Sell These Stocks As Amazon Takes Over Payment Processing

There is no other company like (Nasdaq: AMZN), whose presence is becoming ubiquitous in so many segments of the U.S. economy. It’s almost easier to enumerate the sectors it is not getting into than the ones it is.

One such sector is the financial sector, where I shared with you in March that Amazon was in talks with potential partners about offering a checking account-like product. This would not be Amazon’s first foray into the financial sector. In a very low-key launch in 2011, Amazon began offering loans to the small businesses that operate on its Marketplace platform. Amazon said last June that it had made $3 billion worth of loans to these businesses.

The e-commerce giant also offers a pseudo-debit card, Amazon Cash. It lets consumers add cash to an Amazon wallet and purchase items online without a credit card. And in 2017, Amazon dipped its toe into the deposit business with Prime Reload. This gives customers a 2% bonus when they use their debit card to move funds from a bank account to their Amazon account for use for transactions on the website. This lowered the fees Amazon paid to credit card networks like Visa (NYSE: V) and Mastercard (NYSE: MA) 

The goal here is to disrupt the decades-old credit card payment system – the entire swipe-fee system is a $90 billion a year industry. This includes not only the aforementioned payment networks, Visa and Mastercard, but also payments processing companies such as First Data (NYSE: FDC) that collect 2% on every credit card transaction and 24 cents on most debit card transactions.

Now, Amazon has placed greater emphasis on targeting of companies involved in payments.

Amazon Offers Discounts to Adopt Its System

The company is now offering the discounts it receives on credit card fees to other retailers if they use its online payment system, Amazon Pay. This service, which was revived in 2013, has attracted more than 30 million users.

This latest move by Amazon is a very real threat to not only the credit card-issuing banks, but also payment processors like the aforementioned First Data and other online payments firms such as PayPal Holdings (Nasdaq: PYPL) and Square (NYSE: SQ).

Paypal is the current leader in streamlined online payment methods with 237 million accounts globally. Taking aim at them is Visa and MasterCard, which have teamed up to offer a one-button online checkout feature later this year that will replace their separate Visa Checkout and Masterpass initiatives. Other credit card companies – American Express and Discover – have announced they will also join in the project.

And now, looking to disrupt all of them, is Amazon and its Amazon Pay…

Previously, online merchants using Amazon’s service have paid about 2.9% of each credit-card transaction plus 30 cents. This in turn was divvied up among Amazon, the card issuers and the payment networks. But now, Amazon is offering to negotiate lower fees with merchants that make long-term commitments to use Amazon Pay.

Amazon is able to export the rates it has negotiated with banks and payment networks because, like PayPal, it is acting as a so-called payments facilitator. That means it aggregates smaller merchants to help them lower their cost for accepting electronic payments.

This move from Amazon here in the U.S. reminds me of what China’s technology giants, Alibaba Group Holding (NYSE: BABA) and Tencent Holdings (OTC: TCEHY) have done with Alipay and WeChat Pay in China. Alipay, for example, has a stand-alone valuation in excess of $80 billion.

Related: Add These Two Stocks to Your Portfolio as the Tech Rally Goes Global

And there’s no reason that Amazon cannot be just as successful. . . . .

Another Win for Amazon?

It has had a history of being a successful disruptor. And it will enter the payments space with several distinct advantages. These include a network of more than two million merchants, 100 million Amazon Prime users and those 30 million users already of Amazon Pay.

And importantly, people trust Amazon. A survey from the consultancy Bain on whether people were willing to try a financial product from a technology company showed that Amazon was at the top of the list of those most-trusted tech firms.

The list of firms that will be affected by Amazon’s new emphasis on the payments sector is long, but there are two firms perhaps most at risk – the two high-flyers in the sector, PayPal and Square. Both stocks fell sharply on the day the story on Amazon’s intentions hit the newswire.

PayPal is little changed year-to-date and is actually down slightly over the past three months. And while its stock didn’t crater after the latest earnings report, as it did after the prior report, it is still down in price from the earnings report date.

This relatively poor performance is likely due to the fact that it has become the target of not only Amazon, but also all the major credit card firms. And it lost eBay as a major customer earlier this year.

