Weak dollar? Maybe mkts are finally believing the Fed

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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I’ve been wondering recently: why is the dollar falling? This question disturbs me a lot, because frankly, I thought it was going to continue to rise based on the divergence in monetary policy between the Fed and the other major central banks.

But as it turns out, there is a difference between what the other central banks say and what they do. While the Fed is openly debating whether to begin tapering off the pace at which they expand their balance sheet, in fact several other major central banks have already started shrinking their balance sheets.

That may prove to be a headwind for the dollar for some time until the difference in monetary policy reasserts itself, probably in the first instance by those central banks that have stopped expanding their balance sheets taking other measures to loosen policy.

The most immediate reason why the dollar is weakening is probably that the Fed has managed to convince the world that tapering off its quantitative easing program has nothing to do with tightening interest rates.

At first the market assumed that “tapering” also meant “hiking” and that short-term interest rates would go up sooner than they had expected. But many Fed officials have tried to clarify that the decision to taper off QE is totally separate from the decision to raise interest rates.

The markets seem to believe this now and rate expectations have fallen back sharply.

For example, the June 2016 Fed Funds futures were implying a rate of 1.82 percent on July 5th, the day they peaked, but have since fallen back to only 1.42 percent, so, down about 40 bps off the highs. This fall in interest rate expectations has naturally hurt the dollar.

Furthermore, a lot of investors seem to worry that the first tapering will be accompanied by some reaffirmation of the dovish outlook, as Mr. Bernanke seems to be taking considerable pains to reassure investors.

But here’s the funny thing. In fact, while everyone is worried about when the Fed is going to start tapering off its QE program, in fact several other central banks have already started to taper off.

During 2012 the Fed’s balance sheet actually shrank while other central banks strongly expanded their balance sheet. The gradual impact of this change may have been one reason for the strength of the dollar this year.

But since the beginning of this year, the Fed’s balance sheet is up 23 percent, but the ECB’s balance sheet is down 21 percent. Even the Bank of England, which is complaining that the market is too pessimistic with regards to interest rates, has let its balance sheet shrink by 2.4 percent from its peak. Its balance sheet hasn’t grown at all this year. The Swiss National Bank balance sheet also peaked in March and has been shrinking since then.

Meanwhile, the Fed’s balance sheet keeps growing, and of course what the FOMC means by “tapering” is just that they will slow the pace of its expansion,not shrink it. So it may be that the tapering argument is not such a strong support for USD in the first place as other countries are doing similar.

The ratio between the Fed and the ECB’s balance sheet is now at a record high. The last time the ratio was around this level, EUR/USD was close to 1.50!So this is consistent with a much higher EUR/USD.

Of course, this ratio is not entirely appropriate for the ECB, because in fact the ECB can’t really do QE like other central banks do. It’s forbidden from buying bonds directly from the market, so it can only expand its balance sheet through lending. If banks don’t want to borrow, there’s nothing it can do.Recently the banks have been repaying their long-term refinancing operations,with the result that the ECB’s balance sheet shrinks.

But the Bank of England does have control over its balance sheet. As it has stopped increasing the amount of its bond purchases outstanding, the Fed’s balance sheet has been expanding relative to the BoE’s. That too should be pushing GBP/USD higher.

The case of the Bank of Japan is a bit different. The Bank of Japan’s assets are indeed growing faster than the Fed’s, and the currency pair has moved appropriately. However USD/JPY has risen much faster than the ratio of the two balance sheets.

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A ‘dove-nado’ of Fed speak could be more powerful than QE

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Two Federal Reserve economists are telling the Street what it already suspected: Dovish talk may be even more powerful than quantitative easing.

In a research note, the economists wrote that the Federal Reserve’s asset purchases, or quantitative easing, probably provided a “modest boost to economic growth and inflation.” However, the effects of QE would depend in large part on the Fed’s interest-rate guidance, the note said.

“[E]stimates from a macroeconomic model suggest that such interest- rate forward guidance probably has greater effects than signals about the amount of assets purchased,” the economists wrote in the paper, released by the San Francisco Federal Reserve.

