I have a demonstration in China to sell to you

This article is an on-site version of our Unhedged newsletter. Sign up here to receive the newsletter straight to your inbox every day of the week

Good morning. Why is bitcoin still trading at nearly $ 17,000? We’d think the flagship cryptocurrency would be hit hardest by the (now downright insane) story of FTX. Is this a controlled market at some level? We do not know. Send us your conspiracy theories: robert.armstrong@ft.com and ethan.wu@ft.com.

Chinese gathering

China’s economy and markets have been working under the double weight of zero-Covid policy and a slow-motion real estate crisis triggered by official efforts to curb speculation and debt in the real estate sector. November brought some official hints that the government may want to lighten these two burdens. From the FT, last Friday:

China eased coronavirus quarantine requirements for close contacts and international travelers, in the first marginal easing of Xi Jinping’s zero-Covid strategy since the policy was reasserted at the Communist Party congress last month.

The Council of State, the Chinese cabinet, has reduced the mandatory quarantine for close contacts of positive Covid-19 cases and arrivals abroad from seven to five days, maintaining another three days of home isolation …

And yesterday:

China’s central bank will extend a year-end deadline for lenders to limit their lending ratio to real estate, one of the strongest moves ever made by Beijing to ease the pressure from the credit crunch that is shaking China’s real estate sector.

. . . lenders now have an unspecified amount of time to limit the ratio of their outstanding real estate loans to total large bank loans to 40% and their outstanding mortgages to total loans to 32.5%.

Speculation about these moves was circulating even before the news actually arrived. The stock markets bought both the rumor and the fact:

Some sellside analysts were also enthusiastic, especially on the real estate side. Here are some quotes from a Caixin story titled “Chinese regulators launch property bailout for conflicting developers”:

“The housing bailout in China has finally come,” Société Générale economists Yao Wei and Michelle Lam wrote in a statement on Monday. “If implemented, the plan should greatly increase the chances for housing, both construction and sales, to find a fund and start recovering soon.”

The measures represent “the most crucial pivot since Beijing has significantly tightened real estate financing,” economists at Nomura Holdings Inc wrote in a statement Monday. They “showed that Beijing is willing to reverse most of its measures. of financial tightening, including the three red lines and the two red lines introduced at the end of 2020, “they wrote.

The enthusiasm, both on the Covid side and on the real estate side, seems unwarranted.

Of course, there is a trade-off, and perhaps a good one, in the timing of a given incremental relaxation of regulations. But the structural problems that motivate those regulations remain unchanged. From an extremely simple point of view, the problem medically is that Chinese Covid vaccines are not as good as the mRNA vaccines used in many other countries. On the real estate side, the problem is that the Chinese economy in general and the finances of Chinese families in particular depend heavily on real estate investments, investments that no longer generate a level of return even remotely acceptable.

We are therefore sympathetic to the point of view of Andrew Batson and Ernan Cui of Gavekal Research, who wrote this on the relaxation of the Covid rules:

The government’s preferred strategy is likely to continue to refine current techniques for eradicating local epidemics, while pushing to develop better vaccines and treatments nationwide. Public health officials appear to envision the ultimate goal as a combination of improved pharmaceuticals and other measures that will minimize both infections and deaths. This ideal is far from being realized: under current conditions, there would be millions of deaths among China’s vulnerable elderly population if the spread of the virus were uncontrolled.

When better vaccines will be widely available in China is unclear. Meanwhile, as Batson pointed out in a statement yesterday, case numbers in China are actually increasing quite rapidly. While national regulations are softening slightly, local officials will need to tighten restrictions to reduce these numbers. A boost to the economy from the easing of the zero-Covid policy seems distant.

The situation in the real estate sector is less deadly but even less susceptible to quick fixes. The only vaccine against bad investments in real estate is financial pain. Falling asset prices, budget devaluations, reallocation of workers and capital to new sectors – it all takes time, as the United States discovered in the years after 2008. The idea that China’s real estate sector “will soon find a low and start to recover “seems frankly bizarre.

Amazon joins the cost cutters

Even the mighty Amazon can’t escape the wave of technology layoffs:

Amazon plans to lay off about 10,000 people in corporate and tech jobs starting this week, people familiar with the matter said, in what would be the largest job cut in the company’s history.

The cuts will focus on Amazon’s device organization, including voice assistant Alexa, as well as its retail division and human resources, said the people, who spoke on condition of anonymity because they weren’t allowed to speak. publicly.

The job cuts are inevitably compared to those of Meta last week, even if the scale is different. Amazon is cutting 3% of its corporate workforce, mostly from unprofitable divisions. By contrast, Meta lost 13% of its entire staff, but took care to limit cuts to its unprofitable metaverse unit. Markets, after smiling at Meta’s layoff announcement last week, seemed less pleased with Amazon. The stock fell 2%. (This is likely due to the fact that the cost cuts had already been priced. The stock rose 12% last week after news of a cost review surfaced.)

Until recently, Amazon has been a story of astounding growth, with compound revenue growth of 19% since 2017. Investors slapped a meaty multiple on the stock, nearly 90 times lower earnings. But as we noted earlier, that multiple is a bit deceptive as the company has never given profits a high priority and its investors have played along with it. The assumption has always been that at some point in the future Amazon could significantly increase margins if it wanted to or if investors demanded it. The big question is whether, now that the stock has returned all the gains from the pandemic period, that time is coming.

Amazon’s web services business is highly profitable. The question concerns the retail trade. Amazon’s combined domestic and international retail arms have experienced five consecutive quarters of operating losses. Sales went well. The real problem will be familiar: costs. In recent years, Amazon’s spending has steadily increased in proportion to revenue, a pattern that accelerated during the pandemic:

Line chart of Amazon cost categories as% of revenue showing Getting expensive

The management is attentive to this. Here’s Amazon’s chief financial officer at the company’s October earnings call (Andy Jassy, ​​like Jeff Bezos before him, doesn’t speak to investor hoi polloi):

Turning first to our [retail segments] we have generated over $ 1 billion in operational cost improvements driven by increased leverage of our fixed cost base and ongoing productivity improvements in our fulfillment and transportation networks. This represents a solid quarter-over-quarter productivity improvement, although not as much as we had planned. . . we recognize that there are still many opportunities to continue to improve productivity and increase cost efficiency across all of our networks. ..

We are working very hard to make sure that current profitability is not the new normal.

Amazon is trying to cut where it is most bloated. Its Alexa unit has an operating loss of $ 5 billion annually, the Wall Street Journal reported. The halving would nearly cover Amazon’s losses in North American retail over the past year.

Although the company’s top line is still growing, in a recession that’s not a sure thing. Advertising tends to lead the cycle, and Google’s revenue has slowed while Meta’s is shrinking. If revenue growth stops or stops, investor recriminations will increase, as happened with Meta. Amazon still has time to prove it can make a good profit. But the markets will eventually get tired of waiting. (Ethan Wu)

A good read

Ah, youth.

Cryptofinance – Scott Chipolina filters out the noise of the global cryptocurrency industry. Sign up here

Marsh notes – Expert insight into the intersection of money and power in US politics. Sign up here

Leave a Reply

%d bloggers like this: