Sep 3, 2020

Axios Capital

By Felix Salmon
Felix Salmon

Situational awareness: Stonks are down today, for no particular reason.

  • In this week's issue: Supply chains; banking licenses; a deteriorating conglomerate; Airbnb's resurgence; and more. All in 1,747 words, which will take you 7 minutes to read. Tell your friends to subscribe here.
  • Not in this week's issue: The story I published on Sunday with Axios' Hans Nichols about the potential fiscal emergency facing Joe Biden in January. Tl;dr: He might need to do a $1 trillion stimulus just to buy himself time to do his $3 trillion stimulus.
1 big thing: A fragile world retrenches

Illustration: Aïda Amer/Axios

There are few positions more uncomfortable today than being an American company reliant on China. But reconfiguring supply chains is far from easy.

Driving the news: The high-stakes negotiations over the fate of TikTok could yet fall apart, should China decide to bar valuable Chinese intellectual property from being used by an American company.

More important Chinese exports, especially pharmaceuticals, are also at risk. Chinese state-run Xinhua News Agency ran an op-ed in March calling for "strategic restrictions on the export of medical products to the U.S."

  • Such restrictions could have savage consequences, given that China manufactures about 70% of the acetaminophen used in the U.S.; makes about 80% of the world's heparin, an anticoagulant; and has a similar monopoly on the manufacture of antibiotics.

The big picture: A recent McKinsey report showed almost all industries at risk of supply-chain disruption. The exceptions are largely regional industries like glass, cement, and food.

  • By the numbers: The report found 180 separate products for which one country — often China — accounts for more than 70% of the global export market. Many of those products are chemicals and pharmaceuticals.
  • Supply-chain disruptions will cost the average company about half a year's profit every decade, estimates McKinsey. If competitors can take advantage of the disruption to gain market share, then potential losses grow even larger.

Be smart: While politicians in all countries tend to love the idea that the solution to this problem lies in increasing domestic production, the fact is that such relocations are often impossible in practice, especially where entire industries, with specialization and economies of scale, are found in specific markets.

  • What they're saying: "Multinationals with production facilities in countries such as China," says the McKinsey report, "are typically there to serve local consumer markets, whether or not they also export from those places. As prosperity rises in these countries, they are key sources of global growth that companies will continue to pursue."

The bottom line: U.S. companies can make investments to become more robust and resilient to shocks. Nevertheless, between climate change and growing nationalism, it's reasonable to expect such shocks to become an increasingly frequent and disruptive part the business cycle in just about every industry.

2. A second startup becomes a bank

Illustration: Annelise Capossela/Axios

You wait 10 years for the OCC to start approving bank charters for startup banks, and then two arrive in less than month.

  • Driving the news: This morning a quiet startup named Jiko announced that it had obtained a bank charter by acquiring its partner bank, Mid-Central National Bank of Minnesota.
  • Getting regulatory approval to become a bank holding company was nontrivial. It took about three years, Jiko CEO Stephane Lintner tells Axios — roughly the same amount of time that Varo Bank spent getting its charter. But at this point the regulatory doors have clearly opened.

How it works: Jiko has a very different business model from Varo and other challenger banks. While Mid-Central National Bank will retain its relatively small number of customers, people who bank with Jiko won't open accounts at Mid-Central, and the money they put on deposit with Jiko won't swell its balance sheet.

  • Instead, all Jiko deposits immediately get turned into Treasury bills. If you deposit $5 into your account, you buy $5 of Treasury bills; if you put a $4 coffee on your debit card then you sell $4 of Treasury bills to pay for it.
  • Why it matters: The Jiko model means that the bank itself remains very small. Jiko will use it for direct access to the plumbing of the financial system, but it will never grow big enough to pose any systemic risk. That's music to regulators' ears.

What they're saying: "The move by Jiko represents an important milestone in the maturity and evolution of fintech companies seeking to expand the reach of their products and services by becoming banks," acting comptroller of the currency Brian Brooks tells Axios. "While two data points don't make a trend, the de novo charter granted to Varo Bank this summer and this acquisition by Jiko should demonstrate the optimism and positive energy for consumers, our economy and the federal banking system."

What's next: Jiko has yet to really bring its product to market — all of its customers are still friends and family. When it does launch in earnest, it will be the first American neobank to have direct access to the banking system from day one.

  • Many customers won't even know that they're banking with Jiko, if Lintner's vision comes to fruition. By opening up its APIs, Jiko hopes to attract other financial-services companies to start using its platform.

The bottom line: Jiko has a very stripped-down vision of banking, with no maturity transformation and no credit risk. That's understandably attractive to regulators.

3. GE heads towards zero
Expand chart
Data: FactSet; Chart: Axios Visuals

How the mighty are fallen. GE was the largest public company in the world in the early 2000s, a mighty conglomerate spanning everything from nuclear power plants to credit cards and daytime TV.

  • Today, it's worth less than companies you've never heard of, like Becton Dickinson or Crown Castle International.
  • In fact, according to new research from JPMorgan analyst Stephen Tusa, GE stock — once the classic "widows and orphans" investment — might be worth nothing at all.

