Dear Diary,
E-commerce giant Amazon.com has raised $6 billion in debt financing. Investors readily throw their money into the River of No Returns.
Lenders are demanding a yield of 3.8% for Amazon’s 10-year bonds. That’s 150 basis points over the US Treasury’s 10-year borrowing costs. (A basis point is 1/100th of one percentage point.)
Amazon’s bond buyers worry neither about the return on their money nor the return of their money.
Holders of the company’s stock are even more sans souci. If you look up Amazon’s P/E ratio, you’ll find it listed as N/A – for “non-applicable.” That’s because the company is losing money.
After 20 years, Jeff Bezos’s online marketplace has never learned how to make a profit. The last quarterly report showed it with losses of about $1 a share – or about $2.50 on every hundred dollars of sales.
Epic Fail
Reports Fortune magazine:
Amazon’s Fire phone, dubbed a “shopping machine,” is a flop. The device, which the company introduced in June, led to a $170 million write-down last quarter and a lowered sticker price of just 99 cents.Tom Szkutak, the company’s chief technology officer, toldFortune in October that the phone was “priced wrong.””I’ve made billions of dollars of failures at Amazon.com,” [Bezos] said. “Literally billions. […] Companies that don’t embrace failure and continue to experiment eventually get in the desperate position.”
Some of Bezos’ billion-dollar mistakes include a site for auctions, which didn’t work. That effort evolved into something called zShops, which also failed. The idea eventually evolved into Amazon Marketplace, which now represents 40% of Amazon’s unit sales, Bezos said.
So generous and undemanding are Amazon investors – in both its debt and equity – that Bezos feels no pain from his many failures. Every flop and failure makes him richer. He learns nothing.
Nothing succeeds like failure… but only if it hurts.
A painful failure is worth far more than an agreeable success. No one can possibly know what will work in business ahead of time. Instead, we improvise. We try things. We ad lib.
Most of what we do is embarrassing and unproductive. But what is left after you’ve shucked off all the many failures?
Success!
Likewise, in your personal life, a strikeout is more valuable than a home run. A man strikes up a conversation with a good-looking woman at a bar. She turns away, with a yawn.
Next time, he will not try to talk about Japan’s trade deficit!
But suppose the desperate girl had feigned interest. He might have married her and spent the next four decades regretting it.
No Pain, No Gain
Another example: Japan.
Over the last 20 years, Japan has spent hundreds of trillions of yen trying to revive its economy.
It invented zero-interest-rate policy and quantitative easing. (More on that below from Chris.) And it took its government-debt-to-GDP ratio from a relatively comfortable 60% to a crushing 235%.
These efforts were huge flops: Nominal GDP has gone nowhere in 23 years. (GDP adjusted for deflation is slightly ahead. But since the stated purpose of the programs was to eliminate deflation, Japanese policymakers should hardly get credit for it.) Meanwhile, government deficits are running at 8% of GDP.
And with the Japanese population in decline, it is almost impossible for economic growth to keep up with the growth in Japan’s debt service costs.
No country since the start of the Industrial Revolution in the 18th century… or since the birth of the welfare state in the 19th century… or since the start of the great post-World War II credit expansion… or since the advent of the free-floating fiat currency system in 1971… has ever faced such a challenge.
Everything Japan has done over the last 25 years to meet that challenge has failed.
But where’s the pain?
There is none. There’s the problem: No pain, no gain. Nothing is learned. Nothing is changed.
The government has benefited from more spending without raising taxes. The corporate sector has benefited from bailouts and cheap loans. The household sector has benefited from low prices.
What do you learn from that?
Nothing. You just keep doing what doesn’t work. Like Mr. Bezos, you keep raising money and spending it.
Decades go by and you wonder why it doesn’t work.
Regards,
Bill
Further Reading: Places are filling up fast for the first Bonner & Partners Family Office “open house” event in Nicaragua next year.
Japan’s failure to revive its economy through various schemes and interventions has been breathtaking.
The Bank of Japan (BoJ) launched its – and the world’s – first QE program on March 19, 2001.
Within two years, the BoJ had pumped up the Japanese monetary base – made up of bank reserves plus currency in circulation – by 60%.
But noticing its scheme wasn’t either reviving the economy or boosting consumer price inflation, the BoJ ended QE in 2006. It then mostly reversed its expansion of the monetary base.
But this initial failure didn’t stop QE from coming back into fashion following the global financial crisis. In October 2010, a desperate BoJ implemented a second, relatively small, QE program.
The result?
In October 2013, Japan’s consumer price index was roughly the same as it was in October 1993.
This is made clear in the chart below from the St. Louis Fed.
The black line tracks the expansion of the monetary base. The blue line tracks consumer price inflation. The gray shaded areas mark the BoJ’s QE programs.
As you can see, despite a ballooning monetary base, consumer price inflation hardly shifted.
In other words, despite buying hundreds of trillions of yen worth of bonds… and massively inflating commercial banks’ reserves… over the past 20 years or so, the average inflation rate in Japan has been roughly zero.
And over that time the country suffered no less than five recessions.
Now, under Abenomics, Japan has doubled down on QE. And once again the economy is slipping back into recession. And the country is entering its third decade of weak growth.
Bill’s right: Nothing has been gained. And nothing has been learned.
P.S. Be sure to catch Bill’s keynote speech at the upcoming Bonner & Partners Family Office event in Nicaragua in January. If you really want to know what’s going on in the world of “funny money,” it will be an eye-opener.