The Efficiency Trend
The Democratic Party is going full-on socialist.
Warren Buffett just saw one of his biggest investments lose 27% of its value in one day, prompting him to admit, "I was wrong in a couple of ways about Kraft Heinz..."
Jeff Bezos accepted New York's offer to take his tax breaks and shove it.
And the Fed capitulated to the market and vowed to never hike rates again. Promise.
And now, ladies and gentlemen, I'm going to tell you that these are all outcomes of the same trend. And that trend has just about run its course.
Let's start with Bezos and Amazon.
Amazon is the most valuable company in the world. Jeff Bezos is the richest man in the world. This has happened because Amazon offers you outstanding convenience at the cheapest price. In other words, it's because of efficiency (so efficient that it's driving other retailers out of business).
But where does this efficiency come from?
Well, it's tax breaks like what they asked for from New York City. It's also the fact that they don't pay federal taxes at all (because of past losses and R&D credits). And they don't pay their lowest-tier employees very well...
The internet tells me that an Amazon factory worker makes $13 an hour. That's a solid 25–30% more than what the highest minimum wage states offer. (I see that both Georgia and West Virginia are at $5.15 an hour?? Wow.)
Which means an Amazon factory worker makes a grand total of about $27K a year. That... is not much. You figure $1,500 a month for housing and transportation, you're looking at $250 a week left over. And I haven't talked taxes or health care.
Now, does Amazon have any obligation at all to pay taxes or its employees? Nope. In fact, a truly efficient business model might be obligated to avoid taxes and decent salaries as much as possible.
But there is such a thing as goodwill. And if you're not creating it, you might get invited to pack sand by places like New York City (where, by the way, both Apple and Google just expanded without asking for any tax breaks).
Gray Area, Shmay Area
Now, Buffett. I've talked about this Kraft Heinz thing before...
In 2013, Warren Buffett teamed up with a Brazilian private equity firm called 3G Capital to buy everybody's favorite ketchup maker, Heinz. Berkshire and 3G each put up $4.25 billion, and Berkshire added $8 billion for Heinz preferred stock that paid 9%. Heinz was valued at $28 billion at the time. The buyout was accomplished with $16.5 billion in cash, and the rest was loans.
A couple years later, Buffett and 3G Heinz set their sights on Kraft Foods. At the time that Heinz announced its intention to buy Kraft, the Heinz CEO said via press release:
"Over the past two years, we have transformed Heinz into one of the most efficient and profitable food companies in the world while reinvesting behind our key brands and continuing our relentless commitment to quality and innovation."
And while it's true that profit margins did get better with the Heinz buyout and subsequent merger with Kraft...
It's not exactly due to reinvestment and a "relentless commitment to quality and innovation." It's more like firing people. 7,000 people, in fact.
When Heinz merged with Kraft, the total market cap came to $83 billion. The Heinz part of that total market cap amounted to $43 billion (according to Bloomberg's Matt Levine, who is a great read). So, Buffett and 3G put up a total of $16.5 billion to buy a $28 billion company, and two years later, that stake was worth $43 billion. So they more than doubled their money while 7,000 people lost their jobs.
Heinz estimated that it would save $1.5 billion a year once 7,000 people were canned. So basically, Buffett and 3G took the 10 years of salary for 7,000 people and put it in their pockets. They fired another 2,500 employees at Kraft once that merger was done.
Buffett helped gut Kraft Heinz for a quick buck. Again, that's not building goodwill. It's not even building a sustainable business. Kinda the opposite, actually...
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The Fed Has Lost Control
We can't even make money expensive anymore. The 10-year broke 3% in December, and it nearly broke the stock market's back. Why is that? For starters, it's because money goes where it is treated best. If rates are too high in the U.S., just go to Japan. They'll lend you money for nothing.
We also know that demand for money is falling. Fewer mortgage loans, fewer home sales. And banks had to extend car loans to like eight years to get people to take them on. These kids today have so much tuition debt that they aren't buying cars and homes...
You wanna know why so many people are pushing the socialist agenda in the Democratic Party? It's because they are scared of where things are headed.
In the next five years, AI and automation will take 20–30% of all jobs that exist today. Kids come out of college with $60K in debt. Corporations like Amazon use every trick in the book to avoid taxes. But you'll sure pay your share on that $27K a year. Vulture capitalists like Buffett can fire you and take your salary...
Here's the thing about efficiency that we are maybe just starting to see: It's not a zero-sum game. We may be at the point now where if one person wins, it means another person loses. That is a bad place to be. Lots of animosity.
Capitalism is supposed to be about ownership, that any of us can own part of America's great companies. Seems to me that message is getting lost right now.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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