Jun 3, 2021

Axios Capital

Situational awareness: AMC filed to sell another 11.6 million shares of stock this morning, taking advantage of its meme-driven rise. "We caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment," says the prospectus in bold type on its front page.

  • In this week's newsletter: The differing meanings of inflation, the financial importance of a good story, AMC (of course), unreliable financial advisers, crypto investors, the Libor mess, used-clothes unicorns, and much more. All in 1,661 words, a 6.5-minute read.
1 big thing: Your inflation may vary

Illustration: Aïda Amer/Axios

Inflation is a much trickier concept than it seems, as I learned after publishing an article about it last week. There was a lot of feedback!

Why it matters: When people disagree on whether inflation is here, or whether it's worrisome, they often assume that they're talking about the same thing. Normally they're not.

How it works: Different ways of thinking about inflation end up leading to very different conclusions about its dangers.

  • There are dozens of official inflation statistics, each measuring a slightly different thing. The CPI alone comes in a dizzying array of different flavors, depending on whether you want "headline" or "core" (excluding food and energy); whether you want seasonal adjustments; whether you're looking at monthly or annual changes; whether you're looking at urban consumers or urban wage earners; and much more.
  • The Federal Reserve instead looks at something called PCE. That, too, comes in different flavors: the trimmed mean PCE, for instance, excludes whatever has moved the most in price, to give an idea of how the broad mass of prices are moving.

By the numbers: The trimmed mean PCE rose at a 2.4% pace in April, well below the headline 7.5% pace for the PCE as a whole, or the 8.3% reading for the PCE excluding food and energy.

  • That implies inflation is showing up mostly in a relatively small number of areas suffering from supply constraints, such as lumber, chickens, or semiconductors.
  • A relatively low reading in the services component of the CPI — it was up 2.6% in the year to April — implies that higher wages are not (yet) driving inflation. Before the financial crisis of 2008, that number rarely dipped below 3%.
  • Base effects are also skewing the numbers, which are generally reported on a year-on-year basis. Measuring anything from a base of April 2020 is likely to result in a statistic of limited utility.

The big picture: Recent decades have seen a lot of the kind of inflation that's good at entrenching the upper-middle class.

  • Asset-price inflation — a roaring stock market and housing market — has made the rich richer, while leaving much of the country behind. Rampant inflation in college tuition and health care costs has similarly privileged the few who can easily afford them.
  • Wage inflation, especially for lower-paid service workers, might show up in higher prices for their services but would also help to reverse the trend of rising inequality.

The bottom line: No one really knows what modern inflation might look like. The only certainty is that we're not going to replay the 197os. Back then none of the big forces driving modern price dynamics — like China, or the internet, or crazily expensive houses — were at play.

2. The return of the storytellers

Illustration: Annelise Capossela/Axios

Charles Duhigg has a wonderful profile of billionaire financier Chamath Palihapitiya in the New Yorker. His piece includes 31 instances of the word "story" or its cognates ("stories," "storytellers").

Why it matters: As financial markets have matured, the importance of old-fashioned storytelling has generally waned. The stock market is no longer governed by brokers phoning up clients and sweet-talking them into a certain company; instead it has increasingly rewarded lightning speed and brute computational power.

  • The current stock-market frenzy, however, has seen a significant spike in stocks that trade on the strength of their narrative — sometimes to the point at which the story-based valuation diverges wildly from anything you might learn at finance school.

How it works: "Having a great story, and knowing how to tell it, can be a quick way to get rich," writes Duhigg.

  • "When it seems that some improbable group has become fantastically rich overnight," he continues, "a few financial storytellers often rise to prominence: people you’ve never heard of who fill the media with sensational tales of wealth earned in bold, exciting ways."
  • Chamath is one such storyteller — one of the very best, a native speaker of both Twitter and CNBC.

Context: Chamath, alongside many of his followers, has lost a lot of money this year as his SPACs have imploded and the price of his beloved bitcoin has started to fall. But he's still happy to spin his own genius in a misleading and innumerate letter to his investors.

The big picture: In a sense, Chamath and Elon — the first-name-only lords of the Redditverse — are unnecessary. Many of today's most compelling investment stories are distributed across social media in a way that is largely authorless.

  • Satoshi hasn't published anything in years, but his crypto story still resonates; AMC stock might not have its own Roaring Kitty, but it's still headed to the moon, cheered on by TikTokers.
Bonus: The AMC rocketship
Data: Yahoo! Finance; Chart: Sara Wise/Axios

More than 760 million AMC shares were traded on Wednesday, with a total volume of $47.6 billion.

