Amazon’s Growth Boils Down to Two Words: ’Alexa Listening,’ Garrity Says

have you. Thanks for being here. Um, I was just looking at the market cap of Amazon at nearly four hundred and eighty billion dollars, right, So four and eighty billion is the market cap for a company that did sales of about a hundred and forty billion, So we're talking about a four to one there net income two and a half billion. How does that work on an annual basis? You got a four d and eighty billion dollar valuation and yet your net is two and a

half billion and people just love you well. Pim, thanks for the setup on world domination. But the issue it is it goes into the competitive dynamics that Amazon under founder and CEO Jeff Bezos, have followed since pretty much the beginning, which is the company is always focused on pricing as being the wedge that it is used to gain market share, and the company has always referred to the fact that they arguably have this flywheel which at some point in time, when things slow down and margins

start to improve, should lead to meaningful expansion on the bottom line. So the profit margin that you highlight is raizor thin arguably has the potential to expand, and certainly, you know, here we are a week I'll expand. Even though some people have said that Amazon, you know, first built this business on the fact that they did not pay sales tax in the states to which they ship books, very true, and in some respects, you know, this continues

to the present day. So yes, there's acts avoidance, and arguably the pricing on that can be worked into what price it is that the consumers have to pay. But one might argue that as we've seen this business model develop and evolve, and following the acquisition announcement a week ago of the thirteen point four billion dollars being spent to acquire whole Foods. I would really say Amazon's growth prospects boiled down to two words right now, Alexa listens.

And if we look at the Amazon Echo being implanted in the homes of a wider range of higher income households. While people may think, gosh, the echo was wonderful, you know, I give a request, I get an answer. Well, it's not just a matter of depending upon interaction, it's the matter of listening and gathering further data. And so how can Amazon monetize that? Amazon argument is going to monetize

that if we looked at Whole Foods. Whereas Whole Foods located, Whole Foods is located in situations where it caters to high income households, so it has to be in fairly close proximity to where these households are located. So not only has Amazon now just gotten a wider number of distribution points that are closer to their customers, they arguably at the same time have gathered a source of data which gives them greater depth in terms of understanding the

range of products that consumers are buying. Complement that with the fact that you know, if we go back over last six or twelve months, Amazon had been rolling out the Echo and we've had people have responded to this product favorably. But there are implications longer term where this integration on the part of Amazon is getting far closer to consumers such that it's now within the consumers home

passively gathering data. So I'm trying to understand, going back to something that you said earlier, Amazon has proven really good at disintermediating some of the big behemoth retailers and having more efficient systems also by squeezing out prices by by getting prices as low as possible. At what point will they be able to meaningfully increase prices to improve their margins. Well, you're starting to see some of that

happen already. Um. You know, Amazon over time has started to introduce more of their own brand products and have been providing those two consumers and consumers have appreciated Amazon very much because Amazon was convenient. You could shop on Amazon anytime you want, wherever you want it, and Amazon would deliver. But in the process of the trade off of this convenience, consumers aren't necessarily being perhaps as mindful, and it may not matter so much at the higher

end income end of the distribution. Curve. Consumers are making a trade off. They're not necessarily looking at the price that they're paying. They're not looking at the value because they're putting greater value in the convenience that Amazon can deliver.

And there is documentation out there that says Amazon, with respect of their own brand products, changes the prices on a fairly rapid basis, and more often than not, you actually end up paying more for the Amazon owned brand product then you do for a branded name product being provided by another vendor through the Amazon site. That's kind

of an amazing situation, isn't it. This is yield management, which people have been accustomed to thinking of in the context of the airline industry, where you look at the manipulation around per seat pricing. This is yield management going online and then with Alexa coming into your home. Talking about Alexa, maybe you can expand on this because if you go to the Alexa site, it is targeted towards businesses, not to individuals necessarily, and it's designed to give businesses

what they call competitive analysis tools. And one if you could speak about that in the context of what Alexa is doing, because boy, if you're offering web website traffic statistics plus an audience overlap. That's kind of a sophisticated piece of information for companies that don't have to host the technology. Well, it's really a byproduct of what it is that Amazon is doing, and and Amazon, in the process of doing that, is obviously trying to monetize what

it's already gathering for itself. Some people have been making a case, you know, in fairly significant publications, um that Amazon is now acquiring the role that railroads used to play back in the late nineteenth century, when railroads essentially determined what traffic crossed the rails and what was the price at which this traffic crossed its rails. So one might argue that it is Historically we looked at Amazon

