Oct 8, 2020

Axios Capital

Felix Salmon

Situational awareness: Morgan Stanley is buying Eaton Vance for $7 billion, in a sign of the need for scale in the asset management industry. Citigroup, meanwhile, wishes it could make big acquisitions, but it's going to remain in the doghouse for the next few years.

  • This is the first issue of Axios Capital to be edited by Aja Whitaker-Moore, the new business editor at Axios. We're very excited to have her on board! (All errors, of course, remain mine alone.)
  • In this week's newsletter: Cognitive disconnect at the federal and corporate level, the fate of garment workers in a pandemic, Lending Club goes normcore, Christie's sells a T. rex, and much more. All in 1,609 words, a 6-minute read.
1 big thing: The age of cognitive disconnect

Photo illustration: Sarah Grillo/Axios. Photo: Chip Somodevilla/Getty Images

Alice laughed: "There's no use trying," she said; "one can't believe impossible things."
"I daresay you haven't had much practice," said the Queen. "When I was younger, I always did it for half an hour a day. Why, sometimes I've believed as many as six impossible things before breakfast."
— Lewis Carroll, "Alice in Wonderland"

The paradoxes of Trumpism were on full display Tuesday.

  • Over the course of the day, Trump agreed with Fed chair Jay Powell that the need for fiscal stimulus is urgent, requested that Congress fund a new round of stimulus checks — and, at the same time, instructed his Treasury secretary to cease all negotiations on Capitol Hill and put off any stimulus until after the election.

Why it matters: The pro-stimulus case is obvious; the anti-stimulus case is also relatively clear. What's impossible to conceptualize is any coherent ideology or strategy that can pursue both at the same time.

The big picture: Since even before his election, Trump has been a chaos agent — the kind of politician who appeals to a disillusioned "lol nothing matters" crowd.

  • Trump's ability to elicit incomprehension from East Coast elites is a large apart of his attraction, and part of the reason why his consistent inconsistency has not damaged him electorally — until now.

The fideist slogan credo quia absurdum ("I believe because it is absurd") is similarly the best way to make sense of the Trump administration threatening legal action against Microsoft as a result of the software giant having a goal of increasing Black representation among its employees.

  • A standing executive order requires federal subcontractors like Microsoft to "engage in affirmative action efforts to increase the workforce representation of women and minorities," per workplace law firm Jackson Lewis.

Between the lines: Trump is falling in the polls. It's possible that the chaos of recent days, in combination with the seriousness of the issues at stake in this election, is testing the faith of Trump's fideist following.

The bottom line: Markets gyrated in response to Trump's tweets — falling on Tuesday when he called off stimulus negotiations, then rising on Wednesday after he signaled that he was still pro-stimulus.

  • If you're not a noise trader, the best way to deal with unpredictable chaos is normally just to ignore it. That's hard when the noise concerns the future of genuinely important fiscal policy.
  • After four years, markets should probably have learned that while Trump tweets certainly move markets, they rarely do so for very long.
2. Oracle's disconnect on remix culture

Illustration: Aïda Amer/Axios

The most important Supreme Court case in modern Silicon Valley history came to oral arguments on Wednesday.

Why it matters: Oracle is suing Google for writing some specialized code, known as an API, which allowed developers to code in Oracle's Java programming language when building Android apps. Oracle claims copyright on Java APIs, and wants $9 billion in damages.

  • The cognitive disconnect comes from the fact that Oracle is simultaneously trying to spend billions of dollars in an attempt to align itself with the business model of TikTok, which is entirely based on reusing copyrighted material without payment to the rights holders.

Background: There's no doubt where Silicon Valley stands with regard to the Supreme Court case — and it's not with Oracle. Just one amicus brief was signed by just about every living software-engineering legend in the Valley, and other companies like Microsoft, IBM and Mozilla have also sided with Google.

  • The Supreme Court is not tech Twitter, however, and the outcome could easily go Oracle's way.

Be smart: The APIs in question were written by Sun Microsystems, an engineering-led Silicon Valley company that respected remix culture and interoperability and would never have sued Google like this. But then Sun was bought by Oracle, and the Sun culture changed.

  • TikTok is the essence of remix culture — a place where dance routines and snippets of music get reimagined by millions of users. The music copyright holders, like Sun Microsystems, might not love the fact that they aren't being directly paid for that use, but they know that when other companies help them turn up in new contexts, they ultimately make more money.

The bottom line: Culture matters, and it's hard to see how TikTok can coexist over the long term alongside a litigious sales organization like Oracle. Maybe that explains why Oracle, unlike Walmart, isn't seeking a board seat at TikTok.

3. How the pandemic devastated garment workers

Illustration: Aïda Amer/Axios

Over the past six months, if you're like most Americans, you've spent a lot less money on clothes than you normally would — while also spending a decent amount of money on masks.

