Oct 17, 2019

Axios Capital

By Felix Salmon
Felix Salmon

Situational awareness:

  • Improbably, there is a Brexit deal on the table! But don't hold your breath waiting for it to be passed by the U.K.'s minority government. Boris Johnson's Conservatives have only 288 seats in the 650-seat parliament, and no other party supports the deal.
  • You might also have seen an article in Vanity Fair implying that traders have been front-running Trump announcements. If you haven’t, you’re lucky: As I explain here, there is no there there.

This Sunday, tune in to HBO to watch a show that puts the corrosive effects of power and money under the microscope. "Succession" had its second-season finale last week, but "Axios on HBO" is here to pick up the slack, at 6pm ET/PT.

In this week's newsletter (1,708 words, < 7-minute read): The children of the rich; Bill Gates and Jeffrey Epstein; podcasting; why we're not at full employment; and much more.

1 big thing: How scions succeed

Illustration: Sarah Grillo/Axios

"My dad was vice president of the United States. There's literally nothing, as a young man or as a full grown adult, that my father in some way hasn't had influence over."
— Hunter Biden, in an interview with ABC News

America is not a meritocracy. Wealth and power are both largely inherited traits, to the point at which there's a name for the seeming inability of the children of the rich to fail: the glass floor. Yet while inheriting wealth is relatively uncontroversial, inheriting power can be problematic.

Driving the news: Hunter Biden, Joe Biden's son, has received much good fortune over the course of his life, first as the son of a Delaware senator and then as the son of the vice president of the United States.

  • Hunter was accepted to Yale Law School, became his father's deputy campaign manager, was offered a plum job with a bank holding company that was one of his father's largest campaign contributors, founded a lobbying company, was appointed by President George W. Bush to the board of Amtrak, and founded an investment firm with another political scion, John Kerry's stepson Christopher Heinz.
  • He joined the board of Burisma Holdings, a Ukrainian natural gas producer, in 2014. According to the NYT, his board seat "allowed Burisma to create the perception that it was backed by powerful Americans at a time when Ukraine was especially dependent on aid and strategic backing from the United States."

None of this is criminal, although when U.S. companies hire Chinese princelings, that can violate the Foreign Corrupt Practices Act. In 2016, for instance, JPMorgan paid a fine of $264 million for giving investment-banking jobs to the children of high-ranking Chinese officials. (Deutsche Bank seems to have done something very similar.)

Politicians' children have a tendency to receive amazing jobs — up to and including senior White House positions, in the case of Ivanka Trump and her husband.

  • John McCain's daughter Meghan c0-hosts "The View" on ABC and she also appears on ABC News. Her co-host Abby Huntsman, the daughter of former Utah Governor Jon Huntsman, previously worked for NBC News; both of them have also worked for Fox. Bill and Hillary Clinton's daughter, Chelsea, also worked for NBC News.

The bottom line: If you're the child of a prominent politician, your connections are going to be valuable in many different industries. That's going to help your career whether you like it or not. It's also going to leave you open to accusations of nepotism and free-riding.

  • When should scions say no to lucrative opportunities? The emerging consensus seems to be that work for domestic companies is generally accepted, while work for foreign companies is more problematic. But these norms are constantly evolving.
2. Jeffrey Epstein's richest friend
Jes Staley, Larry Summers and Bill Gates pose with Jeffrey Epstein (center) in 2011. Photo obtained by the New York Times.

Jeffrey Epstein was a master of maximizing and leveraging proximity to wealth and power. While some of his associates certainly inherited their social status (like Robert Maxwell's daughter Ghislaine and Queen Elizabeth II's son Andrew), most of the time he went straight to the top of the family tree.

The big picture: After Epstein was convicted of sex crimes in 2008, his friendships with the rich and powerful continued unabated. In fact, his relationship with Bill Gates started in 2011.

  • A blockbuster NYT investigation reveals that Gates and his associates regularly visited Epstein at his mansion in New York. That's in line with what we already knew about Gates flying on Epstein's jet and donating $2 million to MIT at Epstein's behest.
  • The NYT obtained a photograph from 2011, showing Gates and Epstein at the latter's mansion, alongside Jes Staley, who was at the time the chief executive of JPMorgan's investment bank. (He's now CEO of Barclays.)
  • Gates is accompanied by his then-science adviser, Boris Nikolic (on the far right of the photo), who was so close to Epstein that he was named as a fallback executor of Epstein's estate in his will.
  • Also in the photo is former Treasury secretary and National Economic Council director Larry Summers, who at the time was expected to become the next Fed chair.

What we know: Epstein prided himself on collecting rich and powerful men like Staley, Summers, and Gates. (Also on that list: Apollo CEO Leon Black.) Being well connected helped Epstein maintain his gilded and depraved lifestyle even after his conviction and imprisonment.

What we don't know: Why did the likes of Gates, Summers, and Staley willingly consort with Epstein? They must have known they were risking serious reputational damage for themselves and for their institutions. Just imagine the firestorm that would have surrounded the Fed had Summers been chairman when Epstein was arrested earlier this year.

The bottom line: The children of politicians do need jobs in order to navigate life's waters, but people like Summers, Gates and Black do not. They're very big fish who have spent decades avoiding the unwanted attention of unsavory would-be remora.

