#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.

#11 – Expand our minds.. of what is possible.

I started this blog nearly a year ago with reflections and a few predictions on the incredibly turbulent times ahead (this was before Donald Trump and Brexit, see blog #1). As I have been reading and I have been taking an incredibly insightful class on Political Risk, featuring some of the brightest minds at the Eurasia Group, I thought it would be worth the time to summarize and paraphrase some of the more astute comments. The bottom line is we have to expand our notion of what is possible. Increasing nationalism and weak leadership across the globe is increasing the range of potential outcomes. Buckle up, we all need to be prepared!

1st story – Donald Trump. No surprise here, but we need to go deeper.

There is not a lot of global leadership in the world. We have more wildfires than we used to have. No Global Leader want’s to accept the cost and risks of putting them out. When we talk about the #1 Geopolitical risk we need to start with Donald Trump. We have to be able to talk about Donald Trump in an analytical way. Some people think of him as a savior, or as a man-child. We need to go beyond that.

Why is Donald Trump different? He is the first person to serve as US president without serving in the Gov’t or in the Military. Most of the time you have a track-record, a voting record. With Donald Trump we are still trying to piece what types of decisions he will make, and what drives him; and he is probably trying to piece it together it himself.

He is the first president since the 1930’s that does not think that Global Leadership means US leadership. Go back to the Marshall Plan – was it the smartest move in the US politics / or was it a bail-out for Europe? He doesn’t believe the US has to be playing that leadership role. He believes that the US guarantees the security of Japan and Germany. These are the two of the world’s richest countries, why is the US still doing that? The counter argument is that there are advantages to the US playing that role.

Would Donald Trump start something if China went after Taiwan? Will the US support NATO? What about Mexico? Mexico is still thinking this guy is building a wall. Does he have to build the wall? He can’t take that back?

We haven’t had to ask these questions in some time! They are moving markets, adding risk! Whether you think he is an agent of change, or a tyrant… he is moving markets, he is opening up possibilities of change.
2nd story – all of our assumptions on oil are changing.

July of 2008, – Oil was selling for $170 a barrel. Folks were writing articles about how this was going to 500. With India, China etc., demand is only going higher. Are we going to run out of oil? Nope. We used to think that we would run out of oil, now many experts believe this may never happen!

Here is what happened: Fracking and technology has now allowed for oil to be pulled from the earth, that no one was thought was possible. Electric and renewable energy is adding energy sources that are not dependent on oil. If you go all the way back to 1980, the only thing that Regan and Carter could agree on was to end foreign oil dependence. If you compare the known reserves of 1980 to today (2 and half more times oil today). We can find new oil, we can produce it, and we can produce it a lower cost.

There are a lot more US oil companies in the market that are able to compete, drill and sell when price goes up. These companies also are able to bounce back quickly, when the price drops they go into bankruptcy. When the price rises, they re-enter the market and add rigs to drill more oil. It’s not just the big oil companies that are adding to the over-supply it is these nimble smaller companies that are adding to the pressure of over-supply (given the technology advances, and the costs of producing oil have dropped).

We are now back in the low 50’s with the price of Oil. Countries that export oil, that really need the money, are in really bad trouble in the long term. When OPEC cuts production they are just trying to establish a floor. When American companies see price going up, companies pop up… We are stuck in this range of 45-65 on oil prices…

If you are Saudi Arabia and Russia they won’t have a problem in 2017, or 2018… but maybe 2019. Venezuela has a problem right now. Venezuela, is in real trouble. Venezuela used to rely pretty heavily on the US given the crude they were producing required a significant refining capability. Their natural partner was the United States.

When does Russia really get in trouble? When does Saudi Arabia really get in trouble?

Saudi’s solution is vision 2030. A project that is trying to modernize the Saudi economy. How much of the human capacity can you use is the question most countries will face? How much talent can you use? Most graduates of university of Saudi are women, yet only 22% of women are employed. Iran is not under any sanctions anymore. There is intense competition between Iran and Saudi on influence and leverage. Saudi’s are losing oil share and losing influence (Syria will stay in power – Iran will not win Yemen conflict). UAE and Oman, allies of Saudi, don’t really want to stir up conflict they want to make money. Saudi doesn’t really have the same friend on the US that it did with GW Bush (given our lack of independence).

