The Wedge Goes Deeper

“Nearly all men can stand adversity, but if you want to test a man’s character, give him power.”

– Abraham Lincoln

“If more of us valued food and cheer and song above hoarded gold, it would be a merrier world.”

– J.R.R. Tolkien

Photo credit: JJMustang_79 via Flickr

PUBLISHER’S NOTE: John Mauldin is off this week on a well-deserved honeymoon vacation. In his place, John asked his longtime colleague and protégé Patrick Watson to write Thoughts from the Frontline. John will be back next week. – Ed D’Agostino, publisher


In last week’s letter, John Mauldin had some harsh words for the Federal Reserve leaders whose hubris pushed us into our current monetary corner. Now, with no good choices left, all we can do is pick the least-bad one.  

I could easily pile more criticism on Janet Yellen and the gang, but I have a different question: Why are powerful people so consistently clueless about the harm they inflict on everyone else? We’ll look at some new research for a possible answer.

Then we’ll apply that information to last month’s biggest corporate news story: Amazon’s $13.7 billion takeover of Whole Foods Market. It will have effects way beyond those two companies. You’ll see what I mean shortly. Fair warning: It’s not good news.

First, a little business. John had a fascinating interview at our recent Strategic Investment Conference with Altegris Investments CIO Matt Osborne. Along with the economic outlook, they discussed some personal investments of John’s that he rarely reveals. Due to the nature of those investments, we had to restrict the session to “qualified purchasers.”

If you fit that description but missed the conference, we now have an audio recording, slides, and transcript available. Just follow this link and answer a few questions to see if you qualify. You will then be given direct access to the materials.

Now, on to our story.

Sharpened Edge

John wrote a letter last year called “Life on the Edge” that I think was one of his most important ever. It drew more reader feedback than anything else of John’s I’ve seen. You may want to read it again after you finish with this one.

Drawing on Peggy Noonan’s Protected vs. Unprotected theme, John described how our economy has left so many people behind. Their anger, much of it well-justified, is one reason Donald Trump is now president.

The issue is broader, though.

Powerful people everywhere routinely make decisions that hurt others. We see it in central bankers, politicians, corporate CEOs, religious groups, universities – any large organization. The old saying is right: Power really does corrupt. And corruption is a barrier to sustainable economic growth. This is more than a political problem; it has a serious economic impact.

Recent psychological research suggests that powerful people behave remarkably like traumatic brain injury victims. Controlled experiments show that, given power over others, people often become impulsive and less sensitive to risk. Most important, test subjects often lose empathy, that is, the ability to understand and share the feelings of others.

For instance, researchers asked people to draw the letter E on their own foreheads for others to view. To do that, you must mentally place yourself in the other person’s viewpoint. Those who reported feeling powerful were three times more likely to draw the E from their own vantage point instead of the observer’s.

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Powerful people also lose a capacity called “mirroring.” When we observe other people doing something, our brains react as if we were doing the same thing. It’s why, when you watch a sporting event, you may unconsciously mimic a golf swing or the referee’s hand signals. Some portion of your brain thinks you are really there. But when researchers prime test subjects with powerful feelings, their mirroring capacity decreases.

You can see why this is a problem. The Protected-class members of the Federal Open Market Committee must feel quite powerful when they gather in that fancy room to make policy decisions. It’s no wonder they forget how their decisions will affect regular working-class people: Their empathy circuits get turned off.

Similarly, as John wrote in “Life on the Edge,”

Business executives meet in a nice office, tweak a few numbers, and somewhere down the line people lose their jobs. Those folks are thousands of miles away, and the decision-makers never even see them. This is what it means to be “protected.”

So if hubris is a disorder, can we treat it? Not easily. As with drug addictions, the patient must recognize the problem and want to change.

I once told John, jokingly, that we would get much better Fed policy if all FOMC members had to spend two weeks a year as Uber drivers or bank tellers. As it turns out, the research says that might actually help. Putting the powerful in situations where they must interact with regular folks helps restore empathy.

