November 18, 2021
Welcome back to Axios Capital, which is something of a chartapalooza this week.
- In this week's newsletter I look at what Joe Biden wants from his Fed pick. I'll also cover misery; mortgages; household wealth; EV valuations; corporate break-ups; Sweetgreen; shenanigans at Sotheby's; and much more. All in 1,680 words, a 6.5-minute read.
1 big thing: Biden, hawk
Joe Biden could be the first president since Jimmy Carter who wants to make the Federal Reserve more hawkish.
Why it matters: Standard political calculus has been turned upside down this year, as the Democrats start preparing for what is certain to be a bruising 2022 midterm campaign. Instead of trying to maximize economic growth and full employment, their new priority is to ensure that inflation comes down as quickly as possible.
The big picture: Inflation was not caused by the Democrats — it was caused by the coronavirus pandemic, which precipitated both global supply-chain disruptions and a huge fiscal response, mostly from the Trump administration.
- The spike in inflation has happened on Biden's watch, however. As per the (arguably unfair) rules of the political game, that means it's his problem: Voters will blame him for inflation if it stays high.
- Biden's latest spending bills won't move the needle on inflation one way or the other. Neither will strongly-worded letters about gas prices. Instead, Biden's main point of leverage comes from his ability to nominate members — and the chair — of the Fed board.
What they're saying: "The Fed chair has practically unilateral power over monetary policy, and at this point monetary policy is really the only thing our government can do to affect inflation," says economist Noah Smith. (While there are 12 voting members on the Federal Open Market Committee, the preference of the Fed chair has in practice always been respected.)
- Between the lines: Beside the Fed chair, there is one seat vacant on the seven-member board of governors already, with two about to become vacant as Richard Clarida and Randal Quarles are both leaving the board around the end of the year. On top of that, if Powell isn't renominated as Fed chair, his seat will be vacant too.
- Biden will certainly want a more diverse Fed board, and one that cares more than the current quorum does about bank regulation and global warming. None of that will stop him from preferring hawks to doves.
Be smart: Current central bank orthodoxy is decidedly dovish. Most central bankers — including both of the front-runners for the Fed chair position — are more likely to welcome the return of inflation than they are to fear it. Then again, central bankers don't need to run for elected office.
The bottom line: As UBS analyst Solita Marcelli says: "It is very common for politicians to prefer central bankers who promote economic growth by keeping monetary policy loose. However, under current circumstances, that strategy could be counterproductive for President Biden."
2. Inflation, charted
During the 1970s, the last sustained period of inflation, economist Arthur Okun invented the misery index — the sum of inflation and unemployment.
- The index peaked at 21.2% in 1980; its low point was 5.76% in January 2020, just before the pandemic.
- Thanks to falling unemployment, the misery index now stands at 9.2%. That's lower than the level of misery seen in the four years following the Great Recession of 2008, but it's still high by the standards of recent decades.
Homeowners might not be unhappy with rising inflation.
Why it matters: Not only are houses a reasonably good inflation hedge in and of themselves, but anybody with a mortgage — about 50 million households — will see the real value of that mortgage eaten away by inflation.
Homebuyers, in particular, have never had it so good. In real terms, the 15-year mortgage rate is now negative — the first time that's ever happened.
- When mortgage rates fall into negative territory, borrowers end up paying back less, in real terms, than they borrowed in the first place.
- Note for nerds: What I'm doing in the chart above is taking the 15-year mortgage rate and subtracting the 10-year TIPS breakeven rate, which is the amount of inflation that the market expects to see over the next 10 years. That's roughly the amount of time that borrowers tend to hold a mortgage.
Another beneficiary of recent inflation — specifically asset-price inflation — has been household balance sheets, writes Axios' Kate Marino. Americans' net worth has now reached nearly six times the country’s gross domestic product.
Why it matters: The past two decades of growth in net worth are mostly due to the appreciation of assets like real estate and equities — not to the accumulation of savings, according to a new report out from McKinsey Global Institute.
3. A very unusual auction
The U.S. Constitution is one of the most copied and reprinted documents in the world. This evening, an early copy, dating to 1787, is being auctioned at Sotheby's — and has an extremely good chance of getting sold to ConstitutionDAO, a meme-fueled crypto group.
Why it matters: This is a slightly bizarre collision between the real world and the crypto world, with both sides slightly puzzled by the other side's rules and conventions.
- ConstitutionDAO was formed, for instance, on the understanding that the copy being auctioned today was the last surviving copy in private hands. But there was no crypto-style mathematical certainty about that — and in fact Sotheby's now says there's at least one other. That doesn't seem to have slowed down ConstitutionDAO's fundraising, however.