as being a disruptor. You know, Amazon now as the intermediary, is gaining substantial economic power, and the question here might have to be argued as we look at the Whole Foods acquisition, you know, will the regulators decide to intervene

because of this greater influence that Amazon has. And the other question is will read later start to be concerned about some of the privacy issues that may be raised around the prospect of having Alexa, sitting in the home, listening to what people are saying and then anticipating what people want before they actually themselves consciously know that are consumers willing to give that much away of themselves to

get this convenience that Amazon has historically provided. This is fascinating, you know, I hadn't realized that Amazon branded products were actually charging more than what you could get for other brands that are sold through Amazon's network. Fascinating, fascinating talk. David Garretty, chief executive officer of g v A Research. Also he's a columnist at Investor PDA, and he joins us here in our Bloomberg eleven three oh studios. Looking

very summary. Always wonderful to see you, David. Well, there was a leg Mason survey that came out earlier today that showed that in come investors are seeking an overall rate of return of about eight point six four per cent, which seems difficult to get at a time when junk

bond yields are a little over five percent. Here to put some perspective on that, I want to bring in Alan McKnight, chief investment officer in the wealth management division of Regent's Bank, which oversees about eighty one billion dollars. Alan joins us here in our Bloomberg eleven three oh studios. Thank you so much for joining us. Uh have you found when you're talking with fund managers and clients that people have unrealistic expectations of what kinds of returns they

could possibly get? We think so when we think the biggest issue is that people want to look on a historical basis as to what they should expect in the future. And if you look at the long term returns and use a very simplified ten percent for stocks, five percent for bonds, you get to this magic equilibrium of eight percent. Well, the reality is if we believe that expect returns and stocks will be closer to seven and bonds will be closer to two, suddenly you're looking at closer to five

five and a half percent versus this magic eight. Well, on a second to you're talking about a blended UH group of fixed income that includes corporate and government dead Is that right exactly? And we just think, given where we are on the curve and what we've already seen with the benefits to high yield investment grade corporate bonds, that it seems less likely to us that will generate the types of returns and fixed income as we have.

So a total return kind of bond return of about two percent by year end, that means that we see some losses before your end. That probably includes some increases in bunchmark yields. Correct, that's that's correct. So where do you see it going the benchmark tenure for example, Yeah, so we think the tenure will continue to go higher. But what we've seen so far is what we think is indicative of the future, which is one of we're seeing the back end of the curve come down, We're

seeing the short end of the curve go up. We've seen this flattening effect until such time that we see some implemental ideas from Washington and some real change associated. It's hard for us to envision a scenario where the entire curve shifts up dramatically in the ten makes any greater move than say to two six or two seven

by year end. At what point do asset prices, whether they be bonds or equities, get to the point where you say, let's keep something in cash, let's deploy capital in a neutral position, because we feel that well, we've made enough money. Looking at the SMP five, it's up nine percent this year. So our thought on that is that you have to continue to rebalance the portfolio and rebalance to the underperforming asset classes and rather than going solely to cash, we think that there are better uses

of funds. And certainly if you look over the long term, there should be a correction of about ten percent every year if you go back to nineteen hundred and approximately every three years, just looking at the statistical data. So our perspective is, if you can be a long term investor, you shouldn't try to get in and out just as

that's about to occur. Instead ride through it and rebalance to find those underperforming asset classes and opportunities such as what we've seen last year in international developed markets as well as emerging markets, rather than going to reallocate that capital out to some some cheaper assets, if you will. So when you talk to clients and you say, you know, you guys may be expecting eight point six percent hold or returns for this year, that's not gonna happen. You're

gonna get five and a half percent. Do they just say okay, or do they say can you make that happen. Please. It's a great question and it's a real challenge because I think most investors would say that's what I need. So when you think about what's what's required versus what's possible, we would say what's possible as closer to the seven

percent range, but what's required is much higher. But with what's possible is not possible without taking a lot of risk and being lucky, right, I mean, how is it possible to get seven percent risk without potentially losing your shirt? Well, that's that's exactly I mean the differences around long term versus short term and the very short term. We don't believe that you're going to get seven percent let's say

through the end of the year. What we believe is of the next five to ten years you should be able to deliver that. And more importantly, if you talk to clients, it should be about what is your timeline, what are your liquidity needs, and how much risk are you willing to take to to go down that path? And that's where we see the greatest disconnect for clients who want something, they want to be able to do certain things. But then when you start to back into

the data around it, in the numbers. It's this aha moment of well, I neither save more, I need to allocate more capital of this, or if I'm reaching for risk or yield, then I should assume I'm gonna have more volatility. And that's a difficult concept for many folks to think that they just want the return without all the risk. What are you hearing from your your base of of salespeople and and managers. What of those, let's say, reactions that you hear from investors, what's the most common one.

