Summer is over, and the news is picking up. Welcome back to reality!
Amazon Cheats
It was reported that Amazon has been putting their products ahead of others. This meant Amazon would focus on promoting products that garner more profit on their marketplace. First, this shouldn’t surprise anyone. Second, this is the problem when shopping goes digital. You can’t pay for product placement like a brick and mortar store. You can’t price out different shelves, aisles, and store-front displays like traditional retail. The Journal unearthed this problem on behalf of the ignorance of other merchants. Now, obviously some merchants knew, as noted in the piece, but they cannot exclusively hope and rely on the paper’s reporting to fix this for them.
What does this mean going forward? Well, in a time where Republican and Democrat lawmakers seldom agree, they appear united on regulating Big Tech. Likely, this means it’s time to throw Amazon into the fire. Expect the company to pop up on the radar soon. Leave it to the government to regulate fair competition on an online marketplace… owned by Amazon… as well as one where they actively participate as a seller.
WeWork – The Dead Unicorn
The problems associated with the company have been well known for months, and speculated on for years. They don’t make money. Period. The revenue nearly equals the expenses, but unlike other IPOs where this is the case, this company has a poor path to proving profitability. The workspace is rented out and the theory is that the income stream would dry out as soon as the next recession hits. The problem for WeWork is most folks believe the next recession is hitting within one to two years. So, why buy a company that stands directly to lose when a recession hits if a recession is around the corner? No chance. The reporting from The Journal has been impeccable. They have outed the poor cash flow, as well as detailed this slow motion disaster for traders to see. The IPO has now been shelved through at least the end of October.
The implications of this are strong, and should be looked at positively. The market isn’t allowing a unicorn to get away with it. Instead, the market is demanding more and not simply hoping for future profits. This speaks to a skeptical, but strong market. We should be happy that the market has swayed in its behavior and developed this mindset. It shows that traders are more prepared for a recession than ever. Data, and deeper access to information has made investing easier and that’s good for regular investors who don’t follow this stuff daily.
A Recession … Is Looming?
Another thing happened in recent days. A huge amount of money has moved from momentum (aggressive) into value (conservative) at rates we have not seen since 2000 before the Tech Bubble. This is telling. It shows investors are fearing a recession and moving away from speculative assets and into more reliable ones. Again, that is a display of strength.
Look, a recession is going to hit. As of now, we are reliant on three main factors. Incredible strength in the job market, stability in housing, and spending + confidence in the US consumer. The first two are likely to remain, but the spending habits of the US consumer are something to take note of. US consumer debt is at all time high levels and is expanding. Remove student loan and housing debt, and the data still remains valid with just credit cards. How much debt can the US consumer take on before it becomes too much? Reports show the upper echelon of Americans have slowed their lavish and luxurious spending. Reports also show auto repossessions and delinquencies are steadily rising.
The Keeping Up With The Jones’s Kardashians Instagram Economy for the middle class seems to be leaking water. At some point the leaks become too much and the ship quickly sinks. Unless lenders methodically come out ahead of this looming problem and extend olive branches to their consumers, we can expect this to be where the next crisis begins.
Another Banking Scandal
JP Morgan committed egregious crimes between 2008 and 2016. They were spoofing trades at their commodity desk. What happened? The spoofed, or fake trades would artificially drive up the market and allow the company to profit more on their holdings. Trading desks all over the US, Europe, and Asia have been found guilty of this, and other market manipulation techniques since the financial crisis. Why? Wall Street demands profits, and regulation post-2008 put a lot of profits out of reach for big banks. In particular, fee revenue and interest income from loans.
The American consumer has been largely protected from fraud since 2008, with the major footnote being the Wells Fargo fake account scandal, the industry appears to have hardly cleaned up their act. They got more sophisticated and hide it better. We have seen this with instances of currency manipulation, and we know it happens in high frequency trading as well. It seems that banks, who operate as an intermediary, will always skim some off the top or steal from the till.
The fact is, a regulator cannot keep tabs of this real time, and uncovering it is hard. The scary part is that US interest rates likely fall in coming years, adding more pressure to a banks bottom line since interest income from loans will decrease. Couple this with the American consumer eventually curbing their spending, and big banks will be further pressured to show profits. What happens next is likely a continued practice of manipulating markets to drive up quarterly profits ensuring they hit the expected number.
How to fix it? Tough call. We can be thankful that regulators of both political sides are unearthing these scandals and slapping big fines, as well as carrying out criminal investigations. We may need to look at how we evaluate a financial company success and create more realistic numbers for future profit. The industry has changed a ton in ten years since the dust settled of 2008. Tech evolution, zero percent interest rate policy, and government regulation has drastically changed the way they can profit. The party is eventually going to come to an end. Let’s just hope folks are methodical about it and don’t reach too far or dig too deep. Accounting scandals come to mind, or an abuse of the American consumer.
Autoworkers Strike
The UAW strike at General Motors reportedly costs GM $100 million per day. It shows how innovation and technology will further the demise of the American worker. This is a problem that was bound to arise, and it resulted in the first UAW strike since 2007. It is also the largest strike America has seen since then. Yes, more Americans are working than ever before, but the rise of automation will begin to reel its ugly head.
IBM released a study a few days back showing that most Americans workers are not safe against this looming threat. How employers respond is key. They are going to need to pivot employees into other lines of business, and help them develop new skills. The American corporation is incredibly strong, and the economy is a representation of it. However, the corporation cannot begin furloughing employees, cutting hours, and permanently laying them off. It appears they stand ready to come out ahead of the problem. In turn, it can create a more diversified economy, filled with efficient companies that are evolving their employees for the better. This is something that matters and can be done without regulation.
Phil Your Day 