February 24, 2019
Have you received your share of the $62 billion in tax refunds paid out so far this year? You might be feeling a bit disappointed; the same number at this time last year was $101 billion. But treat yourself to something special anyway, just for getting that tax return in nice and early.
1 big thing: Mobile banking heats up
American banks are minting money. In 2018, they made $237 billion in profits, bringing their average return on assets to an extremely healthy 1.35%. That's up from 0.97% in 2017. With banking so profitable, a lot of new players are looking to get in on the game, or to increase their market share.
The big picture: In a tech-obsessed world, a broad range of institutions have decided that the future of banking lies in apps. The logic is simple: Increasingly, Americans want to bank on their phones, rather than in expensive-to-maintain branches, so banks should give them what they want.
- Goldman Sachs, which already has an online savings account called Marcus and a cash-management app called Clarity, is reportedly going to launch a new card designed for iPhones in particular. Expect something beautiful, designed by Apple.
- Aspiration, an eco-friendly mobile-first bank, has relaunched its product with a slew of attractive features including cash back on debit card purchases, zero ATM fees worldwide, and 2% interest on deposits.
- Varo offers a savings account paying as much as 2.8% to customers who use its checking product.
- Other neobanks including Chime, Acorns, and Simple are also competing hard; even JPMorgan Chase has one, called Finn.
- Banks, prepaid debit cards, and brokerages are all blurring into each other, offering much the same products. Look at SoFi Money, for example, or at the new Wealthfront savings product, which promises to support bill payment soon. Expect it to have a debit card, too.
The bottom line: None of these products are particularly revolutionary, except insofar as their users tend not to hate them. If and when winners start to emerge, expect them to be acquired by the major banks, at which point Actually Pleasant Banking might start to become a mass-market phenomenon.
Bonus: The appeal of digital-only banks
Most mobile-first banks target millennial customers, on the grounds that they are less wedded to their existing banks and are more likely to constantly be on their phones. But a new survey from Marqeta, a fintech startup backed by Goldman Sachs and Visa, shows that Gen Xers are just as likely to have moved to such a bank, and are just as likely to want to move.
2. How to make money the old-fashioned way
Ken Fisher doesn't care about millennials, or apps, or disrupting anything; he's in all respects the epitome of the kind of investment manager that younger, cooler startups are attempting to disrupt. So far, there's no sign that they've made so much as a dent in his revenues.
- Fisher's firm, Fisher Investments, now manages $100 billion. RIABiz, an investment-advisory trade publication, estimates that he's generating $1 billion a year in revenues.
- In a world where Fidelity is offering mutual funds with zero expense ratio and no minimum investment, Fisher Investments turns away potential customers with less than $500,000 to invest, and charges an eye-popping 1.5% on the first $475,000 of that amount. Those obstacles haven't stopped the money from pouring in: Fisher's assets under management continued to grow in 2018, even as the broad market saw a substantial decline.
Fisher's comparative advantage is in sales and marketing. His advertising budget has been so large for so long that his name recognition is super-high; he is also happy to use his own billionaire status as a way to attract clients. His product is designed to appeal to older investors, often retirees, who like to talk to a fellow human about their finances, and who don't mind paying more than 1% of their assets every year in order to be able to do so.
- By the numbers: Every client with more than $10 million under management is generating a six-figure annual revenue for Fisher Investments. That kind of money buys a lot of TV ads.
The bottom line: It's going to be decades before millennials have the kind of wealth that Fisher's clients enjoy, which means that Fisher Investments has the luxury of time on its side. Meanwhile, the venture capitalists who have invested in smaller shops are not just chasing younger, poorer investors; they're also much less patient. For the time being, then, the dinosaurs still have the advantage.
3. The 4 fintech minotaurs
Have you met the minotaurs? A minotaur — the term was coined by Axios editor-in-chief Nick Johnston — is a venture-backed company that has raised more than $1 billion in equity capital. We've found 56 of them, of whom 26 are American and 4 are in financial services.
- The biggest minotaur, by far, is Ant Financial, the Alibaba-backed financial-services giant. It owns Alipay, the enormous mobile payments service; it also owns the world's largest money-market fund.
- Paytm can be thought of as the Indian version of Ant Financial; it has raised $3.6 billion in equity capital.
- SoFi, in the US, has raised $1.9 billion, and is branching out rapidly from its core business of refinancing student loans. Its most recent valuation was $4.4 billion.
- Stripe is also American, although it was started by two Irish brothers. It powers a broad range of online and mobile payments, and was most recently valued at $22.5 billion.
Stripe is worth less than Square, another payments company that went public in 2015 at a valuation of $2.9 billion.
- Today, Square is worth more than $31 billion, after having raised a total of $778 million in equity capital, per PitchBook. That's $547 million before the IPO, and then another $243 million when it went public, most of which was primary issuance.
- Stripe has raised $1.04 billion in private capital, which is more money than Square. It's not clear how those investors will be able to cash out: Stripe still says it has "no plans" to go public.
4. When Unilever dodged a bullet
It was as bold and audacious as takeover bids get: In February 2017, Kraft Heinz bid $143 billion to buy Unilever in a cash-and-stock offer valued at $50 per share.
- Kraft Heinz itself was only valued at $106 billion at the time, but it managed to put together a bid of 0.222 of its own shares, which were valued at more than $80 each, as well as $30.23 in cash, for each Unilever share.
- The offer, which valued Unilever at an 18% premium to where it had been trading in a Brexit-depressed market, was greeted ecstatically by traders, who bid up stock in both companies as a result. But it was summarily rejected by Unilever, and Kraft formally withdrew its offer just three days later.