The paper, which was not an official Fed policy statement, was by Vasco Curdia, a senior economist at the Economic Research Dept. of the San Francisco Fed and Andrea Ferrero, a senior economist at the New York Fed. It landed during a relative news void Monday, and as many traders wonder when the Fed will begin tapering its asset purchases. Therefore, it quickly became a topic du jour among the trading community, and some read it as a document in support of tapering.

“Everybody’s focused on the ending of the asset purchases, leaving aside the forward guidance and what the research has continued to support from the Fed’s point of view—the promise to keep rates low is as effective, if not more effective, than the outright purchase of assets,” said Daniel Greenhaus, global market strategist at BTIG.

This summer as talk of the Fed “tapering” its USD 85 billion a month in bond purchases picked up, Fed officials were careful to emphasize that they had no intention of raising short-term interest rates anytime soon.

The Fed economists pointed to QE2, a USD 600 billion large scale asset-purchase program, noting it added about 0.13 percentage points to real growth in late 2010 and 0.03 percentage points to inflation.

“Our analysis suggests that forward guidance is essential for quantitative easing to be effective. Without forward guidance, QE2 would have added only 0.04 percentage point to GDP growth and 0.02 to inflation,” the economists wrote in the paper.

The Fed undertook the extraordinary easing program to boost economic growth and put inflation at more normal levels. QE was a new program the Fed pulled from its tool box to inflate asset values and prevent the economy from double-dipping.

The paper relies heavily on model assumptions, said John Briggs, senior Treasury strategist at RBS. So, “[i]t’s hard to be heavily critical one way or the other. It probably feels about right, that it was an eighth of a point of GDP over time, with fading impact as it goes on and fading impact from the first program to the second program to the third program. It’s logical to me that guidance reinforces asset purchases because it helps lower the term structure of interest rates.”

The Fed economists said their analysis showed that “communication about when the Fed will begin to raise the federal funds rate from its near-zero level will be more important than signals about the precise timing of the end of QE3.”

Briggs said the forward guidance does appear to be a more powerful tool. “If you say for five years we’re not going to raise rates, you flatten that end of the curve. If you’re purchasing the long end of the curve, you’re flattening the entire (Treasury yield) curve. My feeling is the forward guidance is more powerful than asset purchases. The paper reinforces that,” he said.

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Chocolate puts market for sweets on sugar high

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Chocolate has often been described as one of life’s greatest indulgences, and now lovers of the popular food group are set to be the driving force behind the global USD 196 billion confectionery market in the next five years, according to Euromonitor.

Growth of chocolate sales is on track to outperform all other confectionery products globally by 2018, the market research firm said in a report this week.

Chocolate is also forecast to record the strongest volume and sales growth this year compared to sugar and gum, in nearly half of the 80 countries surveyed.

Francisco Redruello, senior food analyst at Euromonitor International, said the results show consumers are increasingly willing to pay more for indulging in chocolate.

“[Chocolate’s] value growth is being driven by a number of factors, for example health innovation, more visible branding strategies, certification, sophisticated packaging or simply a taste for indulgence,` Redruello said.

The use of “certification,” where producers attest to using 100 percent cocoa and disclose the origin of the beans, has been particularly successful in drawing consumers, Redruello noted, as “certified chocolate is typically regarded as premium and fetches a higher price than standard chocolate.”

The health benefits of cocoa are also driving demand, especially in countries with severe obesity and diabetes issues.

According to Euromonitor, chocolate sales growth is predicted to rise by 8 percent in North America in the next five years, with an increasingly diet-conscious US market set to remain the food group`s biggest market, accounting for 15 percent of sales in 2018.

Chocolate currently dominates almost 55 percent of the total confectionery market, compared to 31 percent for sugar products and 13 percent for gum, the data showed. Chocolates sales are expected to grow over 12 percent in the next five years, while the sugar and gum sales are forecast to grow 8.5 percent and 10 percent, respectively, Euromonitor said.

Emerging markets’ sweet tooth

Euromonitor sees emerging countries accounting for seven of the top 10 growth markets for chocolate sales in the next five years, with Brazil, India and China all placing within the top five.

The rise of the middle class in China means a more well-off and discerning group of consumers searching for better value in their food choices.

“Ferrero China, for instance, increased its retail value share by one percentage point in 2012. Ferrero`s products have a premium image, using gold colored packaging and advertising to convey a high-end lifestyle to consumers,” Redruello said.

