Guest Opinion: A Global Macro View on Amazon HQ2


Amazon has been getting a lot of free buzz lately. The Seattle FANG has been holding a bake-off to see which city will host the company’s second headquarters, and towns have been falling over themselves to offer tax breaks and every benefit they can drum up.  Excitement has been building as cities have been eliminated, and now we’re down to twenty survivors. The twenty finalists are literally all over the map, from LA to Columbus to Nashville to as far north as Toronto.  I’m guessing the winner has been known to Amazon from the get-go, so the announcement could come at any moment. If anyone is going to make this call, it had better be now—HQ2 is going to Northern Virginia, with honorable mention for Montgomery County.

I’m not a stock picker; I’m a global macro investment manager.  I don’t know about EBITDA, or free cash flows, or enterprise value.  I honestly have no credentials to offer up an opinion about how HQ2’s decision will impact Amazon financially.  But in this case, all that messy bottom-up stuff just isn’t necessary. I doubt that even Amazon has crunched a single number.  What I do as a global macro manager—what I must do—is cut to the chase.  From my perspective, Amazon’s decision has nothing to do with the relative merits of a given location.  Amazon has something much bigger in mind.

Amazon claims the new HQ2 will be equal to its Seattle sister in size and scope, plans to invest over $5 billion in construction alone, and will hire 50,000 new people.  In return, Amazon expects a location with more than one million people, a “stable and business-friendly” environment, a locale with the potential to “attract and retain strong technical talent,” and “communities that think big and creatively.”  They also want a few odds and ends such as existing buildings of at least 500,000 square feet, access to mass transit, etc.

I’m sure every finalist has all the things that Amazon could ever want.  Virtually all of them have promised tax breaks and offered a ton of freebies.  All of them have access to tech and management talent—some more than others, of course—but really, there’s no shortage of labor.  What candidate for Amazon’s top slots wouldn’t be willing to move to any of the top twenty locations?

The bottom line is this:  Amazon doesn’t have a logistics problem, or a labor problem, or a tax problem.  Amazon has an existential problem.  The one thing that Jeff Bezos can’t afford is for Amazon to be split up.  He needs his synergies to dominate every segment he’s in, and he needs them to move into every nook and cranny he’s eyeing for the future, including health care.  He simply can’t afford an antitrust battle; the stakes and distraction would be far too high. He needs to be within commuting distance of Washington, D.C. and all of its 535 lawmakers.  What better lobbyist to keep the antitrust threat at bay than the CEO himself?

His nearby alternatives just aren’t as good.  D.C. itself would be a bit crowded, and a tad gauche—after all, he already owns the Washington Post, and a move to K Street would be over the top.  If it’s true that Amazon set its sights on the Washington area from the outset, but wanted to be subtle about it, it would be much better to choose a spot nearby.  Northern Virginia fits that bill perfectly.

Montgomery County, also a short hop to D.C., would do the job, but if you need to be, you know, commuting to K Street, you can’t beat Northern Virginia.  Throw in a little traffic and Montgomery County is at least an hour away. Northern Virginia, on the other hand, is literally just across the river; you can see the Washington Monument from there.

Not only is Northern Virginia right next door, it is also home to Amazon’s AWS cloud service, one of the crown jewels of the company.  The area is close to three airports—Reagan, Dulles, and Richmond—and has an 85-acre undeveloped parcel of land, the Hub, more than large enough to support the specs in the HQ2 RFP.  There are top universities right around the corner, and plenty of nightlife and things to do.

The buzz from those who follow Amazon’s web traffic and such is that Amazon has spent a lot of time studying the sites around the capital, and one of the REITS in the area, JBG Smith, has been bid up over the past few months.  Some of the betting sites have been favoring the three areas around the capital, with Northern Virginia in the lead by a small margin, most recently paying $240 for a $100 bet—still long odds by some measures, but after all, there are nineteen other contestants.

I’m not a stock picker, as I mentioned, but I’d take those odds in a second.  I’m also not a REIT investor, but if that kind of probability is built into the price of the JBG Smith REIT, it most likely has further to run.  The Amazon stock itself is a harder one to handicap today—so many moving parts, and no way to know the timing of the announcement—but I’m guessing it will get a nice bump on the day they go public.

Ironic, isn’t it?  Amazon moves half of its headquarters from Washington… to Washington.  But if Amazon is to continue growing at anything like the pace of the last two decades, it has to convince our government that it doesn’t pose a threat to free markets.  It’s a tall order. Northern Virginia is the best place for the job, and Jeff Bezos is the best person to do it.

Stephen Morton is the CIO of Inyo Capital Management, a new global macro manager dedicated to the pursuit of uncorrelated, consistent returns.  Steve is a product of the California public school system, has lived and traded in four countries, and is passionate about diversification and scrupulous portfolio construction.  He speaks French and Japanese and has a black belt in aikido.