Square is still up solidly for the year, but that is largely due to Bitcoin hype. Famed short-seller Andrew Left said recently that the stock was rising solely due to Bitcoin mania from investors and that Square was a “collection of yawn businesses.”

The company has been incurring losses for several years now. It reported net losses of $212 million, $171.6 million and $62.8 million in 2015, 2016 and 2017, respectively. At the end of 2017, Square had an accumulated deficit of $842.7 million. And with the company continuing to invest heavily, there is no obvious path to profitability in the foreseeable future.

So once again, Amazon looks to be a likely winner, with Paypal and Square to be the long-term losers in this battle.

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Source: Investors Alley

Does Government Debt Really Matter?

The numbers on the US Debt Clock are spinning at a dazzling pace. US government debt is now over $21 trillion, $174 thousand per taxpayer. Add another $3 trillion for debts of state and local government on the stack.

Unfunded federal government promises are almost $113 trillion, $900,000 per taxpayer, not including another $6 trillion in state unfunded pension liabilities.

It’s fiscally impossible for the debts to be repaid. Governments borrow money and make political promises on the backs of future generations. If the numbers were double (or triple) what they are today; would our lives be any different? We can’t pay it back, why not just continue frivolously spending as long as people are fool enough to lend us money?

“The Budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome will become bankrupt.”Cicero, 55 B.C.

Does anyone really care?

Ignore the political class and their allies. Here is an example.

Nobel Prize winning economist Paul Krugman has an impressive educational pedigree – on paper. While he may be an economics professor at Princeton and the London School of Economics, he tarnishes the reputation of all economists, putting politics ahead of common sense.

In October 2016, anticipating the election of Hillary Clinton, he wrote, “Debt, Diversion, Distraction”.

“Are debt scolds demanding that we slash spending and raise taxes right away? Actually, no: the economy is still weak, interest rates still low…and as a matter of macroeconomic prudence we should probably be running bigger, not smaller deficits in the medium term. (Emphasis mine)

…. So my message to the deficit scolds is this: yes, we may face some hard choices a couple of decades from now. But we might not, and in any case, there aren’t any choices that must be made now.”

After the election, Mr. Krugman reversed his position writing, “Deficits Matter Again”.

“…. Eight years ago, with the economy in free fall, I wrote that we had entered an era of “depression economics,” in which the usual rules of economic policy no longer applied…deficit spending was essential to support the economy, and attempts to balance the budget would be destructive.

…. But these predictions were always conditional, applying only to an economy far from full employment. That was the kind of economy President Obama inherited; but the Trump-Putin administration will, instead, come into power at a time when full employment has been more or less restored.”

In October 2016 the economy was “still weak” and we shouldn’t worry about deficits or debt for a couple of decades. Less than 80 days later the economy magically changed and now deficits matter?

It’s political crap! When the party in power implements their financial agenda, whether it’s more spending or tax cuts, the minority party screams about unsustainable debt. When the process reverses, the charade continues and the new minority party screams about the debt.

The Undeniable TruthWith few exceptions, the political class doesn’t give a damn about the debt. The politicos use the tax system and government spending to buy votes to keep them in power.

They kick the can down the road; secretly hoping any negative consequences happen when they are out of power, enabling them to make political hay and convince the public they should rule forever!

Their behavior won’t change; they will continue to pile up debt until the citizens revolt!

If the politicians don’t care, should we?

Prior to the recent tax cut, The Chicago Tribune reported:

“If the House GOP tax plan becomes law, nearly 81 million Americans – 47.5 percent of all tax filers – would pay nothing in federal income taxes next year.”

Those who pay no taxes (particularly when receiving government handouts) probably don’t care about the deficit.

What about the remaining 52.5% that are working their tails off, seeing their hard-earned tax dollars (and more) being spent by an irresponsible government?

Can something bad really happen?

Common sense economics would indicate, governments creating money out of thin air might temporarily prop up the economy, but eventually it would create a large debt bubble. When it pops, expect catastrophic consequences.


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In 2008, when the government started bailing out the banks, many urged caution, suggesting high inflation and our unsustainable debts would finally come home to roost. It hasn’t happened – yet.