Putin has an approval rating of 82%. Putin hovers above the government and finds people that are to blame. 90% of people get their news from state media. Central bank has some independence and credibility. So there are a two rainy day funds: the reserve fund which is almost gone, and the national welfare fund (a lot of that money is liquid). The state of these funds are the leading indicators to judge whether Russia has a problem. After Putin wins the election in 2017 they will need to start talking about cuts… then you want to look at the price of oil, to see if Russia is in much greater trouble.

3rd story – ISIS may be losing territory, but don’t forget about them.

ISIS is going down. ISIS is losing Mosul. If you define ISIS by territory, then they are going down. That’s not the only way to define ISIS, however. It is a brand. People are around the world may look up on the internet and claim they are ISIS.

Once the territory goes away, the ISIS fighters will be dispersed along in the world, and will not quite go away. Who is vulnerable? Europe, Southeast Asia, Middle East countries close by. We can expect that there will be another ISIS (just like ISIS popped after Al Qaeda).

4th story – Europe – It just takes one

Europe has 47 challenges. Not just one 1. There are so many risks that you can make the argument that they will likely manage them, but just one of them has to go badly for things to turn ugly quickly.

  • Brexit. Article 50 next week. Britain wants to discuss divorce and future agreements. Europe wants to discuss just discuss divorce. This will play out over 2 years. Can end ugly.
  • Le Pen (far right) is running for election in France. Macron likely to win (centrist party). The story here is neither center-left nor center-right will win. Risk is likely overrated.
  • Merkel not inspirational. Formidable leader. Close election in Geramny. Bottom line is the next government will be pro-European.
  • Early elections in Italy, Five Star making populist moves in Italy.  Italy dealing with significant economic challenges.
  • Early Elections in Greece, and overall state of Greece bail-out, Grexit still possible?
  • Europe has a delicate relationship with Russia- Delicate relationship with Turkey. Erdogan – referendum in Turkey (desires power similar to Russia). Germany and Turkey at odds, tension in media. Turkey and Netherlands tension as well (Netherlands refused to provide Erdogan with airport access). The leverage and deal that is in focus, is teal on migrants that the EU struck with Turkey. Turkey is holding a substantial amount of migrants in Turkey that would have traveled to the EU, and getting paid by the EU to do so. Only 10% of the flow that occurred in 2015 has occurred in 2016 because of this deal.

 5th story – and China?

So much is going on in the world that we forget how big of a year it is for China. 19th election, they will replace 5 out of the 7 people of the politburo committee. They make all the decisions. The stakes are enormous. It moves markets. The bottom line: 7 people make all the decisions, decisions that we can’t see. This has never happened before where we cannot see the decision making process! For a country that moves the markets tremendously, to not be able to understand this process will increase volatility for world markets.

 

#10 – An Awakening… Reflections from Trip to China

They say that you only know what you know. That what you read, consume and surround yourself shapes your perspective on how you look at issues and interact with the world. After visiting major corporations resident in Hong Kong (e.g., HSBC), Schenzen (e.g., Huawai) and Macau (e.g., Sands) – this couldn’t be any truer, and I could not feel more naïve after the trip reflecting. I was in a bubble – of European and American politics, culture and business. Surrounded by a nation caught up in the saga of Donald Trump in the US, walking around in China, I realized how sorely I was missing perspective. I like to think I read a fair bit from various sources – Bloomberg, Financial Times etc, yet what I realized I was also reading from a Western bias. Always trying to put the Chinese Company or consumer into my vantage point (of what a Westerner would expect), and frankly having little understanding of a part of the world where more than half the world’s population lives and is responsible for most of the world’s global growth over the past two decades.

Being in the country, opened my eyes, to what was really happening on the ground. It was fascinating watching the hungry, ambitious and entrepreneurial mindset of the Chinese. The huge strides they have made in short time span, The size of these major global companies (e.g., Alibaba, Huawai) that we as American consumers have not really come across yet. Couple this, with the incredible demographics (1.2bn people, rapidly growing economy etc.) and natural business opportunities afforded many within the firewall of China (that is if you are supported the Chinese Government) – China is truly a dynamic and emerging economy. One that is now rapidly moving from an export oriented – low value chain producer, to an innovator of some of the most advanced technologies on the marketplace today. It now longer can be viewed as a “copy cat” or “lowest cost producer”. This would be a mistake.

