Kristoffer Tripplaar/Sipa USA via AP Images
In the future, will the roads be populated only by Amazon Prime trucks?
First Response
One expectation of our post-coronavirus world is that, as in the last economic crisis an probably more so, the big will get a lot bigger. While small businesses are shuttering nearly everywhere, the biggest retailers are hiring half a million people to meet demand. While middle-market firms struggle, they become ripe for mergers, some of which have already taken place. While Big Tech turns themselves into heroes, they simultaneously amass more power and less accountability.
A good example of the arrogance of this power can be seen in Ticketmaster’s announcement yesterday that it would no longer refund events that are merely “postponed” or “rescheduled,” only those that are cancelled. Ticketmaster, of course, is a functional monopoly for ticket brokering, and if you don’t like the way they do business, you don’t really have another option. That could become a standard position in a lot of industries post-crisis.
The question is will this hold for the world’s biggest companies, particularly those in Silicon Valley? My thoughts have shifted on this. Initially I believed that Facebook and Google, which are fundamentally advertising companies, would actually take a step back in this crisis as ad sales crater. Meanwhile, Amazon, which sells physical goods, would be poised for runaway success, dominating a transformed retail sector.
There are certainly plenty of signs of this. Amazon already hired 100,000 new workers to deal with more customers, and will hire 75,000 more. Many major rivals in physical retail will not survive the crisis; department stores are probably dead. Consumer spending at Amazon is up 35 percent on the year, and grocery delivery, a flailing business, is now getting so big it will not accept new customers, putting them instead on a waitlist.
But that last point raises some issues that I think Amazon will struggle with, and why I’m less confident that it will simply become the place everyone shops forevermore. Amazon is creaking under the strain of this demand. In late March Prime deliveries were taking as long as a month. It couldn’t handle anything but essential supplies in its warehouses for several weeks, taking a toll on hundreds of thousands of third-party sellers, who make up the majority of Amazon sales. Many of these sellers won’t be able to come back to the site. This has shifted around over time, and you can still find lots of non-essential goods in the warehouses. But the confusion undoubtedly sunk some businesses.
You can set aside the horrible public relations Amazon has suffered from not keeping its workplaces safe. I do think the crisis could eventually force Amazon improve worker pay and conditions, which would cut margins a bit and share its prosperity. But sadly, Americans don’t think much about who makes and transports their consumer goods. Customers do want good selection and convenience, however. They are not getting it from Amazon right now (and worker walkouts only makes that worse).
At the same time, every single business in America has been forced by circumstance to get smart about their delivery businesses, putting millions of companies in direct competition with Amazon. That includes large businesses like grocery chains and the local restaurant, and the connectors in between (Postmates, Grubhub) doing the delivery. Anyone sitting at home now has an array of options now for no-contact delivery, many of which are brand new. And it’s just always going to be quicker to get delivered a box of tissues or pet food from down the street than from an Amazon warehouse.
It’s jarring to say that Amazon could falter because it’s not big enough to handle demand in this moment, but the better way of putting it is that it’s too big to manage. There are too many moving parts, and if home delivery becomes a race between a lumbering giant and more nimble local businesses, I’m not certain Amazon wins, especially as its Prime promises fail, its storehouse of third-party sellers wither, its supply chain with China breaks down, and its just-in-time logistics cannot work in a crisis. Amazon won by becoming trusted. It’s losing that trust in real time.
Besides, Amazon emerges from this crisis just as exposed to growing monopoly concerns, if not more so. That remains a headline risk for the company, and the new antitrust movement is unlikely to slow down. Big Tech investigations continue to push forward.
A lot of people would disagree with me on this; here are a couple. It’s true that Amazon’s real profitability lies in its cloud computing business, which has gained as everyone stays at home; that could smooth all this over. But I think Christopher Mims had the best take on this last week. “The crisis is laying bare the cracks in Amazon’s ability to be there for its customers when they need it most,” Mims writes. “The entire point of Amazon’s Prime customer loyalty program was to convince Americans to shop at Amazon first, but after this crisis, it’s possible Americans’ reacquired skill of shopping elsewhere will, like anything repeated often enough, become habit.”
