A building boom makes stock market profits look bigger than they are
One dollar of spending becomes a sale today but a cost spread over five to 10 years, helping explain the last two years of soaring earnings.
The Prof G Pod with Scott Galloway · The Week: The $45 Billion AI Fund That ImplodedThink of a dollar changing hands during a building boom. One company spends it on new equipment, and another company receives it for supplying that equipment. You might expect the two to cancel out, with one company's cost offsetting the other company's sale.
They do not, at least not right away.
That is the wrinkle described by investor Jim Chanos, a veteran short seller. The company doing the building rarely counts the whole dollar as a cost today. Accountants call it capitalized, meaning it is treated as a long-lived asset, like a factory or a data center, and then depreciated, or spread as an expense over five to 10 years.
The seller plays by different timing. Chipmakers like Nvidia, equipment makers like Caterpillar, and utilities supplying the project generally count the money as revenue and profit immediately. One dollar therefore shows up almost in full on the seller's side, but only in a small slice on the buyer's side.
Add that up across the stock market, and Chanos says the same dollar is "contributing to profits in a far greater extent than it does in a more normalized economy," when one company's sale is matched by another company's cost. He gives this mismatch as the reason profits for the broad S&P 500 index have surged over the past two years, a pattern he also ties to the dot-com building boom.
The takeaway is that earnings can look healthiest precisely when spending is most frantic. The costs have not disappeared. They are just arriving in small installments over the next five to 10 years.
Questions people ask
What does it mean to capitalize spending?
Capitalized means the spending is treated as buying an asset that will last for years, not as an everyday cost like wages or rent. Instead of subtracting the whole amount now, the company depreciates it, which means recording a little of the cost each year over the asset's useful life, here five to 10 years.
Does this mean the profits are fake?
No. In Chanos's description, the gap is timing: the seller books revenue at once while the buyer spreads the cost over five to 10 years, so more profit is recorded now with more cost to come later.