Nov 4, 2018

Axios Capital

By Felix Salmon
Felix Salmon

Situational awareness: Axios on HBO premieres tonight at 6:30 pm ET/PT. Think of it as Smart TV for content, rather than hardware.

  • Even if you're not the TV type, I'd love it if you could fill out the Axios reader survey. Your replies to this email are great, and do please keep them coming, but we could use a slightly more structured idea of who our readers are.
1 big thing: Enjoy the fiscal sunshine
Expand chart
Data: Federal Reserve Bank of St. Louis; Chart: Chris Canipe/Axios

Americans are enjoying year-on-year wage gains above 3% for the first time in over a decade according to two economic reports this week, including a monthly jobs report that came in comfortably above expectations.

  • September was the 97th consecutive month that the economy has created jobs. That's an all-time record.
  • Fiscal policy is goosing the economy. The Treasury is going to have to borrow $1.34 trillion this year, more than double the number in 2017.
  • Enjoy the good times while they last. The Fed's economists expect an economic deceleration ahead. They're projecting 2.5% growth in 2019, 2% in 2020 and just 1.8% in 2021.

The big picture: This isn't purely an American story. Budgets are getting looser around the world.

This year's U.K. budget marked the official end of austerity. Finance Minister Philip Hammond is "basking in the largest sustained windfall from improved public finance forecasts since the Office for Budget Responsibility was created in 2010," per the Financial Times.

  • Hammond did warn that austerity could return in the event of a no-deal Brexit. It's not clear whether the Euroskeptic wing of his party believes him.

Italy's government intends to run a budget deficit of 2.4% of GDP next year, which is unacceptable to the EU.

  • Italy's sovereign bonds are now just one notch above junk-bond status, per Moody's.

The other side: The euro-area economy grew at the slowest pace in four years during the most recent quarter. And in the U.S., inflation has been running at more than 2% per year, which makes 3% wage gains rather unimpressive.

Go deeper.

Bonus chart: Markets are much cloudier
Expand chart
Data: Bespoke Investment Group; Chart: Andrew Witherspoon/Axios

Stock-market investors are grumbling these days, after a mere month or so of pain.

The market value of the Russell 3000 is down $3.5 trillion since Sept. 20. Only Brazil has seen stocks rise. Every other major market fell in October.

For solace, people invested in stocks should look at the Treasury market.

  • If you've been lending money to the U.S. government, your investments peaked in value back on July 8, 2016. Since then, coupons have been low and interest rates have been rising, causing bond values to fall.
  • Bonds are normally supposed to be a safe investment, but Treasuries have been a losing proposition for well over two years.
  • The current losing streak of 603 trading days is utterly unprecedented in length, shattering the previous record of 393 days. What's more, it shows no sign of coming to an end anytime soon.
  • The bond market always hits new highs eventually. Rising yields mean capital losses, but also bring higher coupons.
  • The great 30-year bull market from the mid-1980s to the mid-2010s, however, will probably never be replicated.

The bottom line: For most of the past decade, capital has fared much better than labor. Now, the tables are turned.

2. Beware Big Tech revenue taxes

Illustration: Sarah Grillo/Axios

Facebook and Google should be afraid of being taxed on their annual revenues, rather than their profits.

  • The UK is proposing a 2% tax on the British revenues of any profitable tech company with more than £500 million in global revenues.
  • The European Commission is proposing a similar tax, which could reach 3%.
  • Spain's version of the tax could raise as much as $1.4 billion next year.
  • Nine Asia-Pacific countries, including South Korea and India, could follow suit, as could Mexico and Chile.

The problem is that the current international taxation regime is based on profits, rather than revenues.

  • Digital companies can sell their products across international borders without being physically based in the countries that account for much of their revenues.
  • They can also move profits around the world by licensing their intellectual property to low-tax regimes.

The Organization for Economic Cooperation and Development started an international discussion on how to deal with this problem in 2012. That discussion now involves 116 different economies, according to Josh Kallmer, senior vice president for global policy at the IT Industry Council. Predictably, little progress has been made.

  • One winner under the current regime is the United States, where all the tech giants are domiciled. The U.S. also has effective veto power at the OECD. So no one expects the process to speed up anytime soon.

The UK, Spain and other countries are attempting to light a fire under the OECD process. If a first-best international solution can't be found, they're saying, they will implement a second-best unilateral revenue tax.

  • A revenue tax would mean double taxation for internet companies, which would get taxed first on their revenues and then on their profits. But there's no doubt they can afford it.

