Amazon economy helps explain paradoxes facing investors
Outlook of expensive stocks and bonds contrasts with an ever angrier populace
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.