What went wrong: Under Jack Welch, GE's chairman from 1981 to 2001, GE became increasingly imperial and financialized. Welch's successor Jeff Immelt continued those traditions — until the global financial crisis destroyed GE Capital's balance sheet along with its coveted triple-A credit rating.

  • Without GE Capital to smooth over the cracks, problems in GE's core businesses became harder to hide.

Immelt had two big ideas for how he was going to turn GE (or at least its share price) around.

  • The first was to buy Alstom, a troubled French power company. The acquisition cost GE $10 billion. The subsequent write-down was about $22 billion.
  • The second was share buybacks: Immelt spent more than $70 billion buying back shares during his tenure as CEO. That's more than GE's current market capitalization.

By the numbers: Tusa reckons that GE's core industrial business has an enterprise value of about $65 billion, based on the multiples its competitors trade at. Add on $6 billion for what's left of GE Capital, subtract $67 billion of liabilities, and you're left with about $4 billion in market cap.

  • A small decrease in the trading multiple, or a small increase in the amount of money that GE has to put aside to cover a set of disastrous long-term care reinsurance policies, and GE becomes effectively insolvent.
  • That's why JPMorgan no longer has a price target on GE.

The bottom line: At the heart of GE is its power unit. The jet engine business has been hit hard by the pandemic, and the power-station unit overwhelmingly manufactures and services ways to turn carbon into electricity.

  • If the world gets greener, as it must, that's bad news for GE.

Go deeper: Wall Street Journal reporters Thomas Gryta and Ted Mann take a deep dive into the Immelt years in their new book "Lights Out: Pride, Delusion, and the Fall of General Electric."

4. Airbnb's resurgence
Data: Edison Trends; Note: Indexed to 100 = highest weekly spend at Marriott; Chart: Danielle Alberti/Axios

Airbnb filed to go public last month, a seemingly strange move for a company that was forced to lay off a quarter of its workforce in May.

  • Why it matters: Airbnb looks as though it's vastly outperforming expectations from this spring.

The big picture: While the hotel industry is still in terrible shape and asking for a federal bailout, Airbnb looks as though it has become one of the more improbable winners from the pandemic.

  • Vacationers prefer homes they can have to themselves over buildings that they have to share with other people.
  • People working remotely have realized that if they can work from anywhere, they might as well work from somewhere beautiful.

By the numbers: Estimates from Edison Trends show Marriott and other hotel chains seeing much lower spending than at this time last year. At Airbnb, by contrast, spending is hitting new all-time highs.

  • Airbnb spending is running a whopping 75% higher than this time last year, says the research shop, based on a panel of spending data including more than 65,000 Airbnb transactions.
  • That means Airbnb's revenues have comfortably surpassed Marriott's, for the first time.

The bottom line: Airbnb's pandemic boost won't last forever. But if nervousness about sharing enclosed spaces persists, and if remote work becomes more broadly accepted, both will be good news for the startup.

Bonus: This summer's idylls
Data: Airbnb; Map: Danielle Alberti/Axios

Where would you like to live and work, if you could live and work anywhere?

  • The most popular locations for people and families renting homes for 28 days or longer are — so far — all places that offer a beautiful escape from the heat during the summer.
  • Destinations topping the list this summer are clustered in Vermont, Maine, Colorado, and upstate New York.
  • Expect that list to migrate south to Florida and New Mexico as winter arrives.

One thing the top destinations have in common: A lot of open space. "In the past, Airbnb was a force of gentrification in cities," writes critic Kyle Chayka. "Now, it's accelerating the pandemic-era gentrification of the countryside."

5. Coming up: The August jobs report

Illustration: Aïda Amer/Axios

The government releases the August jobs report tomorrow morning.

Why it matters: Tomorrow's release — the official and most comprehensive measure of the labor market — is expected to confirm that companies are still hiring, but at a slower pace.

What to expect: Economists expect 1.3 million jobs were added last month (though to give a sense of the range, one economist is expecting a much smaller payroll gain of 800,000).

  • That would be a healthy gain outside of the context of the pandemic, but a tremendous slowdown from the 4.8 million jobs that were added in June. It's also a slower pace than the 1.8 million added in July.

The unemployment rate is likely to hit single digits for the first time since March, with economists projecting a fall to 9.8%, from July's 10.2%.

6. Building of the week: Constitution Bridge, Venice

Photo: Marco Piraccini/Archivio Marco Piraccini/Mondadori Portfolio via Getty Images

Santiago Calatrava's wildly controversial Constitution Bridge opened in 2008, as only the fourth bridge to span the Grand Canal in Venice.

  • Everything about the bridge caused uproar: its minimalist design, its lack of necessity given its proximity to the nearby Scalzi bridge, its budget, its slipperiness in the rain, and more.
  • The shape is a short section of a giant circle some 1,180 feet in diameter. The bridge itself is 261 feet long, and connects the Venice train station to the Piazzale Roma, which is where buses arrive.

The surface of the bridge is made of glass steps, which make it very difficult to traverse for anything on wheels.

  • Wheelchair users were understandably irate, but the real damage was caused by thousands of tourists crossing the bridge wielding wheeled suitcases.
  • The city of Venice fined Calatrava $86,000 for failing to foresee this rather obvious use case, given that tourism is Venice's main industry.
Felix Salmon