#14 – Amazon Domination

Wow. Amazon’s stock just hit $950, Q1 2017 earnings topped $33bn and retailer after retailer is collapsing. Previously I wrote in #4 – Will Amazon take over the world?, that Amazon was destroying brick and mortar retailers. A refresh of the analysis, highlights the trend is not slowing down.  Amazon’s revenue in 2012 (60bn) vs. 2016 (140bn) against 9 large retailers (best buy, sears, macy’s, jc penny etc.) highlights this incredible change in the retail landscape.

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#13 – Reflections on American Leadership and the US Constitution

After finishing a great read on the life of Benjamin Franklin, I have been consistently inspired by how incredibly gifted and astute our founding fathers were. Their foresight and the ability to craft complex compromises that still stand and protect America’s citizens today is incredible, being the single force that has enabled and propelled our nation to develop into what it is today. After enjoying the read on Franklin, it led me down a path of other great American leaders who were truly able to see the big picture, understand what made America unique, and enable its citizens to have hope and believe in the values that were critical to our country’s foundation.

Franklin puts it well in his final speech at the closing of the Constitutional Convention in 1789 which took place in Philadelphia. His honesty, humility, and incredible self-awareness speak volumes about who Franklin was.

” For having lived long, I have experienced many Instances of being oblig’d, by better Information or fuller Consideration, to change Opinions even on important Subjects, which I once thought right, but found to be otherwise. It is therefore that the older I grow the more apt I am to doubt my own Judgment, and to pay more Respect to the Judgment of others[1]

While even doubting his own views, Franklin knew what they had accomplished was incredible.

“I doubt too whether any other Convention we can obtain, may be able to make a better Constitution: For when you assemble a Number of Men to have the Advantage of their joint Wisdom, you inevitably assemble with those Men all their Prejudices, their Passions, their Errors of Opinion, their local Interests, and their selfish Views. From such an Assembly can a perfect Production be expected? It therefore astonishes me, Sir, to find this System approaching so near to Perfection as it does; and I think it will astonish our Enemies, who are waiting with Confidence to hear that our Councils are confounded”[2]

Washington in his first inaugural address, April 30th, 1789, understood the importance of being the first President, and the great care he had to take in setting a precedent, given the general anxiety of US citizens after just throwing out the British Monarchy.

“no event could have filled me with greater anxieties than that of which the notification was transmitted by your order”[3]

Washington reflected on the special nature of America, invoking religious undertones, on a theme that would be repeated in many inaugural speeches years later.

“Every step, by which they have advanced to the character of an independent nation, seems to have been distinguished by some token of providential agency[4]

Lincoln years later, constantly came back to the core values of our US constitution. After the battle of Gettysburg in November of 1863, Lincoln delivered one of the most monumental speeches in American history;

“Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal[5]

During the dark days of the Great Depression and reflecting upon the general mood and spirits of the American people, FDR delivered a soaring speech in his first inauguration on March 30th, 1933:

Happiness lies not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort. The joy and moral stimulation of work no longer must be forgotten in the mad chase of evanescent profits. These dark days will be worth all they cost us if they teach us that our true destiny is not to be ministered unto but to minister to ourselves and to our fellow men”[6]

FDR stressed the importance of our constitution as the foundation in which America is great.

“Action in this image and to this end is feasible under the form of government which we have inherited from our ancestors. Our Constitution is so simple and practical that it is possible always to meet extraordinary needs by changes in emphasis and arrangement without loss of essential form. That is why our constitutional system has proved itself the most superbly enduring political mechanism the modern world has produced. It has met every stress of vast expansion of territory, of foreign wars, of bitter internal strife, of world relations”[7]

Years later, after escalations in tension with Russia, and multiple global conflicts (Korean War, rising tensions in Vietnam)… JFK reminds us again, what we stand for us as a people.

“And yet the same revolutionary beliefs for which our forebears fought are still at issue around the globe–the belief that the rights of man come not from the generosity of the state but from the hand of God.

We dare not forget today that we are the heirs of that first revolution. Let the word go forth from this time and place, to friend and foe alike, that the torch has been passed to a new generation of Americans–born in this century, tempered by war, disciplined by a hard and bitter peace, proud of our ancient heritage–and unwilling to witness or permit the slow undoing of those human rights to which this nation has always been committed, and to which we are committed today at home and around the world.

Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and the success of liberty”[8]

Where is this leadership today? Lost in the shuffle of all the political rhetoric and noise, have we lost our grounding and foundation? Have we lost what has made us so special?

These great American leaders and our incredibly flexible and dynamic US Constitution  were the core reasons the US has been able to out innovate and out pace the rest or the world. Creating an environment that promoted equality, opportunity and liberty.

Hopefully, we will not do too much damage in these next few years…to ruin the foundation and core values that make America special.

 

References

[1] http://www.pbs.org/benfranklin/pop_finalspeech.html

[2] IBID.,

[3] https://www.archives.gov/exhibits/american_originals/inaugtxt.html

[4] IBID.,

[5] http://www.abrahamlincolnonline.org/lincoln/speeches/gettysburg.htm

[6] http://www.presidency.ucsb.edu/ws/?pid=14473

[7] Ibid.,

[8] http://www.presidency.ucsb.edu/ws/index.php?pid=8032&

#12 – Italy… the domino that ignite the next global economic downturn..

As I continue to focus on some of the upheaval and implications of the populism that is sweeping the US and Europe, this briefing will focus on the political risk posed by Italy and the corresponding investment climate.

