Oct 31, 2019

Axios Capital

By Felix Salmon
Felix Salmon

Situational awareness: Jack Dorsey, the founder and CEO of Twitter, came clean yesterday about how the "machine learning-based optimization of messaging and micro-targeting" in digital ads erodes our civic discourse.

  • Take solace that doesn't happen here at Axios Edge: You're about to read the exact same ad that every other subscriber gets to see.

Also happening, in a very busy week:

  • SoftBank's Masa Son did go to Riyadh to speak at "Davos in the Desert," as expected. But almost no one wanted to listen.
  • Jho Low, the fugitive Malaysian financier at the heart of the 1MDB scandal, is giving up $1 billion in assets to the U.S. Justice Department.
  • Altria and Fidelity have slashed the valuations of their respective stakes in Juul. The company, among other things, is facing a new lawsuit from a former executive who says it knowingly sold 1 million contaminated vape pods this year.
  • It looks like Fiat Chrysler, having failed to merge with Renault, is now going to merge with Peugeot instead. How this helps its overcapacity problem in Europe is unclear.

In this week's 1,434 words (< 6 minutes): An angry world, Brexit meltdown, debt consolidation, IMF realpolitik, and much more. As ever, if you got forwarded this email by a friend, you can always sign up free at edge.axios.com.

1 big thing: The angry world

Illustration: Sarah Grillo/Axios

"Monsters walk among us. Corruption is normal. Trust, outside a narrow circle of friends or kin, is unthinkable."
— NYT film critic A.O. Scott, on how Bong Joon Ho's films reflect reality

The world is angry. Millions have taken to the streets not only in countries like Egypt and Iraq, which are beset by poverty or ravaged by war, but also in places like Chile and Hong Kong, previously known mostly for their boring prosperity.

Driving the news: Protests reminiscent of the Arab Spring have toppled the billionaire president of Lebanon and forced the billionaire president of Chile to cancel the upcoming APEC and UN climate summits.

  • Hong Kong leader Carrie Lam, now mired in recession, might not last past March, and Iraqi Prime Minister Abdul Mahdi is likely to be gone in the next few days.
  • Argentina's peaceful and democratic transition of power is orderly only by comparison. The mass renunciation of incumbent President Mauricio Macri, which will probably be accompanied by yet another sovereign debt default, reflects just as much anger as can be seen on the streets of demonstration-racked countries like Spain, Haiti, Russia, Egypt, or Ukraine.

Why it matters: Just like the Arab Spring, most of these protests are aimed squarely at existing governments.

  • The spark that sets off the mass protests is often the kind of thing that would normally elicit no more than generalized grumbling — a modest rise in subway fares, a cut in gasoline subsidies, a new tax on WhatsApp. Invariably, even when those moves are reversed, the protests continue anyway.
  • Taking a leaf from the gilets jaunes in France, the protestors tend to express anger at the entire political system, rather than having a clear political agenda or even identifying with a political party.
  • Peronism, always more of a state of mind than a coherent political ideology, is particularly well suited to this kind of moment. Countries that aren't Argentina don't have a Peronist political leader that the disaffected can rally behind.

My thought bubble: The anger sweeping the globe is more destructive than constructive. Anybody attempting to "harness" it will inevitably fail.

2. The rise of debt consolidation
Expand chart
Reproduced from TransUnion; Chart: Axios Visuals

New data from TransUnion suggests traditional banks might not be able to squeeze quite as much money from their credit card customers as they have in the past.

  • Background: For all the talk of banks being disrupted by nimbler digital competitors, it's generally impossible to see anywhere they've suffered so much as a flesh wound.

What's happening: Americans have $143 billion in unsecured personal loans — up 19% from 2018, with an astonishing 211% rise from the 2012 low of $46 billion, per TransUnion.

  • Most of those loans are debt consolidation, and most of the debt consolidation comes in the form of paying down credit card debt.
  • It's a fair assumption that the overwhelming majority of debt consolidation loans are originated online.

Why it matters: Banks have historically made it very difficult for customers to get unsecured personal loans, because they make much more money when those customers carry a balance on their credit cards instead.

  • Paying down credit card debt with a personal loan nearly always makes financial sense, but before the rise of online lenders, it was practically very difficult.
  • 68% of debt consolidators saw their credit scores rise after they took out the personal loan, per TransUnion. The rise in scores persisted for at least a year after the loans were taken out.

The other side: When it's easier to borrow money, people will borrow more money.

  • While borrowers who didn't consolidate their debt saw their total amount owed rise by $623 on average over one year, borrowers who consolidated ended up with $5,597 more overall debt than they had a year previously.
  • That's partly because a lot of people seem to consolidate their credit card debt exactly when they want to take out an auto loan.

