Jan 7, 2021

Axios Capital

Shortly after 1pm ET yesterday, two things happened. A mob of insurrectionist rioters managed a successful large-scale breach of the U.S. Capitol for the first time since the War of 1812; and the S&P 500 hit a new all-time high above 3,780.

  • In this week's newsletter, I look at how the U.S. and China are kicking off 2021; wonder whether government money will ever buy happiness; compare bitcoin to Tesla; raise an eyebrow at Disney's share price; and much more. All in 1,588 words, a 6-minute read.
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1 big thing: American chaos, Chinese order

Illustration: Annelise Capossela/Axios

Here's how 2021 is beginning: On one side of the Pacific, a show of strength that has shocked the world. On the other side, a show of weakness that has shocked the world.

Why it matters: The chaos that unfolded on Capitol Hill Wednesday afternoon is a sign that the U.S. can't even run an orderly transition of power, let alone project its soft power internationally.

  • The Trump administration is attempting to crack down on Chinese companies as a way of punishing the Chinese Communist Party. But it has done so in such an incompetent manner that it has hurt itself more than the Chinese.

The big picture: China has decisively rejected its obligation under international law to allow democracy in Hong Kong until 2047. It has cracked down on powerful domestic billionaires, foremost among them Alibaba's Jack Ma. And it has done all of this with near impunity, blithely signing a major investment treaty with the EU against the clear objections of both the outgoing and incoming U.S. administrations.

The other side: U.S. attempts to constrain China look like "a driverless clown car careening into a ditch," per Sinocism's Bill Bishop.

  • Remember when Trump banned TikTok, forcing the Chinese-owned app to be deleted from app stores as of Sept. 20 of last year? Well, it's still Chinese-owned, and it's still in app stores. A new executive order targeting apps including Alipay is likely to be similarly ineffective.
  • The listing fiasco is a national embarrassment: The U.S. government was so unclear in what it wanted that the New York Stock Exchange first announced the delisting of three major Chinese companies, then changed its mind and said they could remain listed after all, and then changed its mind again and said no, they were going to be delisted — all in the space of less than a week.
  • More chaos is likely: Bigger companies, including Alibaba and Tencent, could be added to the list, even as Alibaba plans a multi-billion-dollar bond sale in the U.S. And don't be surprised if there's yet another volte-face after Jan. 21, when the Biden administration starts to reverse Trump-era overreach.

Be smart: There's chaos in China, too, though censorship and information control hide much of it. And the U.S. still boasts a robust civil society and a strong, if somewhat battered, economy.

The bottom line: Trump came into office four years ago proclaiming a new era of strength and authority. That has now arrived — in China. Meanwhile, Trump's own government has collapsed to the point of constitutional crisis.

2. Money can't buy happiness

Illustration: Sarah Grillo/Axios

Americans received a historically unprecedented amount of money in 2020; even more is expected soon. The cash has made us richer, but it has also exacerbated inequalities, and it certainly hasn't cheered us up.

Why it matters: One of the biggest government spending programs of all time has come largely in the form of direct cash transfers to individual Americans. That's helped to drive wealth to all-time highs.

  • Most of us don't need the extra $1,400 that we're going to receive pretty soon, on top of the $600 we received from the government this week. As a whole, Americans are richer than we've ever been, flush with government cash and struggling to find places to spend it.
  • Meanwhile, millions of Americans are in desperate need. The number of Americans living in poverty rose by 7.8 million just between June and November, bringing the total to an unconscionable 38 million.
  • Those Americans need to rely on local services — but local governments are staring down a fiscal black hole, and have no choice but to cut rather than expand their budgets, thanks to balanced-budget rules.

By the numbers: Some 150 million Americans received a $600 check from the federal government this week. Many of them watched President-elect Joe Biden promise Georgians this week that "if you send Jon and the reverend to Washington, those $2,000 checks will go out the door."

  • With the election of two new Democratic senators, the $2,000 checks are now extremely likely to happen.
  • They come on top of $2.9 trillion in already-passed stimulus spending, which has raised personal disposable income by more than $1 trillion.
  • Overall, some 20% of Americans' personal income in 2020 came in the form of government transfers.

The catch: Much of the money didn't go to where it was needed most.

How it works: Government cash has sluiced into all manner of asset classes, from stocks to houses to bitcoin. In turn, the prices of those assets have soared, creating an even bigger wealth effect.

  • The S&P 500 ended the year with a valuation of $31.1 trillion, up roughly $10 trillion from its lows in March.

The bottom line: 2020 was one of the longest and hardest years that any of us can remember, filled with illness, grief, loneliness, fear, and death. As the pandemic continues to rage into 2021, politicians will respond by sending us more money.