Key Trends

Many of these trends were things that I understood prior to visiting China, but were further validated and enriched:

  • Access to internet is rising tremendously in China and other emerging economies (more than 50% of China now has access to internet) and this is growing rapidly.[1]Mobile. Mobile. Mobile. Forget Desktops and Land Lines. Online retailers/customer interaction platforms are dominating customer time and money. Wechat, Alipay, Amazon – are spreading into different aspects our life
  • Where needs are not being met in emerging economies (e.g., lack of basic banking services for more than 50% of Chinese[2]) than innovative solutions that leapfrog existing technology are being deployed (e.g., Wechat). I would strongly recommend all watch an overview of Wechat’s capabilities if you have not already: https://www.nytimes.com/video/…/china-internet-wechat.html
  • Demographics create a competitive advantage for businesses that are growing and have a foothold in China. India and China have nearly 2.6bn people. In the vicinity you have Indonesia, South Korea etc. As the middle class grows, as more get access to internet and get cellphones – the market will just keep growing! Asia has to be front and center in every multi-national with ambition of growing global footprint.
  • Reduction of cost of goods/raw materials through technological gains (e.g., 3D printers) that allow every day citizens to create and innovate has leveled the playing field and provided massive gains to productivity
  • China’s firewall of protecting there state sponsored companies has created a breeding ground for companies that have grown and innovated unfettered (Alibaba, Tencent) and creating ecosystems and products that are nowhere in the market. Can American companies compete with this model?
  • More and more competition between countries is through their major multinational companies, put simply the battleground is between Microsoft, Apple, Google, Amazon and Facebook vs. Alibaba, Baidu, Tencent, Huawei and JD
  • Given China’s unfair advantage it provides Chinese Companies due its firewall/protection provided, and nature of the mature and hyper competitive US market – it appears that countries like India is where ground zero will be. A democratic country with free elections that allows foreigners to invest with some controls. Already major investments by Amazon and Alibaba should provide

So what’s the insight?

  • If you are not watching what China is innovating and doing, then you might not adapt (personally and professionally)
  • Recognize the pro’s and con’s of the different governmental styles being deployed in the US, Hong Kong, China and other Asian nations to support business growth and the well-being of citizens and the corresponding business models that adapt. An example is the Chinese care less about data privacy then Americans, therefore facilitating the ability for Wechat to combines nearly all the features of Facebook, Venmo, Spotify in one App. There are practical implications that can be applied to businesses trying to succeed in China
  • To be determined if the strong central planning, allocation of resources and protection afforded by China proves to be a better model than Democracy for the long run in the 21st century. One will need to watch for potential bubbles where competition from the broader marketplace does not exist in certain sectors of the economy, as well as the general quality of life / happiness of the populace
  • Recognize the demographics at play, how they are adapting and where China/India and other Asian nations have significant more head room to grow (a natural advantage for the long haul)
  • Watch India!

So where to invest?

It is still quite difficult to invest in China. Certain companies have listed on the NYSE or the Hong Kong Stock Exchange, yet with some broader questions on the level of disclosure (may still exist). But as noted above there are some broader trends at play globally. Namely, mobile and internet usage is rising, and consumer buying preferences are rapidly changing. The starkest is brick and mortar retail vs. ecommerce. Take a simple look even in the US, Amazon Revenue from 2012 to 2015 vs. Macy’s revenue picture, doing it with less employees and no retail footprint.

 Company Metric 2015-12 2013-12
Amazon Revenue ($, bn) 107,006 74,452
# of Stores 0
# of Employees 250,000
Macys Revenue ($, bn) 27,079 27,931
# of Stores 850
# of Employees 160,000

In summary – tech companies that provide a disruptive growth story with exposure to Asia, are going to be ways to play longer term trends that are changing the way consumers behave and purchase goods.

 

 

#9 – 2016 the rise of asset prices

As we reflect upon the economic impacts of what happened in 2016 (from the whipsaw we saw through Brexit and Donald Trump), and what is in store or 2017. I thought it would be useful to visually see some of the developments.

2016-new

Clearly the most transformative year in some time, as expectations and economic benchmarks across the spectrum: inflation, the currency markets, commodities, equities and interest rates all increased rapidly as the market

Some highlights:

  •  A surge in inflation five-year US forward swaps — a measure of the average inflation expectation over five years beginning in five years.
  • Rising inflation expectations also revised projections for the Fed, as investors anticipate a faster tightening cycle to counter the prospect of a hotter economy and increasing consumer prices
  • US banks were among the chief beneficiaries of higher Treasury yields and a steeper yield curve. Financials are expected to earn more money from lending as long-term fixed rates for loans and mortgages climb further above overnight and short-term borrowing costs (as well as benefit from regulation)
  • European bank stocks enjoyed a powerful rally after a battering in the first half of the year, when news of looming legal penalties, negative interest rates, the UK’s Brexit vote and fears over the Italian banking sector sunk share prices
  • The closely followed three-month Libor rate — a global floating interest rate benchmark that trillions of dollars of corporate loans, credit cards and derivatives contracts are tied to — neared 1 per cent for the first time since the US emerged from recession in 2009.
  • Higher commodity prices provided the ballast for the US energy sector’s rebound, with Brent crude — the international oil benchmark — up more than 90 per cent from its February low.