  • Context: AMC hasn't had a profitable quarter since Q2 2019, when it made $49 million. It only has 500 million shares in total outstanding.
  • Its market value at the beginning of the year was less than $500 million. That number rose to more than $30 billion at market close on Wednesday, or about 200 times its first-quarter revenues.
3. The perils of financial advice

Illustration: Aïda Amer/Axios

Do you trust your financial advisor to put you in suitable investments? That trust might be misplaced, according to a stunning study by Greg Davies of Oxford Risk.

  • Davies polled 200 financial advisers, presenting them with six hypothetical clients. The clients were a range of ages, wealth, self-reported risk tolerance, etc.
  • For four of the six, at least one adviser recommended a "very low" level of risk, while another proposed "very high".
  • For clients 1 and 3, recommended equity weightings ranged from 0% to 100%.

The most striking finding came when comparing clients 1 and 4, who were identical except for self-reported risk tolerance. Client 1 had a "high" risk tolerance of 6/7, while Client 4 had a "medium" rating of 4/7.

  • 18% of advisers nevertheless recommended a riskier portfolio for Client 4 than they did for Client 1.

The bottom line: There's "a large amount of subjectivity and noise" in financial advice, per Davies. And there are no good ways for a prospective client to judge how subjective or erratic any given adviser is likely to be.

4. What crypto investors look like
Expand chart
Data: Personal Capital; Chart: Sara Wise/Axios

Crypto isn't just for high-risk YOLO traders any more.

How it works: Of the 2 million or so investors who have signed up to track their portfolios at Personal Capital, about 17,000 have also taken advantage of a trial program that allows them to manually input their crypto holdings.

  • By the numbers: The median amount of crypto held is $7,000, which works out to about 3.5% of the users' total investments.
  • Crypto holders do have slightly riskier investments overall, but not massively. While 30% are high-risk investors, another 20% fall into Personal Capital's relatively conservative "some risk" bucket.

The bottom line: At least some crypto investors seem to have embraced the idea that bitcoin and its digital brethren are conservative inflation hedges, rather than high-risk speculative investments.

5. The post-Libor mess

Illustration: Sarah Grillo/Axios

The road to replacing Libor is not running smoothly, reports Axios' Kate Marino.

  • Banking regulators have been trying to phase out Libor since a 2008 rate-manipulation scandal, but the long transition has given rise to multiple replacement options.
  • Any hopes that the financial industry would just agree to use the rival SOFR benchmark instead seem to be comprehensively dashed at this point.

Why it matters: One major bank reportedly prefers to move to BSBY — the Bloomberg Short-term Bank Yield Index. Other players are looking at Ameribor.

The bottom line: Libor was never perfect, but everybody used it just because everybody used it. It's becoming increasingly unlikely that Wall Street will be able to find consensus on a similarly ubiquitous replacement.

6. Thrifty gateway
Data: FactSet, press reports; Chart: Axios Visuals

The global used-clothes market is worth $40 billion per year, according to Boston Consulting Group, and is growing at more than 15% per year. Like all other retail, it's moving increasingly online.

  • Driving the news: Etsy announced this week that it was buying UK-based Depop, a fashion reseller beloved by #teens, for $1.6 billion.

Etsy itself, now boasting a market valuation of more than $20 billion, has no shortage of secondhand clothing, although its audience skews older.

  • American fashion resellers Poshmark, ThredUp, and RealReal have all now gone public; European rivals Vinted and Vestiaire have both recently raised money at unicorn-level valuations.

Be smart: All of these platforms have benefited to some extent from speculative activity — people buying items in the hope that they will be able to resell them at a higher price. Another unicorn, StockX, specializes in such trades.

  • Depop, however, is mostly an app for the discovery and purchase of items that don't look like they were found at a chain store in the local shopping mall. It's less about collectible handbags, and more about enabling self-expression.
  • Used clothes, and items hand-made by influencers, are also much more socially and environmentally responsible than fast fashion.
7. Coming up: The May jobs report

Illustration: Brendan Lynch/Axios

The May jobs report out tomorrow should help clarify whether the slip-up in April was a blip, writes Axios' Hope King.

Why it matters: Businesses have reported a shortage of workers across sectors. The U.S. reached a record high number of open jobs — 8.1 million — as of the end of March.

  • Economists expect that 656,000 jobs were added in May, based on FactSet consensus, up from a mere 266,000 jobs in April.
8. Building of the week: Highfield House, Dorsington

Photo via Savills

U.K. architects Lyons + Sleeman + Hoare designed this 15,000 square foot folly — the biggest barn to be built of green oak in 300 years — for the eccentric late British publishing magnate Felix Dennis.

  • The structure was not designed to be lived in. Instead, it's more of a venue, with Treasure Island-themed interiors that need to be seen.
  • As an entertainment palace on the grounds of Dennis's historic Staffordshire estate, the building fits elegantly into a long tradition of English follies.
  • As a self-standing property being sold separately for £4 million ($5.7 million), however, it's not entirely obvious who would want it. Even if the price is surely far below the cost of construction.