The Insanity of Annual Profit Growth Expectations


You don’t have to be a math major to realize the insanity of the ridiculous profit growth expectations that have taken over big business and machine politics in the United States. You just have to do the math.

Wall Street has inculcated investors with the ridiculous idea over the past 20 years that they should only purchase shares in so-called “growth stocks,” like World-Com, Enron, and Global Crossing – all of which are now either nonexistent or corporate shells that serve as case studies for corporate excess, fraud and duplicity.

A growth stock must generate annual profit of at least 8 percent, and companies jump through all kinds of hoops to meet that criteria. The two political machines have begun adopting similar goals for the annual growth rate of their political donations.

It doesn’t seem like an unreasonable burden until you actually add it all up. 

A company with $100 million of annual profit today that succeeded in sustaining an 8% annual growth rate, compounded quarterly, would be generating profit of $76 trillion a year by 2187 in an inflation-free environment. That’s more than the entire gross world product right now. The value of all goods and services on Planet Earth is about $73 trillion.

In layman’s terms: It’s an insane expectation. It can’t be done. Not by every company in the world working together, and certainly not by a single company.
gNevertheless, chief executive officers regularly jump aboard this corporate equivalent of a perpetual gerbil wheel and their companies inevitably wind up consuming themselves. Just as a body worked too hard for too long will begin to consume its own muscles.

The CEOs of wannbee growth companies seem to start out by cutting labor costs via lying off their own people or offshoring their jobs to low-wage nations like China to create the illusion their business is still growing. Once these opportunities are exhausted, they quickly segue into needless acquisitions and cannibalizing their own brand reputations.

That’s when they start monetizing customer loyalty via suicidal nonsense like debit fees, excessive DVD late charges, and airline bag fees.

Boston Market, which filed for bankruptcy in 1998 after only 13 years in business, is a perfect example of this madness. The company had a delicious product, but kept raising its prices and cutting portion sizes every year until customers were paying $15 for the equivalent of an airline meal.

Duh. moz

The painful truth is that many publicly traded companies are no longer in the business of making a good product, but exist solely to serve investors by growing their profits at this breakneck clip. We’ve even established this practice as a legal requirement for chief executive officers. One known as their “fiduciary duty to shareholders.”

Any CEO who fails to put profit growth first, last and always can be sued by investors for failing to fulfill this duty. That wasn’t a bad thing in 1990, but the rise of the Internet and advent of expedited electronic trading has created a world where that goal is now pursued in the short-term, rather than the long-term. 

As a result, publicly traded companies are having trouble transitioning from growth stocks into mature, stable businesses. Many are forgoing strategies that produce longevity and stability for the reckless pursuit of short-term growth in an insane bid to retain their status with investors as growth stocks. Instead of planning 10 years out, they’re planning four quarters out. A fiscal quarter is three months long. 

In short, the moment they become a publicly traded company with a stock ticker they stop focusing on their customers and products and begin focusing solely on manipulating their stock price. That becomes their business.
What does a real growth stock look like?

It looks like Google, Microsoft, Amazon, Netflix and Research in Motion did in their early years, when they were new and fresh. 
The wheels come off when growth companies try to remain forever young. They often wind up cooking the books, much like an aging starlet might resort to cosmetic surgery so she can continue to play the same little girl roles, rather than simply maturing into older roles.

Research in Motion, the Canadian company that makes the Blackberry smart-phones, and Netflix are perfect examples of this madness. Both had solid, business models loaded with loyal customers. 

Instead of transitioning from growth companies into mature businesses and stable employment machines, they rolled the dice and lost. RIM has all but abandoned its core audience the past three years in a failed attempt to match the growth Apple is deriving from the iPhone. Nevermind that iPhone-style touch-screens are anathema to Blackberry’s core audience of business users, who favor real keyboards. 

These aren’t old companies along the lines of a General Electric or Ford. The first Blackberry came out in just 1999. That’s the same year Netflix began its subsciption-based DVD service. 
Like RIM, Netflix wasn’t satisfied with a dominant share of the budget-conscious home movie audience. It needed to remain forever young. So, it hiked its prices in the middle of an economic slowdown that disproportionately impacted its core group of loyal customers.

You didn’t need to be a genius to figure out that move wasn’t going to have a happy ending. Somehow, Netflix CEO Reed Hastings seemed to forget that his core audience originated in the backlash against the movie rental late fees charged in the 1990s by Blockbuster. Yet another mature company that sought to cannibalize its own customers to remain forever young and wound up bankrupt and stupid in 2010. 

The Blockbuster video rental chain was founded in 1985 and grew rapidly before berryimploding under the weight of its exploitation of its own customer base.

Why did it keep hiking late fees incrementally?

Profit growth. 

Are you sensing a pattern here?

None of these companies seem to be able to transition into mature businesses because they’re too busy chasing the growth company status that has become the equivalent of corporate crack. They simply can’t put down the profit growth pipe and are dying early because of it.

