Ama­zon econ­omy helps ex­plain para­doxes fac­ing in­vestors

Out­look of ex­pen­sive stocks and bonds con­trasts with an ever an­grier pop­u­lace

Muscat Daily - - FINANCIAL TIMES - By John Authers

The para­doxes of the US con­tinue. Last week brought the fol­low­ing: Fur­ther all-time records for the US stock mar­ket, re­newed warn­ings from the former Fed chair­man Alan Greenspan that bonds are in a bub­ble that is bound to burst, yet an­other pos­i­tive re­port on the US jobs mar­ket that showed em­ploy­ment ris­ing, and amid all of this, a fur­ther fall in con­fi­dence in Pres­i­dent Trump.

Elected to re­vive the for­tunes of a huge group of mid­dle-, and work­ing-class Amer­i­cans who have been left be­hind, Trump ap­pears now to be at risk of los­ing them. Mem­bers of his party seem far less scared of him than they were six months ago, and far more are pre­pared to thwart him.

The para­dox of boom­ing mar­kets, good eco­nomic data and deep­en­ing so­cial anger and re­sent­ment has only deep­ened since the post-cri­sis re­cov­ery be­gan in 2009. To rec­on­cile these fac­tors, we need to bear two things in mind. One is that the in­ter­ests of in­vestors and of work­ers are dif­fer­ent, and cur­rently di­verge more than at any time in gen­er­a­tions. The sec­ond fac­tor was drama­tised a week ago when, for a mat­ter of hours, Ama­zon’s founder Jeff Be­zos was hailed as the world’s rich­est man.

Let us start with Ama­zon. The com­pany, and all it rep­re­sents, dom­i­nates the land­scape and the cul­ture. It also dom­i­nates the hopes and fears of busi­nesses. The lat­est edi­tion of the satir­i­cal news­pa­per The Onion, a spook­ily ac­cu­rate gauge of pub­lic sen­ti­ment, car­ries a spoof piece by Be­zos head­lined: ‘My ad­vice to any­one start­ing a busi­ness is to re­mem­ber that some­day I will crush you’.

More sci­en­tif­i­cally, anal­y­sis by Bloomberg of cor­po­rate ex­ec­u­tives’ com­ments in earn­ings calls found that in May, June and July, Ama­zon was men­tioned a ‘stag­ger­ing’ 635 times. Pres­i­dent Trump came up only 162 times while wages - the great con­cern of the pop­u­la­tion at large, and of the Fed­eral Re­serve - came up only 111 times. The pre­oc­cu­pa­tion with Be­zos has in­ten­si­fied over the past month. Busi­ness is far more wor­ried about Be­zos than about Trump - in­for­ma­tion that is un­likely to cheer the pres­i­dent.

Be­zos also cast a shadow over the strong jobs num­bers for July. More than 200,000 Amer­i­cans found jobs last month, on net, while the unem­ploy­ment rate dropped to a new post-cri­sis low, even as the labour force of those mak­ing them­selves avail­able for work in­creased. This was un­am­bigu­ously pos­i­tive but Steven Blitz of Lom­bard Street Re­search points to the im­pact of ecom­merce.

Over the past 12 months, the fig­ures show, em­ploy­ment in re­tail [ex­clud­ing auto deal­ers] has fallen by 33,000, while em­ploy­ment for couri­ers and mes­sen­gers has risen by 24,500. Many of us find ecom­merce has made life more con­ve­nient, and helped to save our costs, but the im­pact has been to axe many gen­er­ally low-pay­ing jobs and re­place them with jobs that are usu­ally even less se­cure, and even more low-pay­ing. Hence the vis­ceral so­cial dis­con­tent and sense of deep­en­ing in­equal­ity.

We can see why Ama­zon’s share price may have per­formed well. But how does the dis­rup­tion wrought by ecom­merce trans­late into such strong mar­kets? Jeremy Gran­tham, the founder of the GMO fund man­age­ment group in Bos­ton and a noted mar­ket the­o­rist, sug­gested in a let­ter pub­lished this week that the con­di­tions of the econ­omy that are caus­ing such angst are also ex­actly what will prompt in­vestors to put a higher val­u­a­tion on stocks.

Over time, the fac­tor that pushes up mul­ti­ples the most is profit mar­gins - higher mar­gins lead to higher earn­ings mul­ti­ples. As mar­gins tend to be mean-re­vert­ing, this is al­most ex­actly the wrong way around. Peo­ple should pay more for stocks when mar­gins are low and less when mar­gins are high, Gran­tham pointed out. But in­vestors pile in when mul­ti­ples are high.

Post-cri­sis, mar­gins in the US have been high and stayed high, re­fus­ing to re­vert to the mean. Whether this is be­cause of re­duc­tions in costs (thanks to com­pa­nies like Ama­zon), or ris­ing mo­nop­oly power (by com­pa­nies like Ama­zon), or repet­i­tively low wages (driven by com­pa­nies like Ama­zon), mar­gins are still high. In­vestors love this. Ev­ery­one else hates it.

The sec­ond most im­por­tant driver of p/e mul­ti­ples found by GMO was in­fla­tion; the lower the bet­ter, pro­vided it does not de­scend into scary de­fla­tion. Again, that is ex­actly what we have to­day, pos­si­bly in part thanks to the rise of ecom­merce and of the gig econ­omy. De­fla­tion scares have oc­ca­sion­ally shaken the stock mar­ket but for the most part som­no­lent in­fla­tion is just what in­vestors want.

Nei­ther mar­gins nor in­fla­tion are nec­es­sar­ily good rea­sons to pay more for a stock. The power of these fac­tors is in­stead be­havioural; as Gran­tham puts it, they make in­vestors feel more com­fort­able. Map­ping be­hav­iour over the past decade, he said the cur­rent mar­ket con­di­tions are com­pletely in line with what might his­tor­i­cally be ex­pected. What is un­usual are the eco­nomic and cor­po­rate con­di­tions, with per­sis­tent low in­fla­tion and high cor­po­rate mar­gins.

If in­fla­tion rises sharply, or if de­ter­mined po­lit­i­cal ac­tion [pre­sum­ably through an­titrust pol­icy brings down mar­gins sharply, that would im­ply a mar­ket break. As it stands, the Ama­zon econ­omy looks well en­trenched and that means more ex­pen­sive stocks, ex­pen­sive bonds, re­laxed in­vestors and an ever an­grier pop­u­lace.

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