Why it matters: Behind the change in behavior is a huge change in capital flows from some of the largest names in fashion — including Balmain, Urban Outfitters, and Walmart. The biggest losers are some of the poorest people in the world.

Between the lines: My favorite mask is a lovely flowered number from Amy Kuschel. Kuschel's pivot to masks is a classic example of what Pratt professor Minh-Ha Pham characterizes as "white, feminine-presenting, and middle-class" women doing their civic-participation bit in the fight against the coronavirus.

  • When that kind of pivot happens at the scale of the global apparel industry, millions of livelihoods can be destroyed.

How it works: Brands typically place orders for clothes about three months before they want them delivered, but pay only after delivery. "In the midst of the pandemic," writes Pham in the latest issue of Feminist Studies, "western fashion brands and retailers exercised their contractual right to cancel existing orders, or more accurately, to stiff workers on wages for orders already completed and, in some cases, already shipped."

  • Those workers were not white, or middle-class, or, most of the time, even American. The hardest hit were in Bangladesh, where some 4 million sewers make clothes for the biggest brands in the world. Half of those jobs could be at risk from the effects of the pandemic.
  • A similar story played out from Myanmar to Cambodia to Vietnam, where, again, up to half of garment workers could end up losing their jobs.
  • In the U.S., many garment workers are undocumented, which rendered them ineligible for CARES Act stimulus and unemployment checks. Just like their counterparts in South Asia, many of them didn't just lose their jobs — they also were never paid for work they had already finished.

By the numbers: U.S. garment workers, forced to take any job available, are paid as little as 5 cents per mask, or $190 per week. Needless to say, working conditions have not been improved from their pre-pandemic poorly-ventilated state.

The bottom line: "Garment workers making face masks aren't Rosie the Seamstress," writes Pham. "They're not making masks in the safety and comfort of their homes, they're not doing it out of a sense of public-spiritedness or as a show of gendered civic engagement."

  • Artisanal face masks from Etsy (or Amy Kuschel) are all well and good. But they're also, as Pham writes, "a privileged kind of feminist distancing."
4. Ending Club

Illustration: Sarah Grillo/Axios

Lending Club was founded on the idea of bringing individual borrowers and lenders together. Those days are now officially over.

Why it matters: The peer-to-peer dream was that Americans could deal directly with each other, rather than having to go through hated banks.

  • Lending Club was the foremost avatar of that dream. But the company soon realized that it was a lot easier to borrow money from hedge funds, or the market, than it was to provide the ability for people to make tiny loans to hundreds of different borrowers.
  • Individual lenders wanted higher returns, too. If Lending Club wanted the lowest borrowing costs for its borrowers, it had to move to wholesale funding.

Eventually, Lending Club decided it should just become a bank — so it announced the acquisition of Radius Bank in February.

  • Banks intermediate between borrowers and lenders. If you lend to an FDIC-insured bank like Radius, you take no credit risk, and let the bank worry about what happens if borrowers default. (Lending to a bank and keeping money on deposit at a bank are ultimately the same thing.)
  • It's the exact opposite of the peer-to-peer model, which was built on the idea that individuals are more likely to repay other individuals than they are to repay a faceless financial institution. If that was ever true, it isn't any longer.

The bottom line: Peer-to-peer lending failed. When Lending Club went public in 2014, it was worth more than $9 billion. Today, it's worth just $350 million.

5. Stan gets hammered

Photo: Christie's

The big evening sale at Christie's this week was fair-to-middling, as these things go. It started with a $2.3 million Damien Hirst, and moved on through second-tier works by first-tier artists like Magritte, Pollock, and Jasper Johns. Then, at the end, came Stan the dinosaur.

  • By the numbers: Only one artwork, by Cy Twombly, fetched more money than Stan, who ended up selling for $31,847,500 — well above his pre-sale estimate of $6–8 million.
6. Coming up: Apple's new iPhones

Illustration: Rebecca Zisser/Axios

Apple will announce new iPhones at a virtual event on Tuesday, writes Axios' Courtenay Brown.

Why it matters: It's Apple's biggest event of the year. iPhones are the company's biggest revenue source, though sales have slowed.

Details: Some Wall Street analysts bet the rumored 5G-enabled iPhone 12 — with other upgrades — will push people to upgrade their phones. Other products could be unveiled too.

  • Apple typically rolls out iPhone upgrades every September. This year the event was delayed because of production delays caused by the pandemic.

P.S. ... The second most valuable U.S. company (behind Apple) also has its biggest annual event next week.

7. Building of the week: Florida Poly

Photo: John Greim/Loop Images/Universal Images Group via Getty Images

Florida Polytechnic University opened in 2014 in Lakeland, Florida, between Tampa and Orlando.

  • The Innovation Science and Technology Building, designed by Santiago Calatrava, is its centerpiece.
  • 94 louvered arms raise and lower throughout the day, ensuring shade inside the second-floor atrium.
  • The walkways around the circumference of the building are also shaded with metal pergolas.
Felix Salmon

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