We’re not talking about unprofitable businesses here. These are profitable businesses that are destroying their own futures to secure a short-term financial high.

It’s insanity.
It’s not just the business world that’s being impacted by this intellectual poison. The adoption of private-sector business practices by the two big political machines has created similar behavior among our nation’s elected leaders. A behavior comparable to the unnatural cage-scratching and circling exhibited by unhinged zoo animals.

In the political world they grow political donations instead of profits, but they do it with the same insane expectations. That’s why we’re now seeing the wholesale exploitation of the American people by both Wall Street and Washington, D.C. 

There’s simply no other way for the vast majority of companies and political machines to sustain an 8 percent annual growth rate year after year.

Why do they do it?

Because they’re functioning like crackheads, heroin addicts and steroidal athletes by trading all their tomorrows for just more today. A cloud of voracious locusts also comes to mind.

That’s why the Republicans and Democrats in DC don’t want a $20 campaign donation from an average voter anymore. It’s barely worth the trouble for them to process. They’ve reached a point in their revenue-growth cycle where the only thing that makes a difference is big bricks of corporate cash, and they need bigger bricks every year.

Do you really think President Barack Obareedma is going to raise $1 billion for his 2012 re-election bid by hitting-up little old ladies and college kids for $20 here and $20 there?
Hell no. He’s going to make like every other machine politician and hit-up the Fortune 500 for big bricks of cash.

All of which raises a simple question: how does a machine politician obsessed with donation growth manage to convince a CEO obsessed with short-term profit growth to give them $100,000?

The only way a CEO can make that contribution without violating their fiduciary duty is to get back more for their money than they donate. They often accomplish that goal by pilfering the public treasury via bailouts and no-bid government contracts.

That means allowing big companies like Fluor to shave millions from Hurricane Katrina relief funds by serving as intermediaries for cleanup and emergency housing contracts; allowing predatory lenders and crooked-foreclosure mills to push millions of Americans out of their homes on behalf of sub-prime lenders like Bank of America and Citi; handing no-bid contracts to companies like Halliburton, which former Vice President Dick Cheney’s once led; and allowing for-profit colleges like Bridgepoint Education to secure Pell Grants in the names of hopelessly inept students recruited at homeless shelters. 
In short, it means allowing industry to regulate itself. mur

What’s the logical outcome of this reckless behavior by our business and political elites?

Complete and utter societal collapse.

Financial expert Ron Hera estimates that the U.S. economy will fall to third-world status by 2032 if our elected officials in DC don’t get their collective head out of their collective ass.

That’s where both Wall Street and our two political machines are headed right now. The only question is whether they’re going to bankrupt us first. Judging from the more than $7 trillion banking sector bailout, the answer to that question appears to be a resounding “yes.”

It’s already being done. Big political donors in the banking community are being allowed to take trillions in tax dollars even while they’re pushing middle-class taxpayers out of their homes and into the street.

All ofblago which raises another interesting question: where are these corporate crackheads and their political hookers going to move after they’ve consumed every dollar of middle-class wealth in the United States? Where are they’re going to live after they’ve ruined this country?

My money is on Palm Island in the Persian Gulf.

That’s the community for the super-wealthy being created off the coast of Dubai. It’s the place where Michael Jackson sought refuge after he discovered that the rest of us were not OK with his sleeping with young boys. 

Palm Island is a perfect destination for ruthless tycoons like New York City Mayor Michael Bloomberg, who hails from Boston and already spends most of his weekends in Bermuda, and the Koch Brothers, who stopped being Americans like me and you a long time ago. They’re citizens of the world now.

Our reckless elites have already begun transforming the United States into a plantation state for the middle class, much like North Korea. A police state where the truth, our rights as citizens, and our access to medical care and the news are all for sale to the highest bidder.

We graduatepalm from college drenched in student debt in the 99 Percent and wind up spending anything we manage to save during our working careers the first time we need medical treatment without health insurance. At which point we have to listen to Rupert Murdoch’s stooges tell us that our health care system is superior to the socialized medicine of true democracies like Canada and Sweden.

It’s time to face the painful truth that our beloved United States is now basically the exact opposite of a functioning Society. Webster’s defines a society as a “companionship or association with one’s fellows” and as “a voluntary association of individuals for common ends.”

Our nation has been transformed into a place where Bloomberg and his fellow machine politicians can actually justify the suspension of our rights to free speech and association by citing the need to cleanup an outdoor park. Where a mayor who has never served in the military can order police to critically wound military veterans who have served several combat tours.

I don’t know about you, but I didn’t sign up for any of this police state garbage and I’m tired of running scared. I want my country back.

It’s time to put the mad bulls of Wall Street and Washington, D.C., in a strait-jacket.

color bull

Illustration by Cheryl Gross