Dec 17, 2020

Axios Capital

Welcome to the last Axios Capital newsletter of 2020. It's been the longest year of my life, and quite probably yours, too. And I can't wait for it to be over and for 2021 to be as boring as possible. Please.

  • In this week's newsletter: What is going to change in 2021 — and what isn't. Plus: Mega-philanthropy; Robinhood's legal troubles; Upstart's IPO; Make School's funding pivot; windfall IPO profits; women's unemployment; and much more. All in 1,878 words, a 7-minute read.
1 big thing: The fever will break

Illustration: Aïda Amer/Axios

If I only had one word to describe 2020, I would pick "feverish."

Why it matters: The fever still rages — but never has it been more certain that by this time next year, and probably much earlier, the delirium will have broken.

  • If 2021 is the year of reversion to normal — a year of slow but certain recovery from the ravages of 2020 — then by definition a lot of the weird excesses are sure to disappear.

The intrigue: Much of our current lives has the air of unreality (Switzerland is waging a currency war?), and we'll surely look back upon this year as a delirious outlier along many different axes.

  • The big picture: The pandemic has upended lives and economies — and came during the final year of a Donald Trump presidency that shattered norms and whose actions often elicited outright disbelief.
  • Within the next few months, the Trump administration will be a memory. And if enough Americans take the vaccine, then COVID-19 is likely to be under some semblance of control.

What else will fade away?

  • Trumpism is one possibility.
  • Trade wars with Europe are likely to end, too.
  • The SPAC explosion will probably not make it into 2021. While there will still be many SPACs looking to acquire companies, the number of new SPACs will surely be much lower than in 2020.

The biggest unknown is the seemingly unstoppable momentum of the stock market, which has risen an astonishing 70% from its low point just nine months ago.

  • So long as the market is strong, expect the current parade of IPOs to continue.

What they're saying: Fed chair Jay Powell told reporters yesterday that while historic market metrics like companies' price-to-earnings ratios are high, "that's maybe not as relevant in a world where we think the 10-year Treasury is going to be lower than it's been historically."

  • In other words, if the cause of the stock market's feverishness is the fact that investors expect loose monetary policy and record-low interest rates for the foreseeable future, then maybe that particular fever won't break.
  • There's a lot of skepticism, however, that nosebleed valuations for things like Bitcoin or Tesla stock can survive a reversion-to-boring trade.

Here to stay: Geopolitical tensions, especially with China. The continued deterioration of the human rights situation in Hong Kong is only going to make matters worse.

  • Also: Domestic political tensions, between Democrats and Republicans. Those are now a permanent part of the U.S. political landscape.

The bottom line: Much of the world is still in recession, with high unemployment ravaging civil society. Supply chains have been broken, billions of people's mental health has suffered, and the global neoliberal consensus has been demolished, with no indication of what might replace it. No doubt, 2021 is going to be tough. But its challenges are likely to be much more familiar than what we faced in 2020.

2. Mackenzie Scott's second barrel

Photo illustration: Annelise Capossela/Axios. Photo: Jörg Carstensen/picture alliance via Getty Images

Were you impressed by Mackenzie Scott's $1.7 billion giveaway to social-justice organizations this summer? Turns out, she was only getting started.

  • This week, the multi-billionaire announced that she has given away another $4.2 billion in the past four months, in the form of "immediate support to people suffering the economic effects of the crisis".

Why it matters: Scott is rapidly upending philanthropic norms. These gifts were "unsolicited and unexpected," she writes — while she and her team certainly did their homework on potential recipients, they didn't hand out questionnaires or solicit grant proposals, and all sums were "given with full trust and no strings attached."

What's next: Scott's original list had more than 6,000 names — and that's just domestic organizations. Scott's giving could easily continue to accelerate, especially since her largesse includes nonprofits like Give Directly and RIP Medical Debt, which are largely unconstrained in terms of how much money they can put to use almost immediately.

By the numbers: Scott has given away $5.9 billion this year, which is about 10% of her net worth. She has pledged to give away substantially all of her money, and she has made it clear that she's in a hurry to do so.

  • It took Chuck Feeney some 40 years to give away his $8 billion fortune, and he was 89 years old when he finally finished the project.
  • Scott is moving much faster. She's 50 now; it's entirely realistic to expect her wealth to reach zero (or whatever she needs to live on) long before she gets to retirement age.

That would constitute an astonishing achievement. As her fellow billionaire John Arnold tells Axios, giving away all your money quickly is harder than it looks. "Human nature is to always want growth," he says, and philanthropists always need to fight that urge.

  • Many smaller philanthropists take the opposite point of view. "I want my money to appreciate so I can do something big with it," says The Philanthropy Roundtable's Howard Husock, who has invested his charitable donations in a Vanguard DAF. "I want my money to appreciate in value over my lifetime."

The bottom line: A fast spend-down rate bespeaks a fundamentally optimistic person looking at the big picture.

  • It's a sign that you believe the world is getting better, that the time of greatest need is now, and that philanthropic donations will continue to rise rather than fall overall.
  • It's also a sign of humility. If you don't think you know better than future generations how to spend your money, then you shouldn't have any kind of posthumous say in where it goes.
3. Robinhood's manipulated customers

Illustration: Sarah Grillo/Axios

Robin Hood was famous for taking from the rich and giving to the poor. Robinhood, by contrast, is an app that takes advantage of the small and unsophisticated investors, and uses sophisticated gamification techniques to get them to spend money.

  • That's according to two new lawsuits against the company, one of which Robinhood has settled. The other one it's fighting.

