Aug 6, 2020

Axios Capital

By Felix Salmon
Felix Salmon

Welcome to Axios Capital, the newsletter formerly known as Axios Edge. It might sound like a hedge fund, but we're a lot cheaper, at exactly $0, than the 2-and-20 fees charged by hedge-fund managers. To sign up, just click here.

  • In this week's issue (1,641 words, a 6-minute read): A new type of philanthropy, the rise of retail investing, an important new bank charter, the corporate victims of geopolitics, a whole slew of interesting charts and datapoints from the past couple of weeks, and more.
  • ICYMI: Jonathan Swan's astonishing "Axios on HBO" interview with President Trump is available to watch in full — for free — here.
1 big thing: Charity 3.0

Photo illustration: Annelise Capossela/Axios. Photo: Jörg Carstensen/picture alliance via Getty Images

Philanthropy is rarely associated with humility.

  • The extremely rich tend to think very highly of themselves, and of their ability to bend the world to their will. So when they start giving their money away, they tend to retain maximum control.

Why it matters: MacKenzie Scott, the ex-wife of Amazon founder Jeff Bezos, is worth about $60 billion. She pledged to give away substantially all of that money after she gained autonomy over her own wealth. Judging by her first 116 grants, she's doing so in a refreshingly radical — and humble — manner.

What's new: Alms for the needy was charity 1.0. It was succeeded by professionalized philanthropy — a baroque edifice of foundations and perpetuities and strategies and naming rights and social impact metrics.

  • Scott's giving suggests a new model, one more focused on the value of giving itself, and where the giver does not try to influence the actions of the grant recipients.

What they're saying: "People who have experience with inequities are the ones best equipped to design solutions," writes Scott. In practice what that means is that she trusts them to know what best to do with her money, instead of doling it out only within a complex framework of grant proposals and quarterly reports and two-year re-evaluations.

  • When Scott chooses a cause, she just gives them cash. No schedules, no promises, no strings. (Jack Dorsey's #startsmall initiative is similar, if smaller.)
  • By the numbers: Scott has given $587 million to racial equity organizations, 91% of which are run by leaders of color. $46 million went to LGBTQ+ equity organizations all of which are run by LGBTQ+ leaders. She gave $133 million to gender equity organizations, 83% of which are run by women.

The philanthro-industrial complex did help: Scott was advised in her giving by Bridgespan Group, one of the largest big-philanthropy advisors. But their job was clearly just to identify worthy recipients — and then get out of the way.

What's missing from Scott's philanthropy is capital projects. The easy way to give away hundreds of millions or billions of dollars is to funnel the cash into architecture or endowments, rather than trying to get it directly to those who need it. Scott has avoided that.

  • "There has been too much emphasis on thinking about the future," says Benjamin Soskis, a philanthropy researcher at the Urban Institute. Scott's giving, instead, is based in "respect for people who are doing the work." And that feels new.

The catch: Scott is only getting started in her philanthropy, and the $1.7 billion she's given away so far is extremely impressive. Still, her net worth has managed to increase by $25 billion this year alone, thanks to the rise in Amazon's share price.

  • The bottom line: If Scott is truly determined to give away all her wealth, she's going to have to speed up her rate of disbursement significantly.
2. The continued rise of retail stock trading
Data: The Block; Chart: Danielle Alberti/Axios

Small investors are playing a larger role in the stock market than at any time this century.

  • Whatever the reason — lots of free time thanks to the pandemic, zero-dollar commissions, addictive and gamified apps, enticing volatility — retail investors have become a driving force behind many individual stocks and maybe even the market as a whole.

Why it matters: No one can quantify exactly how much retail investors are trading now, compared with pre-crisis. But thanks to SEC Rule 606, which came into force in January, we now have a very good proxy. That proxy shows that the surge in retail investing that started in March isn't slowing down at all. In fact, it's growing.

How it works: Retail brokerages like Robinhood, TD Ameritrade and E-Trade all route their order flow to high-frequency traders like Virtu and Citadel. Those trading firms make so much money buying at the bid and selling at the offer that they're willing to pay millions of dollars for the ability to fulfill the orders. That practice is known as payment for order flow, or PFOF.

  • Stocks in the S&P 500 tend to trade with the tightest bid-offer spreads, so their PFOF is relatively small. Other stocks have wider spreads, and command larger PFOF. The biggest PFOF of all comes from options trading.

By the numbers: Frank Chaparro and his colleagues at The Block did the laborious work of finding and aggregating the Rule 606 reports for Robinhood, TD Ameritrade and E-Trade. Those firms between them received $99 million of PFOF in January, pre-crisis. In March, that number spiked to $164 million, and in April it grew even further to $175 million.

  • June saw yet another massive jump, registering a stunning $258 million of PFOF just for those 3 firms. Of that amount, $146 million, or 57%, came from options trading.
  • Robinhood's take was large, at $139 million for the four crisis months of March through June. But TD Ameritrade's was even bigger, at $226 million. (The numbers for TD Ameritrade and E-Trade do not include figures for Charles Schwab or Morgan Stanley, with whom those companies are set to merge.)

The bottom line: Retail brokerages like to encourage trading so that they can get PFOF. But that PFOF is small (just 8.8% of the total) with respect to individuals trading S&P 500 stocks. The real money is found in options trading.