Everyday interactions used to happen naturally. Powerful and wealthy people have always had privileges, but they still shared certain common life experiences with the general public. Everyone went to the driver’s license office and waited. We all drove the same roads in the same traffic. We went to the same hospitals when we got sick. We bought our groceries in the same places.

These small points of commonality add up to a stable nation and economy – and we’re losing them. The Protected class is withdrawing into its own protected world. It hasn’t always been this way.

Years ago, I saw Michael Dell at the Austin airport. This was the late 1990s, when he was already a well-known billionaire. I’m sure people recognized him, but they left him alone.

This billionaire, who was perfectly able to fly in his own jet had he wanted to, stood in line to buy frozen yogurt, then took a seat at his gate to eat it. I was on a different flight, so I don’t know if Dell was in first class that day. He probably was, but otherwise he had the same experience as everyone else.

That was 20 years ago. How many of today’s top-level CEOs fly commercial? Not many, I suspect, and those who do probably wait for their flights in special lounges. Their boards may require this because they want the CEO to use time efficiently.

That’s not unreasonable, but it has a cost. It means the CEO (or government official, central banker, etc.) loses awareness of everyday life as most people live it.

Steak or Spam

Something else we all need is food. Except for the very wealthiest, who have household staff, we all visit grocery stores. Some buy steak, and others buy Spam, but we go to the same stores and through the same checkout lines. You know you are in the Protected class if you can’t identify with that experience.

President George H.W. Bush learned this the hard way. Running for re-election in 1992, he marveled at seeing a supermarket scanner. He had no idea they existed, and he reinforced the clueless-patrician stereotype his opponents used against him.

When Bush saw the scanner, he had been president for three years and vice president for eight years before that. Of course he hadn’t done any grocery shopping recently. No one expected him to. But voters expected him to know what it was like. The revelation that he didn’t know was politically problematic.

A few months later, a voter tried to catch Bill Clinton in the same trap. Bill was ready. The Los Angeles Times recorded the event for history.

Debbie Gilbert, the mother of two boys and a part-time employee at a local hospital, said her exercise was prompted by a lack of confidence in politicians.

“I don’t believe that politicians know what it’s like to be in the shoes of the average American family,” she said on the program. “I want to know if you know how much it costs to buy a pound of hamburger, a pair of blue jeans, a tank of gas and a visit to the doctor’s office?”

Without pausing, Clinton weighed in like a contestant on “The Price is Right:”

“Gasoline is about $1.20, hamburger meat is a little over a dollar. A gallon of milk is two dollars. A loaf of bread is about a dollar,” Clinton said, adding that a doctor’s visit differed from area to area.

“Blue jeans run you anywhere from $18 to $50, depending on what kind you get,” he said.

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At that point, Clinton had been either governor or attorney general of Arkansas for 12 of the last 14 years. Had he done much grocery shopping? Probably not, but he knew he might get the question, and he was prepared for it.

Which brings us to today’s grocery story.

Groceries to Go

If you are a shareholder in either Amazon (AMZN) or Whole Foods Market (WFM), their combination ought to please you. Both stocks rose on the news while the rest of the grocery industry dropped. But in the long run, I’m not sure their deal will work out well for any of us.

No one outside Amazon (and possibly within it) really knows what Jeff Bezos plans for Whole Foods. We do know he’s been trying to break into groceries for years. We also know he sometimes acquires companies and then leaves them mostly alone. Amazon bought Zappos in 2009, but today it’s still Zappos.

Much of the Whole Foods analysis revolves around Amazon’s using the stores as a kind of delivery hub or pick-up zone. I don’t think that will happen. First, the stores don’t have much extra space. They can be grocery stores or warehouses but not both. Second, Whole Foods stores are usually in high-end shopping centers. Amazon could probably find lower-rent space not too far away if it wanted logistics hubs.

So, I think Whole Foods stores will still be grocery stores – but they will change. They’ll get new technology. Amazon Go could be the model: a grocery store with no check-out. You get an app that tracks you through the store, identifies whatever you pick up, and charges you for it.