The bottom line: The tech giants are extracting value from countries' populations much as oil companies extract value from countries' oil fields. If ExxonMobil can pay a royalty based on revenues, then why not Facebook?

3. Apple and IBM react to the open source revolution

Illustration: Lazaro Gamio/Axios

A stunning datapoint from Axios' Ina Fried: Apple's iPhone revenue rose by 29% in the most recent quarter, compared to a year previously — even as the total number of iPhones sold was flat.

Technology always plunges in price over time. Except, it seems, if you're Apple.

  • The cheapest Mac Mini was $499 up until this week. Now, it's $799. The rest of the lineup is also seeing price hikes.
  • Apple will no longer report unit sales for the iPhone and Mac, indicating that the company sees more growth from raising prices than it does from selling more gadgets.

Context: The low end of the market, for both phones and computers, is dominated by Alphabet's Android and Chrome. Apple has neither the inclination nor the ability to compete on price against an open-source competitor, so it's not even trying. Instead, it's extracting maximum revenues from its existing customer base.

Open source couldn't be hotter right now: After Microsoft bought GitHub for $7.5 billion, IBM came along to buy Red Hat for $33.4 billion. That's fantastic for Red Hat shareholders, but it doesn't necessarily reflect a hugely strong underlying business.

  • IBM is paying more than 10 times revenues, more than 25 times book value, more than 50 times estimated 2019 earnings, and more than 120 times Red Hat's fully diluted earnings per share over the past 12 months.

The big picture: Open source is of central strategic importance to all tech companies, including Alphabet, IBM and Apple. But the tech giants vary widely in whether and how they decide to build it, buy it or counterprogram against it.

4. Why Googlers leave the office
Google employees walk out in Mountain View on Nov. 1. Photo: Celie O’Neil-Hart/Google Walkout for Change

Google employees in 50 cities worldwide walked off the job Thursday to protest a workplace culture at the company that condoned sexism and paid off sexual harassers.

These workers are among the most valuable in the world, and Google CEO Sundar Pichai has no desire to antagonize them.

Pichai's in a bind. He's reportedly "meeting with his leadership team on Monday to review a plan that would address the demands" of protestors on Monday. The problem: It's not clear he's senior enough to do so.

  • Pichai reports to Alphabet founder and CEO Larry Page, whose credentials when it comes to sexist behavior are far from clean.
  • The protestors want to see an employee representative on the Alphabet board. To get that, they'll need the buy-in of Google's founders, not its CEO.

The bottom line: The tech elites are revolting. This is only the beginning.

Go deeper: Google's restlessness for better company culture

5. Why Netflix employees leave the company

Illustration: Rebecca Zisser/Axios

Every year, 8% of Netflix employees get fired.

Put another way: If you're in a team of four people at Netflix, there's a 50% chance that at least one of you will get fired within two years.

  • The official stance: "We give adequate performers a generous severance package so that we can find a star for that position."
  • The most common phrases used to describe Netflix in Glassdoor reviews are "Freedom and responsibility"; "Let go" (as in fired); "Good pay"; "Free food"; and "Culture of fear."

Why it matters: Netflix's dystopian and demoralizing corporate culture has coincided with the creation of billions of dollars of shareholder value. There's no doubt CEO Reed Hastings considers those two facts to be related.

Bonus: Why women leave the workforce
Expand chart
Data: Bureau of Labor Statistics; Chart: Lazaro Gamio/Axios

The punchiest and most compelling excoriation of sexism in the workplace you're likely to read this week comes from Natalie Portman (yes, that Natalie Portman) on Medium.

Driving the news: Women constitute 50% of graduates from law school, business school and film school — but only a small minority of the most successful professionals in those industries.

  • Exceptions to the rule, in areas like gynecology and film-industry wardrobe departments, dispel the myth that women voluntarily drop out of demanding professions.
  • Women can make much less than 70 cents on the male dollar. Like, in some circumstances, just 1 cent. Basketball star Skylar Diggins-Smith has a rookie contract of $40,000, because she's a woman. An equally qualified man earns $4 million for doing the same job.

"The reason women in nearly every industry are not represented in powerful positions is because women are being discriminated against," writes Portman.

There’s a theory that’s often cited that women drop out of the workforce to focus on motherhood, or because the workplace isn’t conducive enough to rearing children. And I used to believe that too. But it always seemed suspicious as a reason — like a woman would spend hundreds of thousands of dollars on law school, and all the time and hard work to graduate, and all the hours and stress to pass the bar, and then work for years at a law firm, and then give up her 6 or 7-figure job that she loves and has invested so much into, because she didn’t ever consider she might have to find childcare for her kid? A woman who can probably easily afford childcare? It was confusing, but I bought it, cause, well, I don’t know. I’m a sheep.
Now, I would like to dispel that myth.
— Natalie Portman, Why Women Leave

Worthy of your time.