Why it matters: Robinhood is the fastest-growing brokerage the world has ever seen, growing to an $11 billion valuation on the back of its ostensibly free trades and the gamification tools it uses to encourage its customers to do more of them.

Driving the news: Robinhood has agreed to pay $65 million to settle SEC charges that it lied about its trades being free. Its duty of "best execution" to its customers forced to offer better prices than the official "NBBO" price if those were available, the SEC says. Instead, Robinhood would settle all trades at or near NBBO (which stands for national best bid-offer) and pocket the difference.

The state of Massachusetts has also sued the discount brokerage; that suit has not been settled, and Robinhood says it will fight it "vigorously".

  • Robinhood is held to a fiduciary standard in Massachusetts: It has a legal duty of care with respect to its customers, which involves checking that their investments are suitable.
  • Instead, per the suit, Robinhood seeks to maximize the number of times that its customers trade. One Massachusetts resident has averaged 92 trades per day on the platform.

Daily push notifications showing the change in value of customers' stocks encourage excess trading.

  • Other push notifications include one saying "Choosing stocks is hard. 💪 Get started by checking which stock prices are changing the most."
  • One key question that will be settled in court: Do such push notifications constitute investment advice?

By the numbers: Robinhood approved 71,744 Massachusetts residents for options trading. Of those, 14,439 had no investment experience at all.

My thought bubble: Investing should be boring. If you think it's fun, and free, and if confetti rains down your screen every time you complete a trade, that's a sign you're being manipulated.

4. Upstart's path to going public

Illustration: Sarah Grillo/Axios

Upstart is a company that helps banks to underwrite loans.

  • According to the Consumer Financial Protection Bureau, Upstart's algorithm approves 27% more applicants than a traditional model, and twice as many "near prime" consumers with FICO scores between 620 and 660. It also yields 16% lower interest rates.

Driving the news: Upstart raised $180 million in an IPO this week, ending trading on Wednesday with a market capitalization of $2.1 billion.

The big picture: Upstart started life as a way of buying equity in people, allowing them to raise cash not by borrowing it, but by pledging a percentage of their future income.

  • When that didn't work out, Upstart pivoted to lending, using the same set of data inputs that it had used to underwrite its equity investments. But it was still hard to compete with banks with a much lower cost of funds.
  • So Upstart pivoted again, this time selling its underwriting software to banks.

Context: Upstart, which was co-founded by Paul Gu, a Thiel Fellow, has touched on many buzzy ideas over its existence, from income-sharing agreements to Big Data to artificial intelligence. Even its IPO comes at a buzzy time for IPOs.

  • The bottom line: Each iteration has been a bit more practical and a bit lower down the stack, less of a revolutionary consumer-facing company and more of a utility for lenders.
  • That's still sexy enough for investors, who bid up the stock by 45% on the opening day of trading.
5. Why Make School pivoted to loans

Illustration: Sarah Grillo/Axios

Another company giving up income share agreements for loans is Make School, a two-year, $70,000 coding bootcamp in California.

Make School was among the earliest to adopt ISAs back in 2014 when it expanded beyond its summer programs, writes Axios' Kia Kokalitcheva, but this year it made a pivot, in an attempt to minimize the total cost to students.

  • Make School's ISAs were also extremely expensive for the college, which had to borrow the money to cover its costs before it could get paid back, eventually, by the students.

The bottom line: The dream of buying equity in people — especially in students, who have a lot of promise of high future income but who are often cash-poor — is one that never dies. But it also never seems to work out.

6. Women's true unemployment rises
Data: LISEP; Chart: Danielle Alberti/Axios

The true unemployment rate for women isn't going down, as official statistics suggest. In fact, it's going up — at least according to the most recent analysis of official data from LISEP, the Ludwig Institute for Shared Economic Prosperity.

By the numbers: The LISEP definition of "true unemployment" includes anybody who's looking for a full-time job paying a living wage, but who hasn't been able to find one. By that metric, 30.9% of American women were unemployed in November — an increase of 0.5% from the October figure.

  • The true unemployment for women is more than 5 times the official female unemployment rate of 6.1%. By contrast, the true unemployment for men is only 3 times the official male unemployment rate.
  • The American poverty rate is also increasing, and now stands at a terrifying 11.7%.

The bottom line: Women might be finding jobs — but those jobs are disproportionately likely to be part-time or very low-paid.

7. Coming up: Brexit

Illustration: Sarah Grillo/Axios

Brexit has been going on since before Donald Trump was even elected — but now we really do seem to be at the end of the line.

The big picture: While Britain has left the EU, it has stayed within the Single Market — until now. If it doesn't sign a trade agreement with the EU within the next two weeks, it will crash out of the European trade zone in a "hard Brexit" on Jan. 1.

What we're hearing: There's talk that a deal could come together within days. But fights over fish are real, and there's little positive chemistry between the two sides.

8. Building of the week: Tagliero Fiat Garage, Eritrea

Photo: Eric Lafforgue/Gamma-Rapho via Getty Images

Italian architect Giuseppe Pettazzi built the Art Deco Fiat Tagliero garage in Asmara, Eritrea, in 1938.

  • The stunning cantilevered wings, each 98 feet long, were revolutionary in their time, and have survived not only more than 80 years but even a British bombing campaign in World War II.
  • The design provides shade from the tropical heat for motorists stopping to refuel their cars.

Thanks for reading Axios Capital in 2020. If you'd like your friends to read it in 2021, just point them here.