That would work pretty well at Whole Foods – they’re already halfway there. Consider the price labels on their shelves.

Instead of paper tags, most Whole Food products have these little digital devices. Presumably they’re networked and a central office can change them instantly.

We also know that Amazon – the online part of it – uses dynamic pricing that can change frequently. Whole Foods is already set up to do the same in its physical stores. You can bet Jeff Bezos noticed.

The genius of Amazon Prime is that the free shipping reduces your price sensitivity. They don’t force Prime on you, but they don’t need to. Many folks search for what they want and filter by the items that are Prime eligible, then choose. They never know whether a less expensive non-Prime option is available.

I suspect Whole Foods under Amazon will become a more sophisticated version of what it is now: a premium-price grocery store catering to well-off people. They’ll either dash in to grab what they want or have it delivered. In either case, this service will further insulate the Protected class from once-common experiences.

The process has been underway for some time. My colleague Robert Ross and I co-edit an options service called Macro Growth & Income Alert. About a year ago we started seeing trading opportunities in the low-end retailers and dollar stores. Another one popped up on our screens after the Amazon-Whole Foods announcement sent grocery stocks down.

As John keeps saying, we’re overdue for recession. I agree, and I think it makes sense to own stocks that tend to do well in times of economic weakness. The dollar stores are tailor-made for that. But others see the opportunity, too.

Aldi and Lidl are European grocery chains with big plans to expand in the US. I’ve never lived where they had stores, so I have no personal knowledge; but Robert has, and he describes Aldi as “Dollar General with produce and meat.” The atmosphere is spartan, but the prices are apparently low.

See where this is going?

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Value at the Extremes

 One of the fascinations of economics is the way market forces nudge people and businesses in new directions. Unraveling cause and effect can be tough, but things don’t happen randomly. Every trend is really a long chain of actions and reactions.

The Protected class’s increasing separation from mainstream society is a trend that we increasingly see reflected in retailing. Stores that cater to either the top or bottom extremes – luxury retailers and dollar stores – are doing well. Those that cater to the middle are struggling.

Now that trend is reaching the grocery segment. The outcome won’t be all bad, either. Customers at Whole Foods and Aldi may define “value” differently, but both will probably get more value for the money they spend. But they will inhabit even more starkly different worlds than they do now.

In the process, we will probably lose one more of the common experiences that keep society stable and help us value each other’s humanity. The Protected-Unprotected divide will widen even further, and people will cross it less frequently.

I have tried to imagine scenarios where this divergence ends well. I haven’t come up with any.

I mentioned the first President Bush above. The grocery-scanner criticism wasn’t really fair. He is a genuine war hero. Yes, he was born into wealth, but he also volunteered to face danger.

His generation believed the Spiderman principle: “With great power comes great responsibility.” That’s not so common anymore.

If we are to avoid the worst, then the Protected class – and I’m admittedly a member – will have to work at it. We’ll have to go out of our way to stay connected with the other side and help them climb the ladder, too.

This won’t happen automatically and may not happen at all. It’s a collective-action problem. Any particular member of the Protected class has little incentive to sacrifice any privileges. But if we all make nothing but individually rational choices, we will not like the outcome.

The alternative is to do nothing and let the chasm grow wider and deeper. I’m pretty sure none of us want that. If we don’t, then we have to make some changes. Now is a good time to start.

Before He Was Famous

This is where John usually tells you about his travels and meetings or plans for treating guests to a holiday dinner. I can report he is presently in the Virgin Islands on a honeymoon with his new wife, Shane. That’s all the rest of us need to know.

However, since John has kindly lent me his microphone, I have a few words to add.

I have known John Mauldin longer than 99% of you reading this letter. I went to work for him full-time in 1989. He had just sold one company and started another. For the next three years, the two of us and a few others shared a small office in Arlington, Texas. You know how it is if you’ve ever worked in a start-up. You get to know everyone really well.

