Welcome back. I hope you enjoy your long weekend. In New York, we had been under freezing rain and were locked in a house. Therefore, I breathed a sigh of relief and started working again.

Brief exchange with Olivier Blanchard

I wrote last week that I think inflation expectations and the stock market have reached a tie. The data continue to raise concerns about inflation (and therefore monetary policy tightening earlier than expected) is enough to keep the market range-bound, but not enough to force it to fall.

But as a market writer, I’m in a sort of echo chamber: I read and talk to many people with professional interests, and they say that the market will get better, despite inflation. I need someone to get me out of my complacency.

So, fortunately, a friend introduced me to Olivier Blanchard, a researcher at the Peterson Institute for International Economics, an emeritus professor at the Massachusetts Institute of Technology, and the former chief economist of the International Monetary Fund.he wrote In February, he worried that because the US stimulus plan would take much more money out of the economy than the pandemic, the unpleasant inflation level would pose a threat.

I asked him whether the data coming in since then changed his opinion. He replied that things are proceeding as expected, but the central question has not yet been answered. He raised the question like this:

“Workers who have seen a decline in purchasing power, who operate in an increasingly tight labor market, and have (correctly) union- and union-friendly governments, will they remain silent or ask for and receive a raise?”

If the answer is no—as US President Joe Biden’s team believes—inflation will fade quickly. As for Blanchard:

“My belief is that it is more likely to be affirmative. If this is the case, prices will reflect wage growth, and the momentum of inflation will be much greater than the government and the Fed assume. Time will tell everything. But not yet.”

I pressed him. Didn’t it take a long time for inflation expectations to rise significantly in the past? His reply:

“Although the focus of the discussion is on expectations, I think it is misleading. A worker sees that his or her consumption basket is 5% more expensive than last year. No matter what he or she expects for the future, he or she wants a raise. 5% to compensate. Wouldn’t you?”

His message is clear: “Focus on new wage contracts and wages like an eagle.”

Well, compared to the previous month, private hourly wages rose by 0.7% in April. This may not be much (21 cents per hour, to 30.17 USD). But, apart from the crazy spike in the exit of millions of low-wage workers from the labor market last spring, this scale of growth has only occurred once since the Fed began tracking data in its current form 15 years ago. It was in December.

Is Amazon cheap?

A few weeks ago in Barron’s, Bill Miller Say He believes that Amazon’s stock will double in a few years, and if he builds a portfolio from scratch, he will invest 20% or 30% of his net worth in it. I quoted this interview before in the context of Bitcoin; as a portrayal of the mentality of a growth investor, this is very remarkable.

In any case, Miller’s Amazon argument has been bothering me. The stock has run so amazing for many years, and its valuation is so high that I can hardly imagine its stock will plummet again (they have now been flat for nearly a year). It is also difficult to imagine the financial performance that companies must report to justify two to three times today’s price.

I used to think that the stock was overvalued because I thought the growth rate would normalize. I have said this repeatedly in the printed matter, I was wrong! The growth rate is accelerating! Now I think Amazon is an unstoppable monopoly (as Miller thinks) if the antitrust police break it up, it will only become more valuable. So it is worth considering the price of the stock.

For this, I used the dumbest income model in the world™. here it is:

The following are the assumptions of WDEM:

• Amazon’s revenue growth rate for the next five years is 29%, pushing sales to nearly $1.4 trillion. This is the same as the growth rate of the past five years. This is a stupid model in which things proceed in a straight line.

• Its profit margins are stable. Once it becomes a trillion-dollar business, can Amazon expand its profit margins? Of course it can, but it won’t. Its entire model is based on using low profits and high investments as competitive sticks.

• Its tax rate has risen. Populism, plus everyone hates Bezos.

• Its stock count keeps increasing. In a straight line.

• These stocks trade at a price-to-earnings ratio of 77 times. Income is growing at a rate of nearly 30% per year. Why don’t they?

Under these conditions, the annual return on these stocks will be 25% by 2025. This is exactly the kind of return that Miller envisioned. If the average growth rate is only 20%, and the multiple shrinks to only 46 (twice the current market multiple), I will still get an annual return of 5%, which is not bad.

I think Amazon will continue to achieve absolutely epic growth, the reason is simple, I can’t think of anything that can stop it. But it is important to see how much growth is envisaged by my stupid model and Miller’s point of view—that is, what it means for Amazon to grow at the rate of the past five years. If Amazon’s revenue in 2025 is $1.4 trillion, it will far exceed the current combined revenues of Wal-Mart, Microsoft, Google, and Apple. This will be an unprecedented large enterprise.

A good book

Where did the inflation rate drop? IPO price: “This is not the’everyone is a winner’ market in the first quarter.”