- The auction dynamics are very weird. Because the amount of money in ConstitutionDAO is public, and they're committed to spending as much of it as necessary, there's no real point in less deep-pocketed bidders even bidding at all. On the other hand, if you always wanted to bid $30 million for an object at auction while safe in the certain knowledge that you'll be outbid and owe nothing, now's your chance.
- The bidding entity is weird too: It's an LLC governed by ConstitutionDAO, since DAOs are not legally recognized entities in most jurisdictions and therefore aren't allowed to directly bid at Sotheby's.
The one thing that isn't weird: If and when they win the item, ConstitutionDAO intends to put it on show at a museum. Which is exactly what has ended up happening to 11 of the 12 other known copies from this printing.
4. Why companies break themselves up
Show me a company breaking itself up, and I'll show you a company with a disappointing share performance.
Driving the news: GE is splitting into three parts; J&J is splitting into two; Toshiba is splitting into three. In each case, the newly-independent businesses are going to be a lot easier to describe than the sprawling corporate octopodes from which they descended.
The big picture: When a company underperforms on the stock market, there are often calls to break it up. (See Shell for a recent example.) Financial analysts look at how much each of the component parts would be worth as standalone companies, and calculate that the current whole is worth much less than the sum of the parts.
- In the era of index funds, investors can get diversification easily from ETFs; they don't need corporate managers to do that for them.
- Be smart: The Ford and GM share prices are going up and to the right — which is one reason they're unlikely to break themselves up, despite calls for them to do so.
The bottom line: That which financial engineering brings together, financial engineering can just as easily put asunder.
Bonus: When a corporate spinoff faceplants
Kyndryl is a massive IT services company with 90,000 employees and revenues of more than $18 billion per year. It spun out from IBM at $40 per share on Oct. 25.
- Oops: Over the course of just 17 trading sessions, Kyndryl has managed to lose more than half its value.
5. Investors ❤️ EVs
EV automakers Lucid and Rivian are worth $212 billion between them, writes Axios' Ben Geman, despite the fact that neither company has seen any meaningful revenue.
- By contrast, GM and Ford are worth $173 billion, on expected revenue between them of $260 billion this year.
Why it matters: The eye-popping valuations signal that investors see the potential for huge EV market growth, and how those two startups may be well-poised.
- Lucid's team includes several Tesla veterans, and its Lucid Air just won Motor Trend's car of the year.
- Rivian is backed by both Ford and Amazon, which has placed an order for 100,000 of its forthcoming electric delivery vans.
What they're saying: “The valuations placed on Rivian and Lucid are questionable, particularly in comparison to the existing automotive companies," Edmunds analyst Jessica Caldwell tells the Financial Times.
6. The Sweetgreen premium
Axios' favorite unprofitable salad vendor, Sweetgreen, starts trading as a public company today. At the IPO price of $28 per share, it has an enterprise value of $2.85 billion, or 9.5 times the $300 million of revenue it saw over the past 12 months, according to calculations by Axios' Richard Collings.
- Other restaurant chains can only dream of such a valuation, but Sweetgreen has managed to persuade the market that it's as much a fast-growing tech company as it is a salad shop.
Be smart: Expect further stock market listings from the likes of Torchy’s Tacos, Panera, and Fogo de Chão. If Sweetgreen stock continues to trade well, we might also see IPOs from P.F. Chang’s and California Pizza Kitchen.
7. Coming up: Thanksgiving travel
Pent-up demand to see family and friends could translate into some 53 million travelers moving around the country next week, Axios’ Hope King writes.
What to watch: TSA publishes its checkpoint figures every day for the previous day by 9 a.m.
- For context: Air travel is likely to rebound to 4.2 million passengers, estimates the AAA, up sharply from 2.3 million in 2020, but still slightly below the 4.6 million of 2019.
8. Building of the week: Primorsky Aquarium, Vladivostok
Primorsky Aquarium, a pet project of Russian president Vladimir Putin, covers some 375,000 square feet and has more than 350,000 cubic feet of water in its tanks.
- Designed by OJSC Primorgrajdanproekt and opened in 2016, the aquarium perches, crab-like, on the shores of Russky Island, southwest of Vladivostok. Featured fauna include ancient horseshoe crabs, beluga whales, and an Amur Siberian sturgeon.
- For all its remote location, the aquarium has already been visited by former Japanese Prime Minister Shinzo Abe and Korean president Park Geun-hye. Of course, it's much closer to those two countries than it is to almost anywhere in Russia.