  • What we really needed, however, was an effective and coordinated pandemic response. That, rather than any fiscal action, is the first order of business for the incoming Biden administration.
Bonus: Mystery quote

Illustration: Sarah Grillo/Axios

"The stimulus mechanisms that are out there are working toward concentrating the wealth rather than adding wealth from the bottom up."

  • "What we are talking about is people at the bottom going backward, going down, even as people at the top are going up."
  • The risk is that it may take years for people at the bottom of the income scale to see a sustained improvement in their circumstances."

Which Republican economist and Trump nominee said this on Tuesday? Find out here.

3. The battle of the bubbles
Expand chart
Data: YCharts; Chart: Axios Visuals

The value of Tesla overtook the value of all the bitcoins in the world in early June, and has stayed ahead ever since. Elon Musk is now the world’s richest person.

  • The bull case for Tesla is fundamentally optimistic. It involves a real company coming to dominate the global mobility industry. If Tesla gets big enough, and interest rates stay low for long enough, then the present value of its future profits might conceivably be even higher than the current $730 billion.
  • The bull case for Bitcoin is fundamentally pessimistic, or at least anarcho-libertarian. It involves the erosion of national power, the implosion of fiat currencies, the return of double-digit (or higher) inflation, and a global rush to the perceived safety of an asset class that will always be supply constrained.

Between the lines: The two speculative bets have tracked each other closely over the past year. That's because the real driver of their prices is technical market factors. People buy things that are going up, especially when they're feeling rich.

  • It's called the "momentum" strategy, and it generally works very well, until it doesn't.
Bonus: The implosion of Ripple
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Data: YCharts; Chart: Axios Visuals

One asset that hasn't participated in the crypto rally is XRP, the coin created by beleaguered San Francisco company Ripple.

  • Driving the news: Cryptocurrency exchanges, including Coinbase and Binance, have delisted XRP following a SEC lawsuit against Ripple, writes Axios' Kia Kokalitcheva. 
  • Between the lines: The lawsuit against Ripple stems from the commission’s belief that XRP is a security and should be regulated as such. That's something the exchanges don’t want to take on. 
4. Why Disney is surging
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Data: FactSet; Chart: Axios Visuals

Disney stock has had an astonishing run-up over the past year, more than doubling from its March low and hitting new record highs in 2021.

Why it matters: Disney is painfully, exquisitely exposed to the coronavirus pandemic. Its theme parks were forced to shutter, it laid off 32,000 workers, its movies couldn't open in theaters, its Broadway shows went dark, and so on. It even has a cruise line.

  • By the numbers: Disney lost more than $5.4 billion just in the past two quarters. That compares to a profit of $2.6 billion in the previous two quarters. But in a world allegedly consumed by short-termism, the markets aren't worrying about the losses.

The big picture: Disney's new streaming service has been a huge success, and while it's far from profitable yet, capital markets are salivating at the prospect of hundreds of millions of subscribers around the world paying a steady and predictable monthly fee.

  • Better yet, those subscribers will be even more likely to go to the theme parks, movie openings, cruises, Broadway shows, and the like.

The bottom line: With interest rates expected to stay near zero indefinitely, a subscriber dollar in 10 years' time is worth nearly as much as a subscriber dollar tomorrow. Disney now has a growth story to sell — and that's what's driving the share price.

5. Coming up: The monthly jobs report

Illustration: Sarah Grillo/Axios

The December jobs report is out tomorrow at 8:30am ET, writes Axios' Courtenay Brown.

What to watch: The consensus calls for 75,000 jobs payrolls added, per Bloomberg, less than a third of November's gains.

Worth noting: A growing number of Wall Street firms say job growth could actually have been negative. Estimates from Goldman Sachs, Barclays, JPMorgan and Credit Suisse range from 25,000 to 50,000 jobs shed, as the worsening coronavirus pandemic on the labor market that's shown up in other data.

  • If they're right, the job market recovery that's been underway for the previous seven months came to an end in December.
6. Building of the week: The U.S. Capitol

Photo: Tayfun Coskun/Anadolu Agency via Getty Images

President-elect Joe Biden described today’s violation in uniquely architectural terms: “An assault on the citadel of liberty.” Citadel means little city, but it also refers to the fortified area at the center of a bigger city. It’s supposed to be the strongest part of the city; today it was the weakest one.
— Daisy Alioto, in the Dirt newsletter

The U.S. Capitol Building, begun in 1793, was recognizably in its current form by 1829, when Charles Bulfinch ended his 11-year tenure as architect. (The job of Architect of the Capitol has been held by 12 different men.)

  • The Capitol Building is huge — over 1.5 million square feet, on a ground area of roughly four acres. The dome alone has 108 windows.