In India, plain chocolate is losing market share to filled chocolate like those with nuts, which jumped 45 percent in sales in 2012. “The rapid growth in filled chocolate tablets is in line with a growing preference for premium chocolate, which is usually filled with nuts,” Redruello said.

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Indian market may be a ‘slow moving train wreck’: Analyst

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The downward spiral in the Indian rupee poses a significant threat to the country’s equity market, according to one strategist, who warns that continued weakness in the currency could prompt foreign investors to flee domestic stocks.

The weak rupee has depreciated 10.8 percent against the US dollar this year, making investment returns less attractive for foreign investors, who are a major driving force in the market.

“When an emerging market currency does not respond positively to policy liquidity tightening, the market is in deep trouble. Therefore, further price weakness in the currency could plausibly drive further weakness in the equity market,” said Nicholas Ferres, investment director, global asset allocation at Eastspring Investments, referring to the Reserve Bank of India’s recent measures to tighten liquidity in order to make it more difficult to speculate against the currency.

“Indian equities may be a slow moving train wreck that is close to derailment,” he said.

Despite growing risks to the outlook for Indian stocks, they have held up better than other emerging market peers. The benchmark Sensex index has declined 3.6 percent year-to-date, compared with the Shanghai Composite, for example, which has lost 9.2 percent.

This is partly because Indian equities have seen very little foreign selling compared to other developing markets in the region, said strategists. Three billion dollars has exited the country’s stock markets in the recent months, compared with a total $16 billion of inflows this year, according to data from Goldman Sachs.

But with Indian equities trading at 14.1 forward times earnings and 2.5 times book value, Ferres says they are not cheap from a global perspective, and this could force foreign investors to rethink whether it makes sense to be in the market.

“That is the same valuation as US equities with similar levels of profitability, but higher inflation, gearing and inferior corporate governance,” he said.

“Foreign investors who have paid up for the superior growth might simply panic. Under that scenario we may get a proper episode in the equity market,” he added.

US investment bank Goldman Sachs (NYSE: GS) last week downgraded its rating on Indian equities to underweight from neutral citing, concerns around the deteriorating macroeconomic environment, weakening earnings and the risk of foreign selling.

“While stretched positions in rest of the region look largely cleared, foreign positioning still looks extended in Indian equities,” the bank said in a report last week.

“Funds have been overweight India for past couple of years, they haven’t reduced their allocations meaningfully so far this year despite the poor macro environment. We see a rising risk of funds paring their India allocations if macro conditions continue to deteriorate,” it added.

Copyright 2011 cnbc.com

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Stock market bulls and bears struggle for control

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Bulls and bears have been duking it out this week in the worst three day sell off for stocks in two months.

“We’re in August now, one of the thinnest months of the year so it doesn’t take much to push the market around,” said Jordan Kotick, global head of technical strategy at Barclays. “August is one of the most bullish months of the year for rates, and September is a bearish month of the year for stocks. You take a thin market, a bullish rate environment, and a bearish equity environment in September, and you’re going to have choppiness and pullbacks over the next several weeks.”

The Dow fell 48 to15,470 Wednesday, and is now down 1.2 percent for the week so far. The S&P 500 lost six to 1690, falling through key technical support at 1697/1700. It is now down 1.1 percent for the week. Buyers moved into Treasurys Wednesday, as the government auctioned USD 24 billion in 10-year notes. The yield was the second highest at auction since mid-2011. At the end of the day, the 10-year was yielding 2.60 percent.

Thursday’s markets will be watching weekly jobless claims at 8:30 a.m. ET. Claims are always interesting, and now even more so since the Fed is watching employment data closely as it moves toward cutting back on its bond buying program.

Yet another Fed official Wednesday endorsed tapering the USD 85 billion bond purchases if the economy is strong enough. Cleveland Fed President Sandra Pianalto, a nonvoting member said if the labor market remains on the stronger path it’s been on than she would endorse reducing the purchases. While markets have been expecting tapering in September, the talk about it from several Fed officials this week spooked stocks.