Do they readjust their risk profile? Do they kid themselves into thinking, no, I'll worry about it later. Do they add more to savings? What's normally what they do? Well, we've seen as far is that most want to wait. Unfortunately, most folks don't really want to have that difficult conversation and in some case, if it's in an institutional investor, they don't have the luxury of that because it's set for them rather than them being able to actually discern

what that true target rate might be. So denial, you're saying, exactly, okay, so, but it's always a good strategy, right to just deny that the issue exists, Right, it's good, good, I try to do that on a regular basis. But I'm just trying to think though, you know, to get to that seven percent, what would the allocation have to be? Uh, you know, given some degree of volatility, perhaps more than

some people are willing to stomach. What are people what are you recommending people allocate to an aggressive strategy for a longer term horizon with uh, some ability to have a liquid investments right, So we're allocating more to equities and more broadly to emerging markets, international developed where we think there's opportunity right now, we also allocate to small and MidCap stocks because we think there's a higher return premium there. I'll be it. There's a little bit more volatility,

and it's decreasing our exposure to fixed income. Now, the tradeoff of that is there's going to be more volatility in the portfolio. But we don't view volatility solely in a standard deviation. Okay, this is what the statistic means. It's how much can you stop it? From an absolute value perspective and what that may mean for your portfolio. Does at mean that you're not pricing in any chance of a recession in the next few years. We don't

anticipated recession. Right now, we think that we're going to hover around two to two point two percent growth, but we need some implementation in DC to help that along. So right now, you're still betting on the Trump up we are. I want to press you just a little bit on this seven percent idea, because you know, when someone says seven percent, I go looking on my Bloomberg and I call up Royal Dutch Shell. All right, this is a global or soup him. Well, but I mean

it's okay, well it's not Royal. Well, okay, Royal Dutch Shell, and it's got a yield of over seven percent, albeit the stock is down nearly eight percent this year. But if you're telling me that this is a long term bet for whomever is the customer, then they're not going to necessarily worry about the capital appreciation or are they. At what point does that become a denial conversation as well? Well?

I think the big question for investors around do I chase yield in that case where you have an underperforming asset, because the energy businesses has been hit over the last really eighteen months, but more um recently in the last couple of months, and when you chase just absolute levels

of yield, you're gonna get hurt. What we would say is, build a portfolio around equity income and what's more important is the actual growth of yield rather than the absolute dollar value, because if you go chasing that dollar value of yield, inevitably you're going to get hurt because it's the names that have already sold off, and unless you have a very long term time perspective and you have a very clear indication of default risk and cash flow

needs of that company, it can be a more challenging situation. Real quick. What's the most overvalued aspect of markets right now? We would say that probably the most overvalued would be marginally in the high yield space, just as it relates to where spreads are. They're so tight, um, we haven't seen them this tight and quite a while, so that would be the place where we're still allocating to them, but we want to be on a conservative side and

high quality within the high yield space. Well you can't see it, but Lisa is shaking her head because this is something you've been noting for any any little bit. Alan McKnight, thanks very much, Chief Investment Officer, Wealth Management, Regents Bank eighty one billion dollars under management. They're based in New Orleans. But we did get the healthcare bill

out of the Senate yesterday. We at least saw a version of it coming out of the GOP and there were some scathing responses to it, including from Dr Jonathan Gruber and m I t Professor of economics, who said that the deal was quote amazingly bad. Dr Gruber was also a key architect of Obamacare, and he joins us now. Dr Gruber, thank you so much for taking the time. We have a sense of where you may be coming

from with respect to your view on this proposal. I would love to get your sense of which provisions in the Senate bill are most important to watch and have the most potential impact going forward. Yeah, thanks for having me.