This was long before John was famous. He had his quirks, as we all do. He worked hard and expected the same. But otherwise, he was just John. We leaned on each other and made good things happen. It was a wonderful education for me. I moved on to a different kind of career until we hooked up again five years ago. Now it’s much like old times.

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I repeat that history to make this point.

The John Mauldin I know now is the same one I met all those years ago. In this letter I talked earlier about the way power and fame can change people. I can attest it hasn’t changed John, except for the better. He still seeks wisdom wherever he can and shares it freely in these letters, because he genuinely wants to help people.

I haven’t known Shane as long, but I can tell she and John have a special connection. They deserved a break, and I am honored to have helped make it possible by writing this letter. Please join me in wishing them many decades of happiness together.

John will be back in the saddle next week. If you want more Patrick, you can…

• Read my weekly Connecting the Dots letters,

• Subscribe to Yield Shark, my income investing newsletter, or

• Subscribe to Macro Growth & Income Alert, in which co-editor Robert Ross and I help investors generate more income with simple option strategies.

You can also follow me on Twitter @PatrickW. Just remember, the opinions you see there are purely mine. John Mauldin and Mauldin Economics don’t necessarily endorse them.

With that, I will hit John’s send button and get this letter on its way to you.

See you at the top,

John Mauldin Thoughts from the Frontline
John Mauldin

P.S. If you like my letters, you'll love reading Over My Shoulder with serious economic analysis from my global network, at a surprisingly affordable price. Click here to learn more.


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jack goldman
July 1, 2017, 3:27 p.m.

Amazon is basically a currency counterfeiter, a Ponzi scheme along with Facebook, Netflix, and Google. The FANGs do nothing, make nothing, and have no risk. Who cares about price if I can counterfeit unlimited coupons and debt notes? These are just automators and consolidators who are being inflated into never before seen inflated valuations. Real people, make real stuff, and it is really tough. I was a home builder. It was hard risky work.  Fake people reporting fake news delivering fake news, make nothing of real value and it’s really easy to have fake jobs. Why is reality so under priced and fake is so over priced? It does not make sense. One reason may be the fake is subsidized by counterfeit currency. Fake jobs are subsidized. This is a tragedy for the Middle Class who had real jobs until they were down sized and ethnically cleansed by having jobs exported to avoid paying taxes in America. A lot of this is tax scamming. Just the taxes are 51% (Fed, State, social security, sales, inflation, property tax, etc.) in over all savings. If I move from MN to FL I save 7% just in property taxes. The Middle Class whites are being robbed to pay for the lower class immigrants. Whites stop having babies. Black babies are subsidized. Seventy two per cent of black babies are born to single mothers, often on welfare. This is a crisis. Too few white babies. Black kids grow up badly due to no father. This is all part of the tax culture and the on line avoid local responsibility for the real culture. We are being taken over by FANGs and Wall Street counterfeiters. Something has to be done to “level the playing field”.

jack goldman
July 1, 2017, 3:16 p.m.

Counterfeiting currency for fifty years ALWAYS has the same effect. The elite 1% get fabulously rich, the lower class swells, as middle class people are fired, divorced, replaced with machines, immigrants, or down sized. Thus lower end and upper end does better and grows. The middle class is eaten alive by the Wall Street vampire squid that counterfeits our currency. In real silver dollars the Dow has not risen in fifty years. In fake, phony, debt notes it’s a raging bull market driving up real estate, assets, stocks, and leaving the poor working slob in the dust. High school graduate white males have been ethnically cleansed. A few make it but they are not the norm. It’s all part of the currency debasement, currency counterfeiting scam that will end badly. Sadly, the rich who should be shot, will probably profit even more from the chaos. The system is rigged but it’s probably doing as good as we can until there is the inevitable “reset”. Good luck to us all in the reset. Fifty per cent of college graduates live at home. My daughter was paying 50% of her take home pay for rent. No way she can afford that and get ahead. She is a college graduate free slave. It’s all part of the inflation, counterfeiting regime.

Ron Miller 15345216
June 30, 2017, 2:52 p.m.