Hold on to your seats for 2017, the first 100 days of the Donald Trump administration will be likely volatile, as the sky high expectations of the market (for Donald Trump and his ability to deliver on tax reform, and infrastructure spending) will come into focus. Happy new year to all!

#6 – Monitoring for Inflation and Trump Economic Indicators

After analyzing and monitoring a couple key indicators (e.g., oil, mortgage rates) that we laid out in the previous post on what a Trump presidency will mean for your personal finances, I am further of the belief, that many of these impacts will be fairly pronounced. To recap some of the biggest near term considerations that may impact your personal finances.

  • Interest rates will rise (and are rising), which will impact the demand for housing prices, which should normalize the  housing market and likely mitigate a housing bubble (less buyers willing to spend $$ on higher interest rates), but challenge’s the overall timing of whether to buy or rent.
  • Money will be spent, and a lot of it. Monitor where these infrastructure projects will be undertaken, and where an additional impact on the real estate market will occur (as a result of new railroads and infrastructure projects)
  • Rising tide of equity prices – driven by infrastructure spending, tax cuts and Trump’s de-regulation agenda (get into equities! and have some exposure)
  • Rising yield curve and impact on Fixed Income investments (reduce allocation in Fixed Income)
  • Monitor appetite of US debt securities (from foreign holders of US debt – e.g., China) (keep an eye on this)
  • Monitor Tax deduction / credit changes and how you can optimize to meet these potential changes

Below is a brief update of those indicators and some analysis to support the above observations.

Figure 1: Update of Inflation Indicators

Reviewing the last year (and namely in the last month) of Inflation Indicators, since Trump was elected we can see a marked increase in the yield curve and change in mortgage rates (3% increase month over month) and the ten year treasury yield curve (up 14%)

nov22

Figure 2: Correlation of Indicators

As Treasury Yield Curves have increased or decreased, Gold has moved in the opposite direction (-.90 strength)

As the Baltic Index has decreased or increased – Crude Oil has followed a similar path (.87 strength)

As you would expect as mortgage rates  increase they are highly correlated with the same direction moves from the Treasury Yield Curve (.92 strength), and a decline in

correlation

Figure 3: Summary of Foreign Holdings of US Debt

holdings-of-us-securities

 

Figure 4: Top Holders of US Debt

China and other countries including Japan continue to trim there US Debt Holdings. Will be key to watching as Trump spends more, whether appetite for US treasuries will change.

top-holders

Source for above data is US Treasury Reporting and Bloomberg.

 

 

#5 – Financial Recommendations to Navigate a Trump Presidency

Like many Americans, I am disappointed in the outcome of the election, and have spent a few days soul searching on how  deeply divided our country is, and how we even got here.  I have spent some time analyzing the rural and urban divide, and the anger that many Americans feel as they are either left behind in the new modern economy, or  feel misrepresented by our status quo government (see blog #1 below). Leaving the social, foreign policy and numerous other challenges we will face aside (brought on by a  Republican Senate, House, Supreme Court and Presidency). I will focus on some pragmatic considerations that we can personally prepare for (from a financial perspective), which I hope you will find useful.

I as many of you know, am a history aficionado, and have spent some researching and thinking about the future uncertain path we are headed down and reflecting on when we have seen this before from previous experiences. Drawing upon US history (e.g., Nixon – inflation of 9% in 1972), and learning’s from the author of intelligent investor (Benjamin Graham, and even as far back as Roman History (e.g., Caesar), we can start to build a understanding of what may happen, and what we can do to prepare for what’s next.

What do we know so far on Trump’s economic policies?

He will cut taxes for businesses (likely a flat rate 15% rate give or take), incentivizing corporations to repatriate cash to the US.
– He will simply the tax code and likely introduce tax breaks for many (including a new child care tax credit)
– He will spend, and spend more – likely on infrastructure projects to stimulate growth
– He loves debt financing, and will more or less ignore the debt limits (subject to moderate/budget hawk Republicans in Congress)
– He will pursue an agenda of deregulation, putting less pressure on banks (from a supervisory and regulatory perspective)
– He will put a great deal of pressure on Federal Reserve Monetary policy – to support the above growth agenda

So what could happen?