 “On Monday, the view was the taper was coming and nobody seemed to care,” said Paul Hickey, co-founder of Bespoke Investments Group. “Now, it seems the taper is coming and everybody seems to be worried.”

Hickey said the market needed to take a break from its recent run. “I wouldn’t read too much into it,” he said. “It’s just a little profit-taking from overbought levels. I think if you saw another percentage or two on the downside, we’d become more interested there and maybe start putting money to work

Kotick said the stock market is beginning to follow a seasonal pattern. “The bull trend is still in place. There are no signs of significant deterioration medium-term, ” Kotick said. “We are in the heart of the seasonal darkness…The last three Septembers, the market had fallen between eight and 13 percent.” Kotick expects the trend to fade in October, as the market then sets up for a Santa rally.

Scott Redler of T3Live.com said the 1700 level on the S&P 500 is the key, and the market has to trade back above it if bulls want to regain control. “Today we pulled back to the 21-day moving average, something it has not done in a while and found some support. The market has come 22 handles off its highs, pretty discretely. It was a stealth pullback,” said Redler, who follows the market’s short term technicals. The 21-day moving average is around 1682, and the S&P fell to 1684 before moving back up.

Traders will also be watching the USD 16 billion auction of 30-year bonds Thursday at 1 p.m. “Like we saw today, there’s clearly interest at a level…We’re seeing a bit of a return of buyers who have been shy for a while in here,” said David Ader, chief Treasury strategist at CRT Capital.

Ader said the bond market’s lack of reaction to Chicago Fed President Charles Evans this week was telling even though stocks were rattled. Evans said Wednesday that he wouldn’t rule out that the Fed could start tapering in September. “If the leading dove tells you they can taper in September, the cat’s out of the bag, and the market did nothing. The market has embraced it,” he said.

Ader said he expects to see yields move lower, and there should be a concession in the curve heading into Thursday’s auction. “Technically, we’ve made some important progress here. Coming out of this August refunding is the most bullish time of the year” for bonds, he said.

What else to watch

There are plenty of earnings on the calendar Thursday, including Fannie Mae, Rio Tinto, Agrium, Beam, Dean Foods, AMC Networks, AES, T-Mobile, Scripps Networks and Windstream, ahead of the market open. Lions Gate Entertainment, Priceline.com, Monster Beverage, Great Plains Energy and Annie’s report after the closing bell.

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Can the new RBI chief survive India’s ‘poisoned chalice’?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The appointment of a renowned economist as the new head of the Indian central bank seems like a promising step towards turning around the country’s battered financial markets, but analysts CNBC spoke to are in broad agreement that Raghuram Rajan has his work cut out for him.

The former chief economist at the International Monetary Fund inherits an economy struggling with the slowest growth in a decade, rising inflation, a hefty deficit and a battered down currency, together with long-standing issues like India’s much needed deregulation of its industry.

 “Rajan can’t exactly be said to be facing the easiest of tasks. The words poisoned and chalice spring to mind,” said Robert Prior-Wandesforde, head of Southeast Asia and India economics at Credit Suisse bank.

“Rajan was wise to point out that he doesn’t have a magic wand that will fix the economy’s considerable woes,” added Prior-Wandesforde.

 Rajan, who is economic advisor to the Prime Minister and the Ministry of Finance, has been tasked to head the Reserve Bank of India (RBI) for a three-year term, replacing incumbent Divvuri Subbarao, who retires next month.

The appointment of the engineer-turned-economist, who is widely acclaimed for having predicted the 2008 global financial crisis two years before it struck, has been mostly met with positive feedback from the financial community.

Still, observers are questioning how much of a difference Rajan can make. Tackling the ‘droopy rupee,’ which has lost 11.5 percent against the dollar this year, will likely be Rajan’s priority, but many India watchers were doubtful he can pull that off.

“What he can achieve in the current circumstances is very limited,” said Anantha Nageswaran, CEO at independent consultant Vansight.

“He can only continue to keep interest rates high as the current incumbent has done two weeks ago,” he added.India’s central bank has spent the past month unleashing rupee-supportive measures, including intervening in the foreign exchange market, draining liquidity and raising short term interest rates.

 The measures have done little to prop up the currency, which fell to a a fresh record low of 61.86 on Tuesday. According to Nageswaran, Rajan’s hands are tied as the majority of India’s problems, to a large extent, are the responsibility of the government.