3. Varo gets its bank charter

Illustration: Annelise Capossela/Axios

Some good news came this week for those of us who worry that "fintech" is a trendy way of saying "regulatory arbitrage": Varo Money, one of many upstart challenger banks, received its bank charter effective Aug. 1.

Why it matters: The benefits for Varo Bank (as it can now officially be called) are obvious. Varo now controls its own deposits, and can use them to fund loans; it also has a lot more freedom to innovate, now that it doesn't need to work within a partner bank's APIs.

  • Because Varo has a national bank charter (unlike Square, which is chartered in the state of Utah), it no longer has to worry about being in compliance with 50 different state financial regulators. One federal charter is all it needs.

The benefits for the rest of us are that a large and fast-growing financial player (CEO Colin Walsh tells Axios that Varo's deposits have trebled over the course of the pandemic) is now subject to full regulatory scrutiny.

What they're saying: "Innovation is happening outside the bank charter today," says Brian Brooks, acting comptroller of the currency and Varo's new regulator. "That creates some amount of risk to the financial system. As incentives have grown for people to operate financial services companies in a specialty way, it has become harder for bank supervision to monitor risks."

What's next: Now that the dam has broken, expect more national charters in relatively short order — within the next year or so. SoFi could be next.

  • While it took more than three years for Varo to get its charter, SoFi's is likely to come more quickly. "The early pioneers had to take covered wagons over the Rockies," Brooks tells Axios. "Now we take a plane flight."
4. The corporate victims of the China tensions

Illustration: Aïda Amer/Axios

The travails of TikTok are the most visible example of how the rapidly deteriorating relationship between the U.S. and China can evaporate tens of billions of dollars of corporate value.

Why it matters: When corporations find themselves at the mercy of politicians flexing their geopolitical muscles, they generally end up ruing the encounter.

Driving the news: While President Trump has vowed to ban TikTok if it isn't sold to Microsoft, U.K. bank HSBC — which makes half of its money in Hong Kong — saw its second quarter earnings fall by 67%. The culprit? "Increased geopolitical risk." As the New York Times put it: "In Showdown Between China and the West, HSBC Gets Caught in the Middle."

  • By the numbers: HSBC was worth $157 billion in mid-February. It's now worth less than $90 billion. By contrast, America's largest bank, JPMorgan Chase — which is slightly smaller than HSBC in terms of total assets, but which is much less exposed to China — is worth about $300 billion.

The other side: Hong Kong's stock market remains a fantastic place to raise money. Alibaba Health easily raised $1.3 billion this week in a secondary share offering.

5. The Q2 healthcare implosion
Data: U.S. Bureau of Economic Analysis via FRED; Chart: Andrew Witherspoon/Axios

The pandemic has been very good for health insurers — largely because they don't need to pay for procedures that haven't been happening.

  • The value of health care services performed in America in the second quarter plunged to $1.69 trillion, from $2.26 trillion in the fourth quarter of 2019.
  • The unprecedented drop was enough on its own to account for 9.5 points of the 32.9% annualized fall in second-quarter GDP.
6. The homeownership rebound
Data: U.S. Census Bureau via FRED; Chart: Axios Visuals

I was astonishingly wrong when I wrote last year that homeownership in America was "not coming back."

  • By the numbers: There was a huge spike in homeownership in April, with the rate now standing near its all-time highs during the mid-2000s housing boom.

Why it matters: Homeownership is a good way to build household wealth, but also means a much less nimble workforce.

7. A fixed-income milestone
Expand chart
Data: Federal Reserve via FRED; Chart: Axios Visuals

The real yield on 10-year U.S. Treasury notes hit -1% for the first time ever this week. Curiously, Switzerland and Japan currently have positive real yields.

8. Apple's inexorable rise
Data: FactSet; Chart: Naema Ahmed/Axios

Apple's market cap is screeching towards $2 trillion, writes Axios' Dion Rabouin; it has gained more than $1 trillion in market cap just since June 2019.

  • The company now represents 6.5% of the S&P 500 — the largest weighting of any company in the past 40 years.
9. Coming up: The July jobs report

Illustration: Eniola Odetunde/Axios

The most comprehensive read on the state of the job market in July comes tomorrow, writes Axios' Courtenay Brown.

Why it matters: It's widely forecast that hiring stalled relative to June's 4.8 million job gain, as coronavirus cases surged and states pulled back on reopening plans last month.

But don't look to economists for guidance on how steep any slowdown may be.

  • Estimates range from a payroll decline of 600,000 to a gain of 3.2 million, per Bloomberg.
10. Building of the week: The Issam Fares Institute
Photo: Hufton+Crow/View Pictures/Universal Images Group via Getty Images

The American University of Beirut in Lebanon is housed in the Issam Fares Institute, a beautiful Zaha Hadid building completed in 2014 and featuring a 69 foot long cantilever.

  • The building was designed to be a forum for public policy debate in the Arab World.

Today, Lebanon is financially and physically in ruins; the university has literally become a trauma center.

  • The president of the university, Fadlo Khuri, has this message for the world: "Keep your faith in AUB and in Lebanon, which will surely endure."
Felix Salmon