In this blog, we will be discussing:
- The medium term expectations of elevated interest rates in the foreseeable future
- Droughts everywhere
- Amazon’s acquisition spree
The Fed’s speech
High inflation experienced in the US is mainly caused by two things:
- Supply-side disruption: lockdown in China and the Russian invasion of Ukraine
- Elevated demand (in the US)
The NY Fed recently released a study that attempts to decompose the drivers of inflation. It discovered that by end of 2021, inflation in the US would’ve been 6%, rather than 9% had there been no supply side shocks. This means that the breakdown for the drivers is roughly 60% demand driven and 40% supply-disruption.
As we’ve discussed in this piece, the Fed can only modulate the demand aspect through increases in interest rates. However, with monetary policy alone, it is unlikely that the Fed can achieve its long-term inflation target rate of 2%. Without recovery of supply-side disruption, and reductions in oil and commodity prices, inflation can only go down to 3%-4%, at best. Nevertheless, the Fed, as indicated by the Chairman’s latest speech, will try to bring inflation to 2%.
On Friday, August 26th, 2022, Chairperson/man of the Fed, Jerome Powell, at the central bank’s annual Economic Symposium, reiterated that:
“Restoring price stability will likely require maintaining a restrictive policy stance for some time,”
This means that interest rates are likely to continue to be elevated for the foreseeable future. The stock market didn’t like this news, and the S&P 500 dropped after Powell’s speech.
Speaking of supply-side disruption, we have more coming our way. Many countries are experiencing major droughts, impacting food and manufacturing output.
- In the US, the drought in the western part of the US has impacted corn harvest. The US is expected to produce the smallest corn crop in three years. The drought has also devastated cotton production, reducing output by about 40% this year.
- The Rhine, Germany’s most important river (a river that impacts 80% of inland waterway transportation in the country), is only about 45% of last year’s average depth. Lower water levels mean that cargo ships have to carry less weight, increasing transportation costs. If the water level remains low, German industrial output will go down by 1%, contributing to further supply-side disruption.
- In China, the Yangtze river has hit its lowest depth since record-keeping began in 1865. The river is important as it is the primary source of hydroelectric power for the region’s industrial production. As a result of the low levels, Shanghai is experiencing power cuts, and Toyota and CATL (the world’s largest battery makers) were instructed to shut down by the local government.
- In France and Switzerland, the river water is getting too hot to cool down nuclear power plants, impacting electricity output.
Amazon’s shopping cart
Amazon has been squarely in the regulators’ crosshairs, specifically the Federal Trade Commission, or the FTC. Regulators are committed to stop Amazon from getting any bigger or expanding into other sectors due to anti-competitive concerns. For Amazon, one strategy to counter that pressure seems to be more M&A, such that the FTC will have a hard time keeping up with all the deals the company is pursuing.
In 2022 so far, Amazon has spent 10 times more cash on M&A than in each of the past three years:
- In March, the company finally closed its $8.5 billion acquisition of MGM (the movie studio that owns the IP for James Bond, Rocky, and others). The FTC is not happy about it and has opened an investigation into the deal.
- In July, Amazon entered into an agreement to buy 1Life Healthcare, which operates primary-care clinics for in-person and virtual care services, for about $3.9 billion.
- In early August, the company announced that it is buying IRobot, the maker of the Roomba, for $1.7 billion.
- It is also in the process of bidding for Signify Health, which provides technology to help with in-home care, a deal that has the potential to be valued at more than $8 billion. Currently, Amazon is locked in a four-way bidding war between three other companies: United Health, CVS Health, and Option Care Health.
Of course the strategy of inundating the FTC with paperwork to stave off scrutiny is as silly as it sounds. When you put all the acquisitions together, there are clear overarching strategies that are consistent with Amazon’s ongoing playbook.
The acquisition of MGM replenishes Amazon’s content library with a long tail of shows (4,000 film titles and 17,000 TV episodes). And at an $8.5 billion acquisition price, that is quite a steal. That’s about half of Netflix’s content budget in 2022. This is in line with Amazon’s strategy we discussed before:
- Get more viewers so that the company can convert them into Prime members (or to prevent them from quitting Prime). In other words, content serves a tool for customer acquisition and churn prevention.
- Acquire lots of viewers and sell access rights (via movie / TV show rentals, other streaming services subscriptions, and advertisements).
Meanwhile, the acquisition of 1Life Healthcare and the bid to acquire Signify Health are two complementary moves in Amazon’s ongoing effort to increase supply of healthcare providers (something that its homegrown solution lacks – more on this below):
- 1Life, through its subsidiary One Medical, operates 182 medical offices in 25 major cities in the US for 8,000 employers. Its customers pay a subscription fee to access doctors and 24×7 digital health services. In other words, for Amazon, this is a play to accelerate Amazon’s physical expansion of its healthcare services and acquire customers.
- Signify Health has a robust roster of doctors in its network (200+ health systems, 10,000+ primary care practices).
Internally, the company also has a project that pursues a similar playbook, called Amazon Care. Now that it is buying 1Life, it appears that Amazon is killing off Amazon Care. This is because, internally, the company believes that their homegrown solution did not have enough offerings to attract other large enterprise customers.
And finally, the IRobot acquisition. This acquisition is to complement its suite of connected home offerings that currently includes Ring (video doorbell and security system), Alexa (smart speaker system), and Fire TVs (smart TVs). When combined with Amazon’s Prime (which has deep penetration in US households), the company knows what you buy and, increasingly, has its eyes and ears inside your home – the company is becoming the operating system of your home.
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Our team members at Vested may own investments in some of the aforementioned companies/assets. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for an investor’s portfolio. Note that past performance is not indicative of future returns. Investing in the stock market carries risk; the value of your investment can go up, or down, returning less than your original investment. Tax laws are subject to change and may vary depending on your circumstances.
This article is meant to be informative and not to be taken as an investment advice, and may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success or lack of success of particular investments (and may include such words as “crash” or “collapse”). All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.
This video is meant to be informative and not to be taken as an investment advice and may contain certain “forward-looking statements” which may be identified by the use of such words as “believe”, “expect”, “anticipate”, “should”, “planned”, “estimated”, “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success of or lack of success of particular investments (and may include such words as “crash” or “collapse”.) All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.