“India’s economic crisis has been a problem of governance and that falls squarely on the shoulders of the government,” Negeswaran said.

“The government is unlikely to do anything dramatically meaningful and positive for the economy in terms of uplifting the aggregate supply, which is what will bring down the current account deficit and restore long term growth prospects,” he added.

Neumann, MD & co-head of Asian economics research at HSBC also voiced concerns over Rajan’s limited power.

“What ails India is the lack of structural reform and the central bank can only do so much. One of the main challenges for Rajan will be that India is moving into pre-election season just when he takes over and the question is will the government play ball,” added Neumann.

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BoE’s Carney fails to impress with ‘Fed 2.0’

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Mark Carney, the governor of the Bank of England (BoE), followed in the Federal Reserve’s footsteps on Wednesday by linking the outlook for interest rates to unemployment, but experts are unconvinced of the advantages of his new plans.

Carney opted to keep stimulus options open, acknowledging that while the UK recovery was clearly underway, it was still very fragile. Speaking at a press conference, he said the central bank would not raise interest rates above the current level of 0.5 percent before unemployment had fallen to a 7 percent or lower. Unemployment stood at 7.8 percent between March and May, according to official estimates.

After his announcement, Carney faced criticism for what some described as an “interesting experiment”. Other said that in adding caveats to his commitment to keep rates low, Carney had delivered “forward guidance-lite”.

“Is Carney a banker or a lawyer?” asked Kathleen Brooks, research director at Forex.com. “He couched the announcement on forward guidance with an economic threshold with so many escape clauses it sounded more like he was reading a disclaimer,” she said.

The BoE’s move echoes that of the US Federal Reserve, which has also linked its low interest rates to high unemployment. The Fed is also targeting an unemployment rate of around 7 percent, with inflation moving back toward 2 percent.

“Where did 7 (percent) come from? It’s a homage to the United States, to a certain extent,” Alan Higgins, chief investment officer at Coutts, told CNBC.

Sebastien Galy, senior currency strategist at Societe Generale described the BoE’s forward guidance as “very much Fed 2.0, but more prudent”.

 Carney declined to comment on whether the decision to introduce the unemployment target had been unanimous, saying only that this would be revealed when the central bank released the minutes of its policy meeting, on August 14.

“It will now be vital for the markets to see if these decisions were unanimous … Absence of unanimity will undermine the whole message and probably increase fears of earlier tightening,” Nick Beecroft, Chairman at Saxo Capital Markets said.

Financial markets had been pricing in an interest rate hike by the BoE in the second half of 2015. While Carney has sought to push back expectations of a rate hike to 2016, some analysts warned that a sudden improvement in the U.K. economy could pour cold water on hopes for unchanged rates for the next three years.

“The recent upswing in the U.K. economy could change that (the interest rate outlook) rapidly,” Joe Rundle, head of trading at ETX Capital, said. “Judging by the steady progress in macro indicators, it is difficult to rule out a rapid decline in the unemployment, which could initiate rate hikes earlier than even the BoE projects.”

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China market bounce: trend change or false alarm?

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The recent rebound in China’s equities has generated some optimism that the country’s beleaguered stock market may be set for a turnaround.

The benchmark Shanghai Composite Index is up 4 percent in the past week and hovering at three-week highs, spurred by positive economic data.

The government’s twin Purchasing Managers’ Index (PMI) reports for the manufacturing and non-manufacturing sectors for July both came in better than expected, raising hopes that the slowing economy may be getting some of its growth mojo back.

Chinese stocks have been steadily climbing over the last couple of weeks, after the government unveiled a “mini stimulus” package in late July to boost business investment, leading many analysts to predict that more growth measures are on the way.

Still, China watchers are tempering the cheer, cautioning that the gains may be more of a knee-jerk reaction, rather than a pivot point for the markets.

“For now, it’s still just a short-term rebound in a bear market. The stronger performance is due to policies to stimulate the economy and recent PMI data, which show China’s economy is stabilizing,” Jackson Wong, vice president at financial services firm Tanrich Securities told CNBC.

