations report their 2021 results to shareholders.

And I really hope that you listen in on a couple of their conference calls. It's never been easier, just go to their investor relations page.

As you listen to the management tell what a wonderful year it was. Just remember to adjust every number you hear by that 7% inflation.

I think you're going to find, that things aren't as rosy as they're portrayed. Simply put this economy, and most of the companies reporting, barely have their heads above water.

When you account for inflation.