Pundit Bill Bonner looked at the stock market and took a critical view of “Trump’s Quack Economists”:

“Markets don’t like uncertainty. …. Presidential advisors Peter Navarro and Larry Kudlow – wrong about just about everything for just about forever – could be right this time.

Maybe the economy really is as strong as an ox. And maybe stocks will go up from here to eternity. But it’s not what we see….

Not that we are always right. ….

Yes…our error was that we misjudged the power of wrongheaded claptrap. Fake money talks louder…and BS walks further than we thought! (Emphasis mine)

We thought the fake money-pumping scheme had reached its end back in 2009.

We were wrong.”

When economists criticize and advise the government; it makes little difference; elected lawmakers show zero fiscal responsibility. The train continues down the track, full speed ahead….

Yes, we should care, and yes bad things can happen. Count on the predictability of the political class. Anyone with wealth or income becomes a target to finance their political spending. We need to protect ourselves.

What economists should we listen to?

I prefer economists with no political agenda – genuinely concerned about helping average hard-working citizens navigate the current and future potential challenges ahead.

Good friend, Dr. Lacy Hunt is tops on my list. He “calls them like he sees them” without any bias. He’s an excellent educator helping us navigate some difficult economic waters.

I recommend his company’s recent Hoisington Investment Management Quarterly Review and Outlook, it’s a primer.

It begins with a discussion of the Fed’s policies over the last decade:

“Nearly nine years into the current economic expansion, Federal Reserve policy actions appear to be benign…. Changes in the reserve, monetary and credit aggregates, which have always been the most important Fed levers…indicate however that central bank policy has turned highly restrictive. These conditions put the economy’s growth at risk over the short run, while sizable increases in federal debt will serve to diminish, not enhance, economic growth over the long run.” (Emphasis mine)

It’s not just a US problem:

“No matter how U.S., Japanese, Chinese, European or emerging market debt is financed or owned, and regardless of the economic system, the path is stagnation and then decline. Even central bank funding of debt will not negate diminishing returns.”

Might the historical cure make things worse?

“While many believe that surging debt will boost economic growth, the law of diminishing returns indicates that extreme indebtedness will impede economic growth and ultimately result in economic decline. …. The standard of living cannot be raised without increasing output.” (Emphasis mine)

Increased debt equates to increased spending and economic output – theoretically! While debt, both government and private, has reached historic levels, they question the premise over the long term.

Talk about diminishing returns…. In 2007, each $1.00 of global public and private debt increased gross domestic product (GDP) by $.36. In 2017 it dropped almost 14%, to $.31. The US dropped about 11%, from $.45 to $.40.

Where are we headed?

“As debt continues to increase, real GDP starts to fall. At this point, debt has reached the point of negative returns, resulting in the end game of extreme indebtedness.” (Emphasis mine)

What is the end game?

When Dr. Lacy Hunt uses the term “end game” we should all take heed; he chooses his words carefully.

Their current newsletter reinforces what we intuitively believed a decade ago, you don’t cure a debt problem with more debt.

How much longer can we borrow and spend before we see the inevitable economic decline? Might we face another great depression?

Might the end game be controlled by others? When creditors lose confidence in the US, the economy and the dollar, they’ll start unloading dollars, causing interest rates to rise – negatively impacting the economy.

No one knows what or when

At the end of a Casey conference a few years ago, the speakers were seated on the stage and the audience asked questions. The main concern – when and what will the end game look like.

They had no idea. Some made predictions, most felt the wheels were soon going to fall off soon – they were wrong.

One participant asked, “Inflation or deflation?” The response of the experts was, “Yes.” The consensus was we could experience high inflation which might be the last major blow to the economy; and then quickly move into deflation and perhaps a major depression.

No one knows for sure how it will shake out, but it won’t be pretty.

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What can we do?

While government debt may not matter to the political class, it should matter to everyone who hopes to save and retire comfortably.

Prepare for the worst and hope for the best. Diversify, own real assets and not just paper. While many have been wrong on the timing, Dr. Hunt has clearly highlighted the trend. Take heed! Those who use some common sense and take some reasonable precautions will fare much better than most.

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Source: Investors Alley