And look, I think it's very important to recognize we all come in this of the view, but the facts be clearly, which is literally, if you ask Republican senators what this bill accomplishes, they don't have an answer for you other than what repeals Obamacare, which it doesn't do. I mean, this is literally taking Obamacare and just making it worse. Well, hold on a second, wait, hold on second, because I think that somebody might say, well, honestly, it

lowers the cost. And if it lowers the cost, but that goes forward and helps the overall budget of the US. Okay, well, let's be clear, so let's separate key terms. It does not lower the cost of healthcare. It does not lower health premiums. It so it does lower government spending on healthcare, but it doesn't lower the deficit. It just goes into tax cuts for the rich. So we're talking about the largest social insurance rollback in our nation's history, and the

torre diduction. The deficit will be maybe ten billion a year, which is like, okay, so or two or three percent, so like who cares. So basically my point is I don't understand the point of this whole bill. And this isn't about the fact that, like Obamacare. This is literally a question what does this bill accomplish. It doesn't lower the deficit, it doesn't lower premiums, it doesn't lower healthcare spending.

It does create more uninsured. It does mean that the sick and loving come out to pay much more further healthcare. I just don't know what the point of it is, all right. Having said that, Dr Kruber, as someone that I'm sure is well steeped in the political world now as you are in the world of economics and healthcare, because you have a pedigree that you know, you're director of healthcare program at the National View of Economic Research

and so on. You know, very distinguished. Can you be a little bit perhaps more political and explain to everybody what do you really believe is going on and what is the ultimate purpose? So basically, honestly, from a standard

politically con perspective, I can't explain what's going on. Because if you said to me, will the will an administration and Congress passive bill which literally makes ninety seven percent of Americans, you know, makes two percent Americans better off and probably Americans worse off, I would have said, you can't do that, because that's just politically impossible. So honestly, I can't explain the politics of this other than Republicans just feel that they need to please their base, that

they promise their base they do something about Obamacare. They're gonna label us a repeal of Obamacare, although as I said yesterday, it's sort of half repeal of Obamacare plus a massive Medicaid cut, So it's really it's a weird bill because it's not a repeal of Obamacare. Okay, it is Obamacare light. It's literally just a scaling back of Obamacare. You don't like Obamacare tax credits, while we do is make them smaller. You don't like Obamacare regulations, They make

them a little bit weaker. You don't like Obamacare pieces, They just make them smaller. Well, plus they add a massive cut in Medicaid above and beyond what Obama did to expand Medicaid, and they used to pay for a tax cut for the rich. Well, honestly, I don't understand the politics, So Dr Gruber, one of one thing that a lot of Republicans are saying is, look, Obamacare, the costs, the premiums are poised to go up rapidly in the upcoming years. You know, to quote President Trump that Obamacare

is quote broken. So clearly there is a lot of concern going forward about the potential for Obamacare to continue providing some of the care that it already has. So, I mean, how would you respond to to that to basically say, this is an attempt to at least lower costs and ameliorate some of the uh, some of the aspects of Obamacare that haven't yet even been observed. So the way I would respond to that is to is to explain the facts. First of all, we're not talking

about the vastment already of Americans. Neither Obamacare nor this law affects you. If you have employer responsive insurance. This law makes your life a little bit worse because it allows employers to put lifetime limits back. So it's sort of violence that Jimmy kim erule, if you will. But other than that, it doesn't much affect you employer sponsored insurance. We're talking about the minority of people who buy insurance in the individual market. All this law will do is

destroy that market. Now, it's true that market doesn't work that well for many people. Um, and that's a shame, and we should address that. And we could address that. But it's sort of like saying, we've got a market that Obamacare created that's not working as we would have liked, so let's just destroy it. But it doesn't replace it, it doesn't fix it. Nothing still makes it better. Now, if you say you don't like Obamacare, that's fine, let's

fix it. I disagree. I think Obamacare is working better than people say. I'm have to get into that. But you know, I know listeners might not agree with me on that. That's fine. Want listeners to ask is what does this law do to make it better? Absolutely nothing, And that's the key thing. It's basically a range previous said, we have a we have a bipolar choice either Obamacare

this law. That's just wrong. They're using the political hate Obamacare to cover up something which is a fundamental attack on the U. S healthcare system. It doesn't make anything better. We're gonna leave it there, thank you very much. Dr Jonathan Gruber is economic Professor of m i T. Massachusetts Institute of Technology, and he was previously the director of

