The real estate credit turmoil brings a strange statistics to be discussed. It shows that the real estate’s share is only 5% of the GDP.

I think that GDP figures are a good reference to evaluate production capacity. But, this kind of figure is not a good estimator for profits evaluations.

When I used to analyze company’s profits I use to rely on a very different model. This is the model:

Let’s sum the balance account of every company around the world. Let’s put together all personal balance account too. Although there are a lot of people that do not make any balance account, for this propose let’s make it for them and sum here. Finally let’s sum the account for public and any other form of companies, people or governments that can hold any kind of possession.

When we look to the resultant asset we can closely see the earth planet.

There are some things that must be eliminated as the economic and financial assets with a liability correspondent. We can do that because we’re inside the same balance sheet. This is a normal rule!

Now, let’s try to see how to generate profits.

To generate them we need to CREATE some new valued asset. We need to register it at the right side of the balance sheet as PROFIT. But pay attention. There is some asset that has a very short term of life. So we would introduce them to the right side and as soon as possible we take them off. The result is no contribution to the huge profit for the long run.

So the PROFITS WE ARE LOOKING FOR IS THE RICHNESS THAT CAN BE MAINTAINED ALONG TIME.

We can find a lot of stuffs related to GDP that has a short term life. We can include in this group the food production, a lot of the services production like all the insurance services, patrimonial guard, medical services and personal services.

This kind of thing is used to transfer asset among the parties involved to them, but they do not increase richness for the long term for the universal balance sheet, at all, as the sum balanced showed above.

We must see this universal balance as the basis to achieve the average balance to people and companies. If it has poor profits the average balance will do that too!

Let’s pay some more attention to a production of microcomputer. If we produce 140M each year and depreciate 140M at the same period we are not accumulating richness anymore, although we can be accumulating richness if the new computer has a higher price than the old one or if we are producing 150M and depreciating only 140M.

The accumulating richness impact use to be small at human made products that have more than five years old. New products trend to accumulate more richness and generate more profits at the accumulated balance sheet we made early in this essay.

But there is special item that can generate long term richness. This special stuff is the real estate!

When we convert rural area to urban area we gain a huge new value that didn’t suffer any depreciation along time. When we put a building over it and make a lot more money. This case can depreciated in 25 years.

We need to pay some more attention here. We increased the number of new buildings in the recent years, and we increased their prices too.

All this created real estate value is financed to the buyer. So the buyer gets a liability and put this asset in his balance sheet. Here, there is no richness variation and no profit too.

The building company use to register all this richness. It is so great that this company can pay some salaries and some more costs to do that. This way this richness creation is distributed to the society players. But there are a lot of salaries paid in this richness chain.

I was astonished when read some report saying: “But investors must remember that US corporate profits as a percentage of gross domestic product are already at their highest level for decades”.

WOW. The model introduced early is extremely compatible to that!

But it says a little more: The profits will not drop to the average years. It will drop proportional to the real state sloping drop. This is the real profit generation curve that works when prices are increasing and must work when they are dropping too! This way, THE US CORPORATE PROFITS AS A PERCENTAGE OF GROSS DOMESTIC PRODUCT WILL NEED TO BE UNDER THEIR AVERAGE LEVEL.

Well, this observation is a very bad scenario. We probably will see a very poor earning’s season in the near future. And this is the main item for the decision making at companies. Probably they will be firing people to hold their companies at black.

When we get to this point we will see that the industrial and commercial plus the real estate economy stays at the same boat that will help us across those trouble waters.

I think all we need a good lucky to cross this near future with this economic turmoil that is coming.