Odds and Sods
I actually have a little scoop today at the Prospect. (It took a little longer to explain so I didn’t post it in Unsanitized.) I obtained some audio of a webinar between regulators at the Treasury Department and bank compliance officers. And the regulators essentially give banks the green light to use the $1,200 direct payments in the CARES Act, now arriving in peoples’ bank accounts, to offset other debts that the individual might have. “There’s nothing in the law that precludes that action,” a top Treasury official says, twice. This would even apply to a “charged-off” account that the individual still has set up for direct deposit with the IRS but that they assume is closed; the money could go there, and the bank could keep it to pay off a debt.
You can read that story here. And you can find all of our coronavirus coverage at prospect.org/coronavirus.
Cannon Construction Underway
It hasn’t been clearly articulated that the announcement from the Federal Reserve last Thursday on $2.3 trillion in support for the economy is the opening assembly of the $4.5 trillion money cannon. The new programs that provide loans to “Main Street” businesses (in this case “Main Street” has businesses of up to 10,000 employees) and purchase short-term debt from state and local governments each explicitly identify the use of equity from the Treasury appropriated by the CARES Act. The $600 billion Main Street lending program is capitalized with $75 billion from Treasury, and the $500 billion municipal bond facility uses another $35 billion from Treasury. So that’s $1.1 trillion on $110 billion in Treasury funds. It’s exactly the 10:1 ratio we assumed the Fed would use, confirming that, if they use all $454 billion authorized by Congress, they will indeed construct a $4.5 trillion money cannon.
There’s another $85 billion in Treasury standing up the $850 billion corporate bond-buying program; while that doesn’t explicitly mention the CARES Act, it’s probably also coming from there. And as Marcus Stanley of Americans for Financial Reform indicates in this thread, it’s from this facility that the gains will be the most ill-gotten.
“There are basically no strings attached to any of this money,” Stanley points out; because it’s a kind of derivative funding, purchasing debt rather than injecting capital directly, the Fed didn’t have to follow even the meager conditions around executive compensation and buybacks and workforce retention in the law. Literally any debt, including high-yield leveraged loans created during the massive corporate debt bubble, could end up on the Fed’s balance sheet through this program (it’s complicated, but the Fed could buy exchange-traded funds with heavy exposure to high-yield debt, a step removed from buying the debt directly). It’s likely how private equity will be bailed out, given how burdened their holdings are with debt. There’s also a securitization program that will prop up junk debt markets like subprime auto lending.
Finally, as Stanley points out along with the Washington Post, the Fed has the wherewithal under Section 13(3)(D) to keep the recipients of these loans and their terms secret to everyone but Congressional leaders. That also was not the intention of the CARES Act, but Fed chair Jerome Powell could effectively overrule the law.
It should be noted that this is at most less than half of the full money cannon at the Fed’s disposal. And so far Wall Street is loving it. After the Fed’s announcement, companies issued more than $2 billion in junk bond debt on Monday, apparently excited to get in on the action. The “biggest rally in the junk bond market in more than a decade” is underway. I guess the old saying is true: in a crisis, it’s good to be in finance. Actually, that’s not an old saying, it’s a truism I just made up.
Today I Learned
- House Ways and Means Committee chair Richie Neal says the first person he consulted for advice on pandemic response was Robert Rubin. (YouTube)
- Hedge funds are reinventing themselves as small businesses to grab forgivable small business loans. (Bloomberg)
- Mortgage servicers, the lowest form of life in the industry, are incensed that one official in the government won’t endorse a no-strings bailout for them. (Bloomberg)
- Borrower requests for mortgage forbearance (meaning they cannot pay their mortgage) has jumped 78 percent in a week. (CNBC)
- Wisconsin Republicans risked the lives of voters in a cynical ploy to hold onto a state Supreme Court seat, and it turns out they lost it anyway. (Daily Kos Elections)
- Meanwhile, a poll worker who volunteered at the polls in Illinois on March 17 has died of coronavirus. (NBC Chicago)
- China won’t allow its coronavirus data to be used in research; this is really bad. (CNN)