Healthcare Program at the National Bureau of Economic Research. And also he was a key architect of both the twenty two thousand six rather Massachusetts healthcare reform bill that was sometimes referred to as Romney Care. Well, you know, the railroad industry has been beset by technological as well as economic challenges, and Thomas Black are industrial and aerospace reporter for Bloomberg News, joins us now from our Dallas bureau to help us understand about the ongoing revolution in the

railroad industry. And Thomas, first of all, thank you for being with us, and maybe you could introduce who is Hunter Harrison and why is it that if I go to Amazon, I find that the book that he wrote is out of print and no longer available, but everybody wants it. Thanks to them, Lisa for having me on. Hunter Harrison is a railroading legend. He's uh. He would be in the Hall of Fame if they had one

for for the industry. He's turned around three railroads and he's on his fourth and it looks like he's um. He's gonna come out a winner on this one as well. The early indication show in his book that he wrote while he was at Canadian National is um is something that most railroad folks have read. It's hard to it because it was it was an in house print of a book he wrote well as at c N, so it's it's hard to find and um, it's certainly people in the industry know all about it and most have

read it. How we work and why running a precision Railroad that's the title. Tell us how he's running CSX. Now it's all about moving cars faster and he tends to go in and shake things up to do that, and sometimes turning logic perhaps on his head. And one of those examples is the hump yard that we talked about in the In the story, it's a it's an operation that's super efficient if you have large volume of railroad cars. You've got to tell people what is a

hump yard? How is it used? And just give us that background. It's called a hump yard because they actually build a little hill where they push a train up the hill and as just crests at the top, there's a worker unhooked the car and then gravity pulls it down the hill and it's automatically switched among about forty rail lines um and it builds trains that way for

a common destination. And so they there there's basically switching rail cars one by one through this mechanism, and it's again very efficient if you have a thousand or fred cars being switched every day. Uh. The key is that they they're switching him one by one. So what Hunter does is he says, why do we have to have all that volume go into this hump yard at the at the beginning when we're forming the train back up

the line. Let's put these cars together in a common destination in blocks and that way, we don't have to go through these yards and switch them again one by one. We'll just use the locomotives themselves to push these blocks around and create trains that way. And so what they found is that they can just skip this this operation, which is highly efficient by not sending so much volumes there.

So he's been able to shut down half of their hump yards and it creates um efficiencies not only from the workers and all the expenses operating hump yard, but also by not jamming cars into these different rail yards and slowing down the process. He's bypassing these railroads yards all together, you know, Thomas. Just to put this into perspective, So Hunter Harris took the helm of CSX in January and since then the shares have risen forty three percent.

Kind of shocking, uh, as far as a gain for a company that is not Amazon or Facebook or one of the fangs. Just to put this into perspective, the US freight rail network is a sixty billion dollar industry,

including a hundred and forty thou rail miles. And you know, at a time when there's so much focus on autonomous truck driving and infrastructure spending, I'm just wondering, what's the what's the road forward just generally for rail companies that are looking to modernize their you know, thought of as a pretty pretty old technology. What sort of the future here the Well, it's interesting that the railroads actually have a lot of technology. They're using pretty sophisticated computer models

to manage their networks. Now they have sensors throughout their uh, their tracks to monitor the track health, the health of the cars themselves. Some railroads are expanding experimenting with the large X ray type machines that the that would be basically over the tracks and cars would go through there and they'd be able to check their their rail cars automatically to see if maybe an axle needs to be replaced, or wheel or brake needs to be replaced. So they

are using new technology. Um, but it's it's it's hard to see because it is an industry that, like you said, that is fairly old and in the concept hasn't changed, right, you still have locomotives and you have cars that they're pulling. Last point to you, Thomas, you know when you look at all this the movement of all this good, how's the railroad industry doing in the United States, particularly CSS give you about twenty seconds. The railroad industry. It's it's

doing well there. They've had difficulties because coal has uh cold, demand has dropped, but they're coming to terms with that and they're strut to see volume growth and that they're much more efficient than they ever have been. And in fact, all the capital that they've spent on the rails since they have been deregulated in nineteen has put the rail system really and it's probably the it's it's best condition ever, is what I'm being told. Thomas Black, thank you so

much for joining us a truly fascinating story. Thomas Back is the industrial and aerospace reporter for Bloomberg News, coming to us from our Dallas bureau talking about c s X. Honestly, I am just shocked PIM gain in one year for a relatively old technology fascinating times. I'm Lisa abram Woods, PIM Fox, and this is Bloomberg. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast

platform you prefer. I'm PIM Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa abramowits one before the podcast. You can always catch us worldwide on Bloomberg Radio