I’ll apologize for what is probably a trivial comment, but the reason for the growing success of the Aldi supermarket chain is not just that the it’s “spartan” while prices are low. That growing popularity is mainly attributable to the fact that customers are learning that, very contrary to the Dollar-General experience, they need not sacrifice a whit of quality at these low prices. The quality is as good or better than the big chains (not including Whole Foods which sells Mercedes-priced groceries), and the reduced prices seem to be achieved because they sacrifice a very few amenities (bag boys), they prepackage all produce, and they carry only one brand — i.e., there is seldom any choice other than the Aldi brand which must lead to significant savings in shelf stocking, warehousing, and wholesale prices. Were these Aldi brands not top-notch in quality, the chain would have failed, but the products are just as good or better than the stuff at Kroger for 50% higher prices. I’m not sure what to compare them to—perhaps they are to groceries what Ikea is to furniture . . . minus all the self-assembly jokes

Leslie Black
June 30, 2017, 12:27 p.m.

Patrick, the Bush supermarket scanner myth was Fake News. Snopes rates it FALSE:

The writer who detailed the story in 1992 did not know what happened (he wasn’t even there) but he knew what he wanted people to believe. And it worked. By 1993, George Bush was no longer President. And today, 25 years later, smart people like you still transmit his myth.

Shows you what went on when Fake News went unchallenged.
June 30, 2017, 12:07 p.m.

The author has his facts wrong about George HW Bush and the scanner. This story has been thoroughly debunked.  Bush was not in awe of seeing a scanner, he was in awe of seeing scanners that could read torn bar codes. The New York Times twisted this story to make Bush look bad. See link -
June 30, 2017, 11:47 a.m.

Enjoyable article.  The hubris the elite gain could as equally be driven by a life in fear not love.

Can I offer a different take on the Amazon / Whole Foods Purchase?

I really believe there is a possibility that it is a take over that could, with hindsight, mark the top or is very near to marking the top in this market.  These kind of take overs always happen near the top in any bull market. Normally the next recession establishes the true value of the purchases made.  Time will tell.

The main street economy is not reflecting the wall street market. Is it any wonder Whole Foods are starting to find retailing organic foods more difficult and are starting to close stores. (nine this year).  Compounding a poor economy is organic is no longer their sole purview. Many main stream retailers are entering the organic market.  The key skill is selling product and whether it is organic or conventional, is ultimately not really very important.  Yes online is coming and the customer values the convenience and will pay the premium.  I am not complacent here.

I see this purchase as equally about Whole Foods being weaker and cashing in on the value of the company.  A good move for Wholefoods investors!  I am not sure Amazon will successfully grow the franchise.

To be fair first.
Take Hudson’s Bay they are developing a complementary retail approach to the customer with both online and bricks and mortar experience, each to support the other.  In a large country like Canada the retail stores are a regional warehouse for the online shopping, saving S&H to the customer and re-enforcing the retail store where the customer can see and touch the products too. (note there are other issues in HBC as a company).  This is what it looks like Amazon want to do. But Whole foods stores are very regionally specific in the US and as you say like any grocery store there is no space to add on new business. More latter on this.

An outlier to the complete online shopping debate is tax revenue.
Online sales are across city/state/provincial/international borders. The sales tax in the originating region are not being collected locally. The sales tax in the receiving region are not being collected.  Businesses are struggling/closing in the receiving region. The customer benefits with paying less tax, 20% in some locales.  All these lost tax dollars are compounded by lost jobs, lost business community in the destination state of the online goods. Generally online shoppers value the convenience above the S&H costs.  So far Governments, in the main, have been very poor at recognizing the lost sales tax revenue. When government finances become even more difficult (well documented on your show) they will look to new areas to raise tax dollars. Online sales and the lost tax dollar is one. This will impact online sales.  time line five years?????  This non collection of sales tax is a competitive advantage outside the bricks and mortar stores purview to control.

