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Modeled Behavior

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How To Train Your Owners: Jeff Bezos Edition

Justin Fox comments on Wall Street’s willingness to give Jeff Bezos whatever he wants



Fox is dismissive of finance theory, but goes on to give an explanation ready made for Bob Lucas could love.



If we think that Broker-Dealers rationalize market prices and what broker dealers value is an asset which generates cash precisely when Broker-Dealers are themselves short of cash then Bezos is better than the US Government.

The US Government gets to borrow money for less than free, because Broker-Dealers know that when worst comes to worst you can always trade T-Bills for cash through Open Market Operations.

Bezos apparently gets equity investments for free largely on the same terms. The deal works like this. When there is plenty of money to go around Jeff can always find a way to spend it.

Yet the moment cash dries up, Amazon’s massive revenue stream will become your ATM, providing you with a life line of dollar-dollar bills. And the more Amazon-dependent Bezos can make consumers the more this works.

Key to this strategy is that the percentage of revenue Amazon deploys in internal investment has to be higher than the fraction of revenue its likely to loose during a recession.

One way to do that is simply to have an insane rate of investment. Then even if revenue collapses, you can always pullback more on investment. The other approach is to stabilize revenues so that even as consumers spend less overall, they don’t spend less than you.

The later runs into diminishing returns to scale, but the second actually experiences increasing returns to scale.

Income is more volatile than Consumption because Investment generally is more volatile than consumption. And inside of consumption, expensive long lived durables such as cars soak up much volatility. Thus, if Bezos sold Americans everything-but-cars-and-houses he is guaranteed a revenue stream that is more stable than National Income.

To the extent Amazon was able to pull this off, rational shareholders would be willing to accept a negative real return on equity. Amazon, then isn’t a charity, but an insurance product for Investment Banks.

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