Economic Landscape

The Italian economy is struggling. Total GDP is still lower today than it was in 2008, pre financial crisis. Italy Government Debt to GDP in 2016 was 132% (the highest it’s ever been), youth unemployment is projected at greater than 40% and Italy experienced an entire year of deflation in 2016, its’ first in 70 years[1]. Contributing to the challenge is a low birth rate (lowest since the state was founded in 1861), and a historic focus on low cost manufacturing that is increasingly being moved to more competitive cost environments (e.g., China). There are large questions of whether Italy’s businesses are keeping pace and innovating with the rest of the world. Enter Italy’s fragile banking system, with more than 331bn in Non-Performing Loans in 2016 (more than 21.4% of loans are bad)[2] and some of the weakest global banks in the world. “As Italy and Europe more broadly struggle to come to grips with an escalating problem with bad loans, a new paper by economists connected to the Center for Economic Policy Research, highlights the extent to which Italy’s main banks — known to be the weakest in the Eurozone in terms of cash reserves — have stepped up their lending to the country’s most troubled companies”[3].

Potential future stresses on the Italian financial system are not unforeseeable. It was just four years ago when the 2012 Eurozone crisis occurred and Italian CDS spiked to near 700 making the feedback loop between sovereign debt and banking institutions not completely in the rear-view mirror. Do Italy’s political institution’s (and the greater European system) have the capacity and resiliency to weather a future potential banking/debt crisis?

Political Landscape

While the world is watching the drama of the French, German and Dutch election (and processing the after-shocks of Brexit). Italy is dealing with its own unique soap opera that has substantially reduced the political capacity of its governmental institutions to address a fiscal crisis. Matteo Renzi, the young charismatic leader who attempted to pursue through a referendum, was dealt a blow in December 2016 after voters “dismissed his plans for constitutional reform in a crushing referendum that saw close to 60% of voters opt for no”[4]. Renzi would later resign after the referendum loss dismantling his left-right coalition. While Italy attempts to pick up the pieces, Sergio Mattarella, the current president, is facing calls to have an early election well in advance of the planned May 2018 date. Recently, Italy’s constitutional court revised parts of law approved by Renzi that raised the chance of early elections this year (which may also result in one-round of voting vs. two rounds). Adding fuel to calls for an early election are Renzi’s Democratic Party and the anti-establishment populist Five Star Movement (M5S). Rising in popularity the M5S now nearly garners 30% of the vote in a mock election, is an increasing force in Italian politics, and is in a virtual dead heat with Renzi’s Democratic Party. Part of the puzzle will be whether the M5S can garner enough votes to offset the requirement to have 40% majority vote (favoring political groups such as PD who are more likely to form a coalition). The M5S has the potential to shake up Italian politics significantly, furthering the populist trends across Europe. While this is going on, there is still a debate of whether Renzi will maintain his positioning with PD (as party lead) after his resignation and whether the traditional political parties will further fragment.

Who is the M5S?[5]

Founded in 2009 by comedian Beppe Grillo and web strategist Gianroberto Casaleggio, the party was based on “the twin ideas of a new form of direct democracy and popular disgust with the political elites,” according to politics professor James Newall. Most of the leadership from the M5S, comes from the left, but it has picked up voters in both directions with voters who are generally disenfranchised with the status quo. The party’s platform is based on five issues: publicly owned water, sustainable (eco-friendly) transport, sustainable development, right to internet access, and environmentalism. The party’s policies don’t fit traditional political parties[6]. It has a flavor of anti-establishment, anti-immigration, pro-green and is overall skeptical of the European Project. Recent successes in the 2013 election, garnered more than 100 seats for the M5S, including the Mayor of Rome. Some of this has not been without growing pains, including 18 resignations and a rocky start for the Mayor of Rome (she has been rocked by a scandal with over 4 resignations).

So what’s the call?

MP5 will win in an early election (one-round of voting) and have enough votes to govern as Italians are seeking a change and are more willing to vote for a change than present circumstances. This will follow populist trends across Europe.

  1. MP5 will win the election and have enough of majority to govern (40%)
  2. MP5 will win the highest percentage of votes but will fall short of a governing %. PD will form a coalition with the right and Renzi will be back in power. This occurs in two rounds of voting. (35%)
  3. PD will win the highest percentage of votes and form a coalition government with the right. This occurs in round of voting (this occurs in the second round). (20%)

 Outcomes (for the most likely scenario and our call)

  • MP5 will pursue an agenda on a wide eclectic range of issues, none of which are focused on fixing governance issues with the Italian governmental system, or addressing the underlying challenges in the banking system.
  • MP5 will underestimate the complexity in governing a large country leading to some rocky steps in the first 100 days of their administration. This will lead to a reduction of market confidence in Italy’s ability to sustain high debt to GDP ratio, and provide private/public solutions to banking system issues.
  • All the while, the ECB and other European governmental actors will have a full plate. Dealing with the fall-out of other European crises (e.g., Brexit, French elections, Greece etc.)

 

Client Implications

Italian asset classes will under-perform broader European countries, as well as other developed countries around the world. Until additional political stability is achieved, many of the necessary solutions to address fundamental economic challenges will not be possible. Other countries in Europe should be explored for investment opportunities.

Supporting Visuals

Presentation1

[1] http://www.tradingeconomics.com/italy/government-debt-to-gdp

[2] http://www.pwc.com/it/it/publications/npl-market.html

[3] https://www.nytimes.com/2016/08/19/business/dealbook/italian-banks-continue-to-lend-to-stagnant-companies-as-debt-pile-mounts.html?_r=0

[4] https://www.theguardian.com/world/live/2016/dec/04/italian-referendum-and-austrian-presidential-election-live

[5] http://www.thelocal.it/20161202/what-is-italys-five-star-movement

[6] Ibid.