This lost tax revenue to government is one facet of the issue. The other is the playing field is not equal between the online and high street retailers.  It is no surprise to me to see challenges/disruption in retailing across the world.  I believe I can sense a move by some established manufacturing brands to open their own retail high street presence to protect the price point / product position / marketing in customers minds.

I believe Amazon make most of the (small) profits that they do make is from their cloud business, arising from the down time their computers experience during the working day around the world.  This is a wonderful but fortuitous profit from their business activities. Indeed as a viable business into the future it may be the real value inside Amazon, not the online retailing.

Amazon’s profit especially in terms of capital employed and size of business activity is low.  Ultimately, I would argue to the investor these metrics matter most.  Money is money and the return on the business activity will have to be balanced against other investment possibilities open to the investor. So far Amazon as a business have managed to get away with capital appreciation of the shares to satisfy investors being the value to investors.  This is a hubris phase of the company. At some point a dividend will have to be paid and it will be paid. Likely when this happens the capital growth phase of the company and in the share price will be over.  When this happens the investor will no longer be satisfied. Hubris and confidence are exposed.  The relative year to year annual growth of Amazon as a percentage will be low and the dividend will be relatively paltry for the share price and the share price will decline in value to match similar investments.  I would argue Amazon is a direct result of low Fed interest rates. Certainly the old business model of generate profits, re-invest them in the business and thus grow the business does not apply. They have done it on the back of share price.

The low interest rates has hugely helped it’s growth and business model. What will the company look like when interest rates normalize?

The Amazon business model started in retailing books on line. It now plans to open 299 bricks and mortar stores. I conclude from this that online does not give Amazon the profit/sales volume required for its long term financial security.  Umm is the business model in error?  It needs a higher profit margin from a real book store! Well charge $$ more for the online sales.  I see so much wrong in this.  Ethics and optics are awful.  Predatory pricing through online sales has put oh so many good businesses out of business.  All to enable Amazon to become the dominant player in the market and then to open bricks and mortar stores! It really is laughable if it were not true. Hollywood could not write a more cyclical script.  Is this a court case waiting to happen? I believe so. More likely as Amazon has the legal financial muscle to win in court it will take Government action to break up Amazon.  This Government action to bring competition back to the retail market space applies to many of the the new silicon valley disrupter behemoths.

Amazon’s work place practices are known to be poor.  Like Uber and Tesla sexual and managerial harassment are commonplace.  This behaviour in the work place is unacceptable.  Old school companies do not get away with this behaviour and nor should the new disrupters.

If Amazon want to go high volume in the grocery world i.e. go against Walmart, then they are moving down market away from the whole foods customer base and the internal Wholefoods culture. Whole foods retail foot print in the USA is very limited to the areas where people care about the food they eat.  I would hazard a guess that if the two footprints of store locations for Walmart and Wholefoods in the US were put over one another there would be little overlap.  I do not see this purchase giving Amazon the mass market grocery exposure they appear to want in targeting Walmart. They will need to buy many more companies to do so. 

A much more sensible purchase in my mind would be to have bought SPUD, an online grocery retailer here in vancouver.  Amazon’s $ muscle could roll that model out across the US.  Yes it would take longer too have a national presence in grocery, but Amazon would be truly controlling their grocery offering to the market.

Buying an established company that have huge culture differences embedded in them is fraught with difficulties.  Amazon and Whole Foods are very different animals. Simplistically Amazon is stack it high sell it cheap(online), Wholefood is not known as Wholewallet for nothing. How will Wholefoods customers and employees respond to a change like this? I believe staff will leave and only strengthen the competition.

Online grocery is growing and when done right is hugely profitable, more so than bricks and mortar. 

I see the possibility that Amazon might be so full of their own self importance and hubris to believe it can do online grocery such that the Whole Foods purchase becomes a mistake. It is so out of their business experience it could become the “Bridge Too Far” for Amazon.

Equally, perhaps the story line of great online retailer needing bricks and mortar stores ala HBC to grow their online business as they move into grocery could be be true. On balance I lean to hubris being the more likely outcome.


daniel Heald
owner Ruddy Potato( a grocery store on Bowen Island)

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