Time and Tide

Are Amazon's disappearing profits and slowing growth a sign of things to come for the broader economy?

(A view of the Blackwater River flowing into the sea in Youghal, Ireland. Source: Getty Images)

Bill Bonner, reckoning today from Youghal, Ireland...

“There is a tide in the affairs of men
which, taken at the flood, leads on to fortune
omitted, all the voyage of their lives
are bound in shallows and in miseries”

~ William Shakespeare, Julius Caesar

When the tide goes out, you can see who’s been swimmin’ naked.

~ Warren Buffett

We’re happy to be back at home. Not that we didn’t like our sejour in France. But it’s still nice to be back in our own bed.  

And here, with nowhere to go and no one to see, we have more time…at least for a while. In two weeks, we will head to South America, where we will check up on the ranch. An election is coming up. Typically, the leftists give money to the trouble-makers in advance of an election. The idea is to stir things up. We don’t understand the logic of it, but that’s what they do.  

Maybe they are just buying votes.

We’ll let you know the status of things when we get there.

The Affairs of Men

In the meantime, here we are in peaceful Ireland…green grass…contented cows…and the back and forth flow of the Blackwater river beside us. The Blackwater is tidal, this close to the sea…it drains out every day, revealing an ancient weir, where fish were trapped as they swam back downstream. Generations of locals – as well as invaders – used the river for food and transportation. They timed both to the tides.    

“There is a tide in the affairs of men,” too, wrote Shakespeare. 

A whole generation of investors (from 1982 to 2021) rode the flood tide to glory.  They bought stocks and watched as the Fed pumped trillions of dollars’ worth of money and credit into the system. Their fortunes rose. They didn’t have to toil.  Neither did they spin. They made money on ‘the float’…by following Marty Weiss’s famous advice: Don’t fight the Fed.

But they learned the wrong lesson.

Investors who buy stocks now are pulling their oars against the current. Investors should buy stocks when they are cheap and SELL them when they are dear. But stocks are already expensive. If there is any upside, it’s not likely to be much.

And now, the Fed has reversed its monetary policy. It’s raising rates rather than lowering them. Just as the Fed called upon investors to buy in the ’82-21’ bull market, they now invite them to sell in the ’22-? bear market. Buy stocks now and you are ‘fighting the Fed.’

Premature Celebration

The tide turned in the stock market at the beginning of last year. The Fed stopped supporting the stock market with lower rates; it began raising them. From near zero, the Fed’s key rate is now 4.75%. A big difference. And Jerome Powell says he will continue raising rates. CNBC:     

Chair Powell says it’s ‘premature’ to declare victory against inflation

With a total of $90 trillion outstanding, in private and public debt, the difference between zero interest and 5% interest is $4.5 trillion dollars. That is how much interest the US economy would have to pay if its debt were suddenly marked up…just a quarter point above the Fed’s key rate…and still below the level of inflation.

Of course, it doesn’t happen that way… debt maturities are staggered. Overall, the US interest rate bill is about 15% of GDP…or about $3.6 trillion. But as time passes…and the Fed continues to nudge lending rates higher…more and more debt (mortgages, corporate bonds, federal bonds) must be refinanced at much higher rates.  

How high will they go? We don’t know. But we believe rates must be at least 2 or 3 percentage points above inflation in order to bring price increases under control. So, if inflation settles down at 5%...lending rates will have to be around 7% or 8% to reach some kind of equilibrium. 

Let’s see, 7% of $90 trillion is $6.3 trillion – or more than a quarter of GDP.  Something big is likely to break before we get there. Higher interest payments leave less and less money available for normal spending…which pinches sales and corporate profits…and leaves businesses struggling to pay their debts.

War and Pieces

Meanwhile, real wages have been sagging (lower than inflation) for nearly 2 years straight…productivity is falling…GDP growth is anemic and soon will be negative (in recession)…the money supply is falling…savings rates are near record lows…consumer debt is at a record high…business debt too is at record levels…and here’s the latest from the housing market. From Newsweek:

Housing Market Crash Fears After Prices Fall for Fifth Month in a Row

In November 2022, house prices in the U.S. dropped for the fifth consecutive month, with prices down 0.1 percent, compared to October.

And that’s not all…

…the US is at war with Russia, through its proxy, the Ukraine…it is preparing the nation for yet another war with China, soon…and much of the world is looking for alternatives to US dollar hegemony.

Not to mention that leading Western governments are trying to wean their economies off of traditional fuels – another explosive mine, revealed by the falling tide!

Tides rise. Tides fall. And surprises happen. We would be surprised if the next surprise were a happy surprise.  

Regards,

Bill Bonner

Joel’s Note: Rule #1 when you’re caught in a riptide: Don’t fight the current.

Your Aussie-born editor learned this lesson as a “nipper” on the beaches of the Gold Coast, during his days there as a junior “surf life saver.” Swimming against the current only drains your energy, worsening your predicament. Instead, swim parallel to the beach… or, if that’s beyond your ability, raise your hand and wait for assistance.

Dear readers don’t need the metaphor explained any further. In fact, given the warning signs up and down the beach, they may wish to just stay out of the water altogether. (Investment Director Tom Dyson advised BPR members to remain in “Maximum Safety Mode” throughout 2022… sage advice given the turbulent market conditions and the potential for a mass drowning…)

Meanwhile, with all the red flags Bill mentioned above… from falling wages and productivity… to anemic growth and evaporating savings rates… a housing market teetering on the edge and an economy nearing recession… readers may be wondering how the average worker/consumer/investor is keeping his head above water.

Good question!

Yesterday’s results from Amazon, where the tide also appears to be receding, may prove somewhat of a leading indicator for underlying market conditions. The New York Times carried the headline…

Amazon Reports Almost No Profit and Slowing Growth

The company indicated the reduced growth and tight margins would continue in the first three months of this year.

Continued the Old Gray Lady…

Amazon on Thursday reported almost no profit in the latest quarter, with unexpected weakness in its big cloud computing businesses helping to slow overall sales growth to one of its lowest levels in decades…

A year ago, Amazon had its most profitable quarter ever, with $14.3 billion in net income. But the downshifting economy and Amazon’s own attempt to roll back expansion plans cut into its earnings this year, hacking profit back to $278 million. The reduced profit included $2.3 billion in lower valuation for its investment in the electric-truck maker Rivian.

As usual, BPR’s macro analyst, Dan Denning, is on the case up in Laramie, WY...

“Even growth in 'the cloud' slowed to 20% with a smaller operating profit ($5.2 billion). All the operating profits at Amazon come from 'the cloud' and (lately) advertising (where Amazon doesn't display the best fit for your search...but whomever paid them most for the best product placement).”

Hmm… what does this mean for the “river of no returns,” as Bill cheerfully refers to the company? And what does it say about the broader economy?

Dan’s planning a review of the tech earnings for today’s research note, which BPR members can expect in their inboxes later today.

“These aren't the kind of earnings from companies that are going to lead the next bull market,” wrote Dan in a private email to the BPR team this morning. “There's still a lot of 'valuation maximization' going on with share buybacks – all while the quality of the underlying business slows with the consumer and the economy.”

“But earnings aren't driving share prices right now. Liquidity is. And the market makers and funds and pumpers and dumpers seem to think the Fed will be on their side again soon. Or, they'll be up the proverbial creek without a paddle...”

If you’re not already receiving Dan and Tom’s research – which include weekly research notes and monthly investment issues, plus a stock watchlist, in-depth reports, Zoom calls with Bill and his private wealth network, updates on our Trade of the Decade and more – make sure to grab a paddle/membership, here…