The bottom line: Indebtedness is nothing to celebrate, but the most insidious debt trap of all is the one where your convenient payment device ends up costing you hundreds of dollars in interest every month. Anything that helps people cut down on expensive credit card debt is ultimately a good thing.

3. Why the IMF chief is praising American isolationists

"Axios on HBO"

After my interview with IMF managing director Kristalina Georgieva aired on Sunday, I received one question from multiple viewers: Why was she so keen to go out of her way to praise the Trump administration and its tax cuts? Take your pick from the following reasons:

  1. Tactical flattery. Georgieva comes to the IMF from the World Bank, and very much wants to bring the two institutions closer together. The bank is run by former Trump administration official David Malpass, who helped her get a major capital increase for the bank.
  2. Fiscal priorities. Georgieva is eager to increase borrowing from countries with "fiscal space" — that is, nations that can borrow money in their own currencies without driving up interest rates. That's exactly what the U.S., with its trillion-dollar deficits, is doing.
  3. Eyes on the prize. Georgieva told me she was determined to get for the IMF the increase in quota — the amount paid by countries to fund the organization — that it was denied this year. The U.S. has a veto on any such increase, and therefore has to be kept onside. Ideally, Georgieva will want to be able to count on the U.S. as an ally in her quest, rather than be forced to fight it as an adversary.
  4. Genuine admiration. Economically, the Trump administration has outperformed expectations, and the U.S. economy is significantly healthier than many European countries. It would be churlish (and highly undiplomatic) not to give the White House some credit for that.

The bottom line: Georgieva is building up political capital. In her job, she's inevitably going to need it.

4. The stock market's unimpressive all-time high
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Source: FactSet; Chart: Axios Visuals

You might have heard that the stock market hit a new all-time high this week. Just don't take that as a sign of frothiness.

  • The S&P 500's price-to-earnings ratio, at 19.5, is high but hardly stratospheric: It's roughly the same as it was on the day Donald Trump was inaugurated.

Why it matters: With GDP growing at a modest 1.9% per year, it's hard to foresee stellar aggregate earnings growth. That helps to explain why stocks are trading at multiples significantly lower than they were for most of 2017 and 2018.

5. Meltdown

Illustration: Sarah Grillo/Axios

Britain began a literal meltdown this week — of the numismatic variety — as the EU postponed the date of Brexit yet again. The exit date is now Jan. 31, 2020.

  • After saying he would “rather be dead in a ditch” than postpone Brexit past today, Prime Minister Boris Johnson went ahead and did just that. A general election will now take place on Dec. 12, 42 days after he promised to leave the EU, “no ifs or buts."
  • Johnson's only hope for victory is that he is loathed and mistrusted slightly less than the leader of the opposition, Jeremy Corbyn.

The bottom line: If Johnson can win a majority, he will take Britain out of the EU on Jan. 31 with the deal he negotiated this month. If his Conservative Party ends up in opposition, however, there will probably be a second referendum before Britain leaves.

  • All polls indicate that if such a "people's vote" takes place, Britain would change its mind and vote to remain in the EU.
6. Coming up: Uber’s third-quarter loss
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Data: Filings, company reports; Note: Analyst estimate via FactSet; Chart: Naema Ahmed/Axios

Uber reports quarterly figures for the third time as a public company on Monday. The company's losses are expected to have widened from the year-ago period, Axios' Courtenay Brown writes.

  • Background: The second quarter's massive loss was due to extraordinary IPO-related expenses, while the massive profit in 2018 was due to the sale of its Russian and southeast Asian operations.

Why it matters: Wall Street has less appetite than it did in the past for money-losing companies without a clear path to profitability. Uber’s report will come as rival Lyft insists that it can attain profitability, at least if certain costs are excluded.

7. Building of the week: Shuri Castle, Okinawa

Shuri Castle. Photo: STR/Jiji Press/AFP via Getty Images

Shuri Castle, in Okinawa, was the capital of the Ryukyu Kingdom from 1429 to 1879, when Okinawa was annexed by Japan. The castle has been destroyed and rebuilt multiple times — in 1453, 1660, 1709, and 1945. The most recent devastation, by fire, took place today.

  • Probably dating back to the 14th Century, the castle has sometimes taken a very long time to be rebuilt. After its destruction in World War II, for instance, the main buildings were reconstructed only in 1992.

Today's fire took place in the early hours of the morning. Once again the main building was destroyed. As a World Heritage site that has become a major tourist destination, however, Shuri will surely be rebuilt more quickly this time.

Felix Salmon

Finally, happy Halloween! It is 502 years to the day since Martin Luther nailed his 95 Theses to the door of churches in Wittenberg. Ed Luce has a very interesting column comparing the present day to that time.