  • When they're discovered swimming with the likes of Epstein, it's entirely reasonable to ask what exactly they were doing — and to keep on asking, repeatedly, even when they decide that their best response is simply stonewalling.
3. Why America isn't at full employment
Expand chart
Data: FactSet; Chart: Axios Visuals

The Fed has two jobs: Keeping inflation at 2% and ensuring full employment. The latter is a key part of the social contract — making sure that anybody who wants a job can have one.

  • But what does full employment look like, empirically? According to Minneapolis Fed president Neel Kashkari, we're clearly not there yet — despite the fact that the unemployment rate is at a 50-year low of 3.5%.

Why it matters: If we're not at full employment, and inflation remains below the 2% target rate (as it does), then the Fed has little choice but to step on the gas.

"Until we see wage growth net of productivity climbing at above 2%, then we're not really at maximum employment."
— Neel Kashkari, in an interview with Axios

By the numbers: Hourly wages were $27.91 in June, up 3.2% from a year previously. (They've since decelerated a bit, with September's data showing earnings growth of 2.9%.)

  • Productivity, meanwhile, was growing at a 1.8% pace in June. Which means that wage growth after accounting for productivity is well below the Fed's 2% inflation target.
  • The U.S. won't be at full employment, says Kashkari, until that number rises to above 2%.

What they're saying: Kashkari tells Axios that the headline unemployment rate is "almost useless" in determining whether the U.S. economy is at full employment.

The big picture: Kashkari is a noted dove, and it's not clear that other Fed officials would agree entirely with his analysis. But it's undeniable that wage growth is low.

  • If Americans started earning more money, the Fed would likely welcome that as a sign of economic health, rather than worrying that it might start causing too much inflation.
4. Podcasting's rosy future

Illustration: Sarah Grillo/Axios

The podcast boom shows no sign of slowing down.

  • Driving the news: Shonda Rhimes, who already has a nine-figure TV deal with Netflix, has now signed a 3-year podcasting deal with iHeartPodcast Network, creating Shondaland Audio in the process. Other TV companies, like HBO, are making podcasts themselves, with significant success.
  • Vox Media alone has more than 200 podcasts, compared with 67 on NPR.
  • Venture capitalists have invested more than $270 million in the podcasting industry this year, according to Pitchbook; they also got their first major exit when Gimlet Media was sold to Spotify for $325 million.

There's a lot of room to grow. Global music industry revenues are more than $20 billion a year, while podcasting doesn't come close yet to making $1 billion a year — even when you include a slew of lucrative live events.

  • Smart speakers are growing fast, and will help solve one of the biggest problems in the podcasting industry, which is the difficulty of playing the podcast you want at the time you want it.
  • Apple's AirPods, too, make podcast-listening much easier in a slew of different contexts.

Podcasts monetize at only about 1 cent per listener-hour, according to an Andreessen Horowitz analysis. Radio generates more than 10 times as much.

Go deeper: The final season of Gimlet's "StartUp" podcast is a must-listen. It covers the sale of Gimlet to Spotify, with interviews on both sides of the deal.

  • The podcast demonstrates just how difficult it is to make money in the podcasting industry. Revenues are sure to grow substantially, but no one really knows where and how the associated profits are going to accumulate.
Bonus: Radio's decline
Expand chart
Data: MusicWatch; Chart: Axios Visuals

Podcasting is entering a lot of white space — areas where people used to listen to very little media, like while they were commuting or doing the laundry.

  • Media is a competitive game, however, and podcasts are certainly going to gain market share from radio.
5. What we're reading: Why tax filing is so hard

An internal Intuit analysis of customer calls this year. (Slide via ProPublica; highlights added by Axios.)

You should be able to file your taxes easily and for free at a government website. ProPublica's Justin Elliott and Paul Kiel explain why you can't, in a massive new investigation. (Spoiler alert: It's because of lobbying pressure from Intuit, the makers of TurboTax.)

6. Coming up: Washington vs. Zuckerberg

Illustration: Sarah Grillo/Axios

Mark Zuckerberg will be in Washington on Wednesday to personally defend Facebook's Libra project, writes Axios' Courtenay Brown.

Why it matters: Up until this point, David Marcus — the Facebook executive who helped create the cryptocurrency — has the been the face of Libra. It's significant that Zuckerberg, for the first time, will be the one fielding questions from Congress on the topic.

  • Both sides of the aisle are concerned about Libra.
  • And, the current backdrop is significantly worse than when Marcus testified before Congress in July: Central banks have voiced skepticism, no banks have signed on to the project, and a lot of companies have reneged on decisions to be involved with Libra.
7. Building of the week: Dock 72

Photo courtesy of Dock 72

New York's flagship WeWork building is now open. Dock 72, in the Brooklyn Navy Yard, was designed by S9 Architecture back in the days when WeWork was a fast-growing vision of the future of work.

  • Built in the location of an old dry dock, the office is raised on stilts to avoid flooding from storm surges.
  • The official archibabble description of the building is spectacular: "A laboratory for the production of ideas and innovation ... 8’ of vision glass, intensifying the light ... active vegetated open space."

Not mentioned: While the attached ferry station is certainly convenient, rush-hour service is not. If you miss the 8:35am ferry from Wall Street, you'll have to wait 50 minutes for the next one.

Felix Salmon