6. When startups aren't disruptive
Expand chart
Data: Western Union and TransferWise; Chart: Chris Canipe/Axios

Not all fast-growing startups are disruptors. TransferWise is a prime example.

TransferWise has outperformed a raft of competitors to become the biggest startup in cross-border payments.

  • It's already making a profit; in fact it's on its second successive year of profitability.
  • Eventually, it's likely to go public at a multibillion-dollar valuation. Payments are very hot these days: Square is valued at $32 billion, while PayPal is worth $100 billion.
  • TransferWise co-founder Taavet Hinrikus tells me that he already knows which month in 2019 will mark the point at which TransferWise overtakes Western Union in transaction volume.

But: Western Union — the money-transfer giant founded in 1851 — is not being disrupted. Its volumes are remaining very steady, and its digital product is price competitive.

The big picture: For all the hype, blockchain companies have yet to make a dent when it comes to international payments. TransferWise proves that impressive growth is possible the old-fashioned way, by being cheap and reliable and not particularly disruptive at all.

7. The criminals at Goldman Sachs
Illustration: Lazaro Gamio/Axios

Two former Goldman Sachs bankers were indicted on criminal charges this week.

Tim Leissner, the bank's former chairman of Southeast Asia, has already pleaded guilty. His colleague Roger Ng was arrested in Malaysia and will be extradited to the U.S.

Andrea Vella also appears in the complaint, as Co-Conspirator #4. He has been placed on leave by Goldman, just two weeks after becoming the bank's co-chairman of investment banking for Asia, excluding Japan.

Leissner stole money from Malaysia, embezzling development-bank funds for the criminal conspiracy. According to the complaint, "more than $2.7 billion was misappropriated by the defendant Tim Leissner and his co-conspirators." The complaint makes it clear that some of that money ended up going to Leissner personally, over and above his handsome Goldman Sachs bonus checks.

  • Leissner has agreed to forfeit $43.7 million. Which is a lot of money even for the husband of fashion model and designer Kimora Lee Simmons.

Goldman Sachs itself has not been charged, yet. It says that it "continues to cooperate with all authorities investigating this matter."

Why it matters: Goldman Sachs facilitated the greatest heist of the century.

Go deeper.

8. The rise of Chinese billionaires
Expand chart
Data: PwC Billionaire Database, UBS and PwC analysis; Chart: Harry Stevens/Axios

The wealth of the world's billionaires rose by $1.4 trillion in 2017, the largest annual increase ever.

  • Nearly all of that increase was driven by the Asia-Pacific region, and specifically China, where billionaire wealth rose 39%. The region minted three new billionaires a week over the course of the year.
  • 701 billionaires are over the age of 70, accounting for nearly 40% of the wealth in the chart above.
9. The week ahead: Midterms and a Fed meeting

Illustration:Rebecca Zisser/Axios

On Monday, all of the previously lifted sanctions on Iran will be reimposed. Expect memes.

As an Axios reader, you're surely aware that Tuesday is a big election day in the U.S. The polls unanimously expect a Democratic victory in the House and a Republican victory in the Senate, so assume that's priced in to the markets. Go deeper.

Disney reports earnings on Thursday, the same day the Federal Reserve open market committee meeting ends. Virtually no one expects the Fed to raise interest rates, writes Courtenay Brown.

  • Likely topics: President Trump's repeated Fed criticism, and just what the "neutral" rate looks like.
10. Building of the week: Centre Point
The facade of Centre Point, London. Photo: Almacantar

Built between 1963 and 1966, Richard Seifert's 34-story Centre Point tower has been a London landmark for more than 50 years. It famously remained empty until 1975, while its owner, Harry Hyams, was holding out for a single tenant.

After becoming a symbol of wasted square footage, Centre Point gave its name to a major UK charity for the homeless. The tower was converted to luxury residences in 2015; the penthouse is listed at £55 million. The building remains largely empty, with the international ultra-rich shunning London property until they have more clarity on the effects of Brexit.

Felix Salmon

This week in dystopia: Amazon's employing 20,000 fewer holiday workers this year; they're being replaced by robots. More than 500,000 African children will no longer receive a vital vaccine this year, after Merck decided to sell it to China instead. Booz Allen Hamilton, McKinsey & Company and Boston Consulting Group have all played critical roles in Crown Prince Mohammed bin Salman's drive to consolidate power. Do you know your customer lifetime value?