– Trump could actually spark some additional near term growth
– Bond prices/yields will jump (reflecting a decline in there value)
– Likely leading to significant deficit growth in the US debt borrowing
– Banks will make more money and will have less supervisory/regulatory pressure and will have more money to lend to consumers and companies
– Inflation becomes more likely, as more money is pumped into the US system, and as consumers expectations rise, so will prices.
– Monetary policy  will try to address these increases (through interest rates raises)
– Leading to a scenario where mortgage rates increase, and the rates the US pays on it’s debt to increases…
– And… the potential for creditors and counterparties that own US debt to not believe that it can be paid back (this will be one to watch, the change in US growth vs. the change in the US deficit and what will win)

So what can you do?

– REITs, Real Estate Investments and TIPs (treasury Inflation Protected Securities) offer natural choices to combat inflation (some may prefer Gold here as another alternative)
– Avoid a heavy weighting of non-inflation protected fixed income investments, increase your exposure to equities, and avoid staying in CASH (as it will devalue relative to the increase in inflation)
– Understand tax deductions and changes to the tax codes in detail. Align your business and personal expense strategies relative to the above changes
– Monitor the 10 year treasury yield curve, oil and gold to monitor inflation / and potential changes to these leading indicators
– Monitor how rating agencies, and creditors are viewing US debt (and whether it still be viewed as credible as time)

A few charts I will leave you with that will frame already what’s happened in the last few weeks.

Source: US treasury as of 11/1/2016 and Nasdaq Crude and Gold Prices

A review of inflation forward looking indicators (Treasuries, oil and gold), yields the following insights (somewhat mixed)

  • 10 year treasury yields have just reached 2015 highs (at 2.15%)  in nearly 7 days!
  • Yet Oil and Gold are dropping likely reflecting a “risk on” trade as investors seek equities

 

untitledrr

goldoil

 

 

 

#4 – Will Amazon take over the world?

Over the past 15 years – investors, small business owners and consumers heavily debated the positive and negative impacts of Walmart. How much was Walmart impacting local small towns?  How important was Walmart for the US economy?  And the debate made sense (given the negative press on how Walmart paid and treated it’s employees), and the sheer size of Walmart (~450bn of revenue in 2012) more than many  International Countries total GDP (larger than Poland’s total GDP!)

But as we all know, and use… Amazon has emerged, and the dominance, growth and potential Amazon has been incredible. Via smart infrastructure investments distribution, warehousing and shipping logistics – Amazon has been able to amass online delivery capabilities second to none. Complimented by a ingeniously designed Amazon Prime loyalty program and a significant set of product offerings (e.g., Kindle, Cloud, Echo etc.)

Demonstrated in simple summary of total Revenue and YoY growth (from 2012 to 2016)  as compared to retail distributors in various sectors of the economy Amazon competes in, the story is striking.

  • On average no competitor has had an average growth rate of above 10% revenue growth in a period where Amazon has averaged well above 20%
  • Amazon’s total revenue has doubled from 48bn in 2012 to more than 107bn in 2016
  • Many of Amazon’s competitors are flat and are down in revenue from 2012-2016 (Staples, Sears, Best Buy, Barnes and Nobles)
  • What’s even more amazing it is likely that much of Walmart and Target’s stagnation in revenue growth is solely due to Amazon!!
  • Amazon is now almost the size of Costco and likely be the #2 retailer by the end of 2017 (in terms of total revenue)
  • Not pictured below are the companies already feeling the pain of the consolidation and dominance of the Walmarts and Amazons (Sports Authority, Borders, Radio Shack)

untitledrr

You might say – shouldn’t we be looking at net income, or the bottom line? and in some respects, it is important to look at how much Amazon is making (which was nearly 1.3bn a record high in 2016) but then we would lose sight of the massive investments Amazon is making in it’s infrastructure capabilities (to deliver and penetrate new markets e.g., supermakets/fresh direct) which impact the overall picture of net income.

My view is you will continue to see massive pressure on the likes of Staples, Best Buy, Bed Bath and Beyond, Barnes and Nobles – etc. really forcing them to become the only destination for that segment (for when a customer wants to try something out in person) otherwise why do you need them?