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July 18, 2019

Amazon: The Champion of Deflation

I’m tempted to glance at Amazon today. I don’t need anything, but that’s not the point. Surely there’s a new gadget or doohickey that will make my life immediately better, even if I don’t know that it exists. Once I see it, I’ll have to have it – chances are that Amazon is offering it for a song.

The End of Black Friday

July 16 marks the end of what has become Black Friday in July: Amazon Prime Day, an online event that’s grown so grandiose that it now stretches to two days. The e-commerce behemoth created the marketing gimmick several years ago to give its Prime members access to incredible sales on thousands of items, hopefully motivating non-Prime members to join the fun.

The day became so popular that Amazon expanded the event to cover two, and other retailers jumped into the fray, attempting in vain to defend what remained of their market share.

This year, a record 250 retailers will offer their own sales online as they try to pry some eyeballs away from Amazon. We don’t know the totals yet, but last year U.S. retailers booked $447 billion in July sales.

That was $4 billion more than retailers booked in December, which is why so many competitors are jockeying for attention this year. Consumers only have so many shopping dollars. If they use a bunch of them in the middle of July on Amazon Prime Day, they’ll have fewer to use on back-to-school sales, Labor Day sales, Black Friday sales, and during the holidays in general.

And all of this exemplifies a classic “race to the bottom.” Online retailers that offer the lowest prices on comparable goods are likely to get the most sales, which drives them to give customers the best deals.

Shoppers win the price wars, but…

The economy loses the inflation game… which is what’s driving the Fed nuts.

More Bang for the Buck

Amazon is the champion of deflation. Since its inception, the company has focused on giving consumers the chance to buy goods from many sellers, while also offering comparable and substitute-level goods. This gives shoppers the best chance to find what fits their needs at the best intersection of price and product quality, and squeezes out the inefficiencies of limited selection and limited sellers.

We get more bang for the buck, allowing us to keep the part of our consumption funds that used to be spent on those inefficiencies.

But if we don’t spend those saved pennies somewhere else, then the economy suffers a bit, and that’s a situation the Fed can’t stand. This partially explains why the Fed kept making newly printed bucks available to the economy by purchasing bonds and driving interest rates lower. If we weren’t willing to splurge on assets, then by golly the Fed would make their value increase by changing the terms of valuation!

Changing interest rates affects anything with a cash flow component – be it steady payments, like dividends and interest, or debt that’s owed. By lowering rates, the Fed makes steady payments more expensive to receive, and debt cheaper to carry.

They’ve been yelling at us to “Buy Stuff!” for a decade. We’re doing our best, but we keep choosing the cheapest alternatives when possible, setting up this epic clash.

The Fed is desperately promoting inflation, while Amazon keeps depressing prices.
They’re locked in a battle, but there’s no doubt who will win.

Apples and Oranges, or Jordan and Bill Gates

It’s like the old meme about Michael Jordan and Bill Gates. In his prime, on average Michael Jordan made $178,100 per day, every day of the year, which is about $7,415 per hour. Search the internet and you’ll find an article listing out how much he made per minute, or during the time it would take to play a round of golf or have a meal. For the time, that was outrageous.

But at the very end of that meme, the story went that Jordan would have to earn that much for 270 years before he accumulated the wealth held by Bill Gates.

They both might make a lot of money and be wealthy, but they were clearly operating on different planes.

In the first quarter of this year, Amazon recorded $59.7 billion in revenue, and $3.6 billion in net income. The company is currently worth just under $1 trillion. Those are great numbers.

But the Fed – well, it’s the Fed. The pseudo-government agency can crank up the printing press anytime and create its own wealth. Currently the central bank holds $3.8 trillion in assets, and during 2018 it gave away $62 billion in excess earnings to the U.S. Treasury, or about $15.5 billion per quarter.

And while Amazon does everything it can to increase business and grab more clients, the Fed does a bit of a kabuki dance trying not to affect the $21 trillion U.S. economy too much.

Technology – with Amazon at its face – is consistently pushing the deflationary efforts of the past decade, but ultimately the Fed will win the fight. We can only hope that we, as investors and holders of capital, don’t get crushed as a result.

Imagine Predicting Exactly Where Shoppers Will Shop Next…?

Accurately predicting where people will shop next… what they’ll be buying… and how much demand there will be for that particular item…

That’s investment power, right there.

And now you can grab that power with both hands, right here.

With it, it doesn’t matter who wins in this clash of the titans… your investment dollars will be in prime position.

Courtesy of Rodney Johnson, Economy and Markets

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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