On General Electric Yet Again.

Here is a simple REAL economy problem. Yesterday's "economic" (a euphemism for Wall Street speculation) news about Dow. 

The Dow is down sharply early Thursday with the headlines blaming lingering concerns over an escalating trade war between the United States and its major trading partners, China and the European Union for the triple-digit, 0.48% loss. However, if you dig deeper into the cause of the sell-off and the size of the move, you may want to place the blame on the performance of Walgreens.

Just days after Walgreens (WBA) replaced General Electric Company (GE) in the Dow Jones Industrial Average after the close on Monday, it is the biggest drag on the stock market. The catalyst behind the weakness in Walgreens, or for that matter the health-care sector today is the news that Amazon is acquiring online pharmacy PillPack in a deal that could shake up the prescription drug industry. Although both Amazon and PillPack did not disclose the details of the pact, traders expect the move to be completed during the second half of the year. According to Walgreens Boots Alliance CEO Stefano Pessina, “Yes, it’s a declaration of intent from Amazon.”

Let us conduct a forensic mental experiment: say some company, call it Specific Electric (SE), declares that it has intentions to design and produce a new generation of jet-engines which will surpass GE and Safran (former Snecma) produced LEAP jet engine by 10% in efficiency and reliability. The implications of this could be huge--since LEAPs are used internationally in the most active and gigantic market of narrow body medium-range commercial aviation with Boeing-737 and Airbus-320 dominating it in their thousands. Guess what is going to happen to Dow Industrial on these news? Not much really--Specific Electric may get some boost to its shares, GE may lose somewhat in a short run, but overall the so called "market" will have a pretty average day. Why? Because R&D in jet engines, appropriate (re)tooling, setting a manufacturing process, training labor force, getting all necessary certifications etc. is an extremely complex and money and labor intensive process. In general--it is a huge industrial ordeal and undertaking, which will see in the end an immense value added to a final product, which may redefine how crucially important nationally and internationally commercial aviation operates. Implications are enormous.

Now, let's imagine that both General Electric and Specific Electric simply disappear--say both go completely belly up. Consequences? In real world they will be gigantic. Pratt and Whitney and Rolls Royce suddenly find themselves in a titanic struggle for a gigantic market and for a strategic position, they also will fail to fulfill GE and SE's huge backlog orders. So, a chaos may ensue with airlines failing to update their fleets or buy new aircraft, this will affect air traffic globally--so you can imagine. Now, let's say Walgreens disappear. What is going to happen to poor clients and patients with their prescriptions and over the counter medicine? Nothing, really. Walmart, Rite Aid, all grocery store chains will be more than happy to jump into this market hole left after Walgreens collapse and this could be done within days, weeks at the most. In the end, one can buy Penicillin, Metformin,  insulin, any prescription and not drug in... well, Google "US pharmacies" and you'll get the idea. And the only reason this will not be a big problem is because selling shit is much simpler, on several orders of magnitude easier, than producing shit, especially when this shit is of the highest levels of complexity such as jet engines. Feel the difference? 

So, getting back to the news in the beginning of this post: let's summarize--we observe a rats' race between two retailers who produce nothing but offer services which can easily be replaced really fast. Anyone who thinks that Amazon is a "tech" company--they better take a red pill (or a blue one? I don't remember) and get back to reality. If Amazon fails tomorrow--there are thousands of groups which will jump in immediately, because it is NOT that difficult--it takes software developers and storage facilities, plenty of those around. Try now to remove ALL jet-engine manufacturers, or MRI machines manufacturers. We will have a major crisis because it will take an enormous and long-time sustained effort to replace them. It is so self-evident, it is so simple to understand that one is forced to ask--what placing of a retailer Walgreens which sells shit which hundreds of others sell, for about the same price, into Dow Industrial has to do with INDUSTRY? The answer is NOTHING. General Electric's shares may worth zero tomorrow, but until it continues with its line of the highest tech products and sells them (and there will always be a market for them) it doesn't matter--it will remain one of the jewels of national and international aviation and medicine. Walgreens (nothing personal against Walgreens and its fine people), meanwhile, may have its shares hitting astronomical numbers but it will remain the most trivial, most common pharmacy and retailer, period.

This brings us to the next question--what is then a real VALUE of US economy or, rather, of its "market". I don't know the number but I know that this "market" is overvalued grossly and is sinking in derivative financial "instruments" (euphemism for non-existent money and imaginary values) and is completely detached from reality. Reality, however, is not as shiny, to put it mildly, but there are still some things which could be done to at least partially correct it. Some of them are being at least tried. But that brings us to...

Trump-Putin summit in Helsinki on July 16th. I will write about that later (some people ask me to do so). What I can say now is that the main point of this summit will be how, in the end, to arrange for the United States to save itself without unleashing WW III. The issue with GE has, actually, a direct relation to Trump-Putin agenda.