In order for the market to sustainably reverse its longer-term downtrend, domestic investor sentiment would need to recover substantially, Wong said, noting that this shift may happen if China delivers a sustained improvement in economic data over a period of a few months.

“Domestic investors don’t trust the stock market at all. With stocks in bear market, every time they buy, they lose,” he said.

“If the economy shows an improvement in growth that will attract foreign investors and institutional investors in China, which will help change the sentiment,” he added.

The benchmark Shanghai Composite is down 9 percent since the start of 2013, weighed down by concerns over a growth deceleration and tighter liquidity conditions in the world’s second largest economy.

A break above the index’s next resistance level of 2,100 would be a positive signal, he added. The index traded at around 2,052 on Wednesday.

The slew of upcoming economic data this week will be important in determining the market’s next moves, in particular the consumer price inflation (CPI) and producer price inflation (PPI), he said. Producer prices in China have been declining since February 2012, weighed down by falling commodity prices, overcapacity and weakening demand.

After a disappointing first-half, Wong expects China’s economy to strengthen towards the end of the year and into 2014. As a result, Wong says he is sticking to his target for the Shanghai Composite of 2500 by year-end, representing a 22 percent upside from the current levels.

“It will depend on the pace of improved data out of China, and economic reforms. But there is no huge downside risk from here,” he said.

—By CNBC’s Ansuya Harjani; Follow her on Twitter

@Ansuya_H

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Activity in BRICs shrinks for first time in 4 years

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Manufacturing activity in emerging markets fell to a new post-financial crisis low in July as output contracted across its four largest economies for the first time since March 2009, according to HSBC.

The HSBC Emerging Markets Index (EMI), a monthly indicator derived from purchasing managers surveys (PMI), fell to a low of 49.4 in July, down from 50.6 in June. This marks the first time the reading below the 50 level, which separates growth from contraction, since April 2009.

Added to that, Brazil, Russia, India and China (BRICs) all saw the first broad-based contraction in factory output in over four years.

Frederic Neumann, co-head of Asian economic research at HSBC said that emerging markets are not yet feeling a lift from stabilising demand in developed economies of the US, Europe and Japan.

“For example, manufacturers have seen new export orders contract for a fourth consecutive month in July,” Neumann said in a note on Tuesday, adding that there are signs that domestic headwinds for emerging markets` growth are “stiffening” as well.

“Total new manufacturing orders fell sharply last month, while new orders for services continue to expand at a disappointing pace,” Neumann said.

The data paint a very different picture for emerging markets compared to that of developed economies like the US, where manufacturing growth hit a two-year high in July, according to the Institute of Supply Management. European factories also snapped a two-year run of declining output last month, a Markit survey showed.

Emerging markets risks

The main risk for emerging markets is that the cyclical downturn in manufacturing and a softer service sector activity will ultimately lead to a weaker job market, Neumann said.

(Read more: Why We`re More Gloomy About BRICs: Goldman )

“Manufacturing employment in China, Brazil, Russia, Poland, and Korea, for instance, has already started to decline, with service jobs in most cases still growing, albeit at a softening pace,” Neumann said. “Deteriorating job prospects could weigh on household spending, thus undoing the lift expected from easing consumer inflation in most emerging markets.”

A slowdown in the world`s second largest economy is worrying because of its drag on Asian economies, HSBC economists said.

“Asia manufacturing orders fall sharply, despite a more stable West. Worries [are] now local, especially with China`s engine sputtering,” Neumann tweeted.

Production at Chinese manufacturers declined for the second month in a row in July , with lower output being driven by the sharpest decline in new business for 11 months, according to HSBC.

(Read more: BRIC Powerhouses Risk`Middle-Income Growth Trap` )

However, some comfort can be taken from the HSBC Emerging Markets Future Output Index, that tracks companies` expectations for activity in the next 12-months. The index rose slightly from June`s low, but was still at the second-lowest reading in 16 months.

Neumann said the relative optimism among firms could reflect the view that such as in China, there will be some “policy accommodation forthcoming to help arrest the broader deceleration in activity.”

-By CNBC.com`s Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu

Copyright 2011 cnbc.com

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Five ways Jeff Bezos could shake up the Washington Post

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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If there is one thing Amazon CEO Jeff Bezos knows how to do well, it’s make tons of money. If there is one thing that is certain about the newspaper business these days, it’s that it generates barely any money.