With the benefit of hindsight, Unilever was unambiguously correct to reject the Kraft Heinz bid.
- Unilever stock continued to rise even after the bid was withdrawn, and the company has been worth significantly more than the $50 per share offer price for nearly all of the past two years. The company is today worth about $150 billion.
- Meanwhile, Kraft Heinz shares have imploded to less than $35, giving the company a valuation of just $43 billion. If Unilever shareholders had found themselves owning 0.222 Kraft shares instead, they would have been very unhappy — not to mention the fact that they would have had to be making interest payments on a massively enlarged debt stock.
Kraft Heinz is operated by 3G Capital, a Brazilian company notorious for its cost-cutting. The company's playbook worked well, until it didn't. Profits go up in the short term when you cut costs, but 3G is very bad at investing in future growth. Instead, it tends to grow via acquisition, and that turns out to be hard when no one wants to be bought by you.
The bottom line: Cutting costs does nothing to improve brand value, as Unilever knew in 2017 and as Kraft Heinz has now discovered. Once brand value has been eroded (to the tune of roughly $15 billion, in the case of Kraft Heinz), it's extremely hard to recover.
5. Don't worry about the national debt
Warren Buffett's annual letter to shareholders is out, which is always most interesting when the Oracle of Omaha admits to past mistakes. (He doesn't admit to his $9.8 billion investment in Kraft Heinz as being a mistake; look for that next year, or possibly in interviews on Monday.)
Buffett has a lesson, in his letter, for "those who regularly preach doom because of government budget deficits". He admits that he was one of those individuals himself, but he's not any more.
- Buffett divides America's history into three 77-year periods. The last period happens to coincide with his investing career, which started in 1942 with $114.75 of savings. Buffett was fortunate to begin investing at such an auspicious time, which shortly predated a stunning wartime run-up in America's debt-to-GDP ratio. (In 1942 it was 48%; by 1946 it was 119%.)
- America did well in its first century and a half. Then, over the course of Buffett's third 77-year period, we contrived to increase our national debt by about 40,000%. "Suppose you had foreseen this increase and panicked at the prospect of runaway deficits and a worthless currency," writes Buffett. "To protect yourself, you might have eschewed stocks and opted instead to buy 3 1⁄4 ounces of gold with your $114.75."
- Buffett, of course, became the world's richest man by investing that $114.75 extremely well. But even if you simply invested it in the broad stock market, it would have turned into $606,811. Had you invested it in gold, by contrast, your small lump of metal would now be worth just $4,200.
The bottom line: There is no evidence from 240 years of American history that the level of the national debt has ever really mattered. The U.S. prints its own currency, and can borrow as much as it likes, increasingly from domestic investors. Per Buffett, deficit hawks have preached doom for decades. They have never been proven correct.
Go deeper: In "How America Learned to Stop Worrying and Love Deficits and Debt," the NYT's Neil Irwin explains how the most respected economists in the world, including Larry Summers and Olivier Blanchard, have recalibrated their fiscal opinions in the light of recent data.
6. Fined banks
Driving the news: Malaysia is seeking a $7.5 billion fine from Goldman Sachs; France is seeking a $4.2 billion fine from UBS. Both cases are unabashedly political, and are accompanied by criminal charges against the relevant bankers.
My thought bubble: Foreign banks make for a very appealing piñata in most countries at most times. Global banks such as Goldman and UBS should expect more fines and prosecutions in future, whether they're deserved or not. After all, there are 195 countries in the world today. It stands to reason that at any given moment, one or two of those countries will find bank prosecutions rather appealing.
7. This week: The China tariff deadline arrives
Two big congressional hearings take place this week, writes Axios' Courtenay Brown.
- U.S. Trade Representative Robert Lighthizer will testify before the House about U.S.-China trade relations on Wednesday — just two days before Friday’s tariff deadline.
- Fed chair Jerome Powell will appear before the Senate Banking Committee and the House Financial Services Committee on Tuesday and Wednesday, respectively. Expect several questions about Trump and the Fed’s political independence.
Trump will be in Hanoi on Wednesday and Thursday for his second meeting with Kim Jong-un about North Korea’s commitment to denuclearization.
The long-awaited fourth-quarter GDP report finally arrives on Thursday after a month-long delay thanks to the government shutdown. It's expected to show that the economy grew 2.4% in the fourth quarter.
- The report will also give us a number for how much the U.S. economy grew in 2018 as a whole. The number to watch is 3%, which is how much the Trump administration has said the economy grew last year. Depending on how you define annual GDP (excellent thread on that here), Trump might get a win.
Brexit progress will be minimal: The meaningful vote everybody expected this week has now been postponed to March.
8. Building of the week: 432 Park Avenue
The tallest residential building in the world, Rafael Viñoly's 432 Park Avenue, in midtown Manhattan, tops out at just under 1,400 feet. Each floor is 8,255 square feet, a good size for a single ultra-luxury apartment with four spectacular exposures.
- The Japanese artist Hiroshi Sugimoto has designed one of the apartments as what one admiring writer describes as a "totalitarian vision" comprised entirely of his own designs and art. The window shades come up from the bottom, allowing the inhabitants to see only sky.
- My friend Naveen Selvadurai remarks: "You know you’ve made it when your shades come up from the bottom. You don’t want to shut the sun out, you want to shut the people out."
Finally, for those of you who made it this far, here's the latest on the World Bank leadership front: Lebanese investment banker Ziad Hayek is contesting David Malpass's nomination to be the new president of the World Bank Group. So far, however, there's still no real heavyweight opposition.