Which is why media junkies and analysts alike are pulling their hair out over what exactly the Silicon Valley billionaire plans to do with the Washington Post. And while no one knows for sure what Bezos has up his sleeve, he will almost surely experiment to find new ways to create value, Wired senior staff writer Steven Levy told CNBC’s “Squawk on the Street” on Tuesday.

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“He is a person who knows how to leverage the Internet to create incredible value, and I think he sees opportunities there that traditional publishers just haven’t seen,” Levy said. “So I think we are going to see things we haven’t seen before in the news industry to leverage the valuable, valuable product that they have.”

Here’s a few ways experts say Bezos may experiment with the Post.

A Netflix for news

The news industry needs a better way to aggregate content, and Bezos may begin to tackle that problem starting with the Washington Post, said Ken Doctor, a news publishing analyst at Outsell.

Much like Netflix or Apple’s iTunes, news needs a platform readers can go to consume new as well as old content and receive personalized recommendations, Doctor said.

“Netflix’s initial notion was to put all movies in one place and have a list where a user can get recommendations, he said. “If you look at iTunes in a similar fashion, digital music was out there, but all the tough work was on the user’s and customer’s part. With iTunes, Apple said let’s bring it all in one place where people can seamlessly buy and listen all in one solution—I could see Bezos pushing in that direction.”

The Amazon CEO could build out a similar platform, on which users could find content from the Washington Post and other regional newspapers and political outlets in one place; recommendations would be generated based on what the user had previously read.

Amazon-like content

The most powerful thing about Amazon is that it knows its users well and leverages that knowledge to sell more products. This may be a key strategy for Bezos to push content and advertising, according to experts.

“What makes Amazon special is that it knows you as you—thus, it gives you greater relevance and greater value,” said Jeff Jarvis, director of the Tow-Knight Center for Entrepreneurial Journalism at CUNY’s Graduate School of Journalism. “Forget big data; we need small data.”

For too long, newspapers have focused on too broad a demographic, he said. What it must do now is act like Amazon and pay attention to that “small data”—the data of individuals—to add value to the reader’s experience.

Amazon is exceptional at getting to know its customers and uses its recommendation technology to give people what they want, when they want it, said Scott Peters, the co-president of Jordan, Edmiston, an independent investment bank specializing in media, marketing services and technology.

Whether it’s targeted advertising or custom content, Amazon’s recommendation engine may provide a handy tool with the Post.
“Amazon has done so much experimenting with marketing and customer interaction, [Bezos] probably will deploy a small army of people creating the best model for the digital side of the enterprise,” Peters said.

E-commerce

Another way Bezos may look at rousing profits at the Post is by implementing an e-commerce component on the digital side, experts say.

“This is a personal investment by Jeff, but e-commerce is in his DNA, so I would think he would be able to exploit some of the aspects of a newspaper that haven’t been exploited before,” Levy said. “Just the idea that so many people see it, and these eyeballs can be converted to sales.”

Bezos could allow advertisers on mobile platforms to sell products directly through the ads, Doctor said. Amazon could charge advertisers a premium to place a “hot button” by their ad or next to their product name in a story, enabling the user to purchase directly through the app.

Amazon could use its recommendation technology for this application as well, Doctor added.

“People don’t just want advertising, but they want to buy and they want to buy smartly,” he said. “This would help delight readers, especially on smartphones and tablets.”

Double delivery service Using the Post’s daily delivery for products is something Bezos may experiment with, Levy said.

“Amazon has been very aggressive in its delivery service, and now he has a delivery that is going every day to people’s houses,” Levy said. “These are some of the places that he might go.”
Doctor said he could also envision Bezos taking advantage of delivery’s physical component, potentially using it for a one-day Amazon delivery system in the Washington area. However, he added, the logistics would have to make absolute sense for Bezos to act on that.

Free Kindles

Giving away Amazon’s Kindle e-readers might be another route to enticing new Post subscribers, Doctor said.
Doctor said the the paper could offer a Kindle Fire to those who sign up for a two-year subscription, but added that he didn’t imagine that as one of Bezos’ major moves.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow