Jan 9, 2020

Axios Edge

By Felix Salmon
Felix Salmon

Happy Thursday! The stock market is at an all-time high, and Tesla shares rose 17.6% in the first five trading days of the year. If they carry on at that rate, the carmaker’s shares will each be worth $1,661,772 by Christmas, and Tesla’s market cap will hit $287 trillion.

In this week's newsletter: War isn't bad for stocks, why Australians are donating money to their government, the work-from-home trend, more on Tesla, and a Netflix joke.

  • Plus, how Donald Trump treats the wine industry the way that Patricia Arquette treats Jim Gandolfini in "True Romance."
  • All in 1,640 words, which should take you 6 minutes to read. Enjoy, and subscribe if you haven't yet done so.
1 big thing: When war pays dividends

Illustration: Aïda Amer/Axios

War. What is it good for? The stock market, it turns out.

Driving the news: U.S. stocks sold off when investors were faced with the specter of possible war with Iran. War kills hundreds of thousands of people every year, which is good for no one. Stocks understandably fell after Iraq invaded Kuwait in 1990, or when terrorists attacked the U.S. on September 11, 2001.

The big picture: Don't pay too much attention to short-term stock market gyrations. When you take a step back, it looks like war tends to be good — not bad — for American stocks.

By the numbers:

  • The Dow rose 43% during World War I, despite the destruction of much of Europe, and it rose 50% during World War II, which was bloodier still.
  • Defense spending has accounted for more than 3% of U.S. economic activity in every year since World War II. Think of it as a consistent and predictable fiscal stimulus.
  • The 2020 defense budget stands at $738 billion, or about 3.6% of GDP. That's roughly the same as the entire economy of Switzerland, or the $787 billion spent on the 2009 American Recovery and Reinvestment Act, aka the Obama economic stimulus bill.

Determining the effect of war on the stock market isn't easy, since the U.S. is almost always at war. Since the end of World War II, per Eurasia Group, the U.S. has been at war in every year bar 1949 and 1985.

  • But if you look at the wars that involved the most U.S. troops — the Korean War and Vietnam — the stock market rose 60% and 43%, respectively.
  • When the U.S. invaded Iraq in 2003, stocks rose 32% in the subsequent 10 months.

It's not just share prices, either. Mark Armbruster, president of Armbruster Capital Management, ran the numbers for the 1926–2013 time period and determined not only that large-cap and small-cap stocks outperform during wartime, but that they do so with lower volatility.

  • In other words: Risk goes down while returns go up.

How it works: If Iran were to bring down the internet in North America, or set off a nuclear device in Manhattan, there would certainly be immediate and significant negative repercussions for stocks. But it's hard to price in tail risks.

  • The base-case expectation with respect to any upcoming conflict with Iran is the same as with all other wars since 1945: The war will not take place on U.S. soil.

The bottom line: Iran is not a significant part of global trade. The only way that U.S. companies can make money from Iran is by selling materiel for use in a war there. The bigger the war, the more money they can make.

Bonus: Stocks climb a wall of war
Expand chart
Data: Eurasia Group, Correlates of War, PRIO; Chart: Naema Ahmed/Axios

America has gotten involved in 36 different wars since 1949; a conflict with Iran would bring that number up to 37. None of those wars caused a significant bear market.

2. Trump's most incomprehensible tariff

Illustration: Sarah Grillo/Axios

The wine industry descended on Capitol Hill this week in a last-ditch attempt to avert 100% tariffs on all EU wines — as well as cheeses, cosmetics and other consumer products.

Why it matters: The U.S. has declared its intention to impose these tariffs as retaliation against the way that European nations illegally subsidized Airbus. But if they go into effect, the brunt of the pain will be borne not by European companies but by Americans.

How it works: European winemakers can sell their product anywhere in the world. American wine importers, distributors and retailers, by contrast, can only source European wine from Europe.

  • Zev Rovine, a natural-wine importer, tells Axios that the 100% tariff would cover 80% of his sales. The overwhelming majority of his wines would simply become unbuyable at those prices.
  • "I work with small producers of natural wine that are very popular in Copenhagen and Tokyo," he says. Those producers would just sell their product elsewhere — but Rovine could easily find himself out of business.
  • The real risk here is less that European wines will increase in price, and more that they will simply disappear from liquor store shelves and restaurant wine lists.

What they're saying: "We are fighting not just to be able to drink European wine; we are fighting for our livelihoods and for our hundreds of thousands of employees," writes another wine importer, Jenny Lefcourt, in the NYT.

  • Even American winemakers oppose these tariffs. Jason Haas, the general manager of Tablas Creek Vineyard in California, told the NYT's Eric Asimov that he relies on the same distributors who import European wines. “The short-term impact is likely to be pretty serious and pretty negative,” he said.

The bottom line: It can take decades to cultivate transatlantic relationships with European winemakers. If the Trump administration severs those ties, no one knows when or whether they might grow back.

3. A tale of 2 carmakers
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Data: FactSet; Chart: Axios Visuals

Former Nissan chairman Carlos Ghosn was in pugnacious form yesterday during a 145-minute press conference in Beirut, at which he proclaimed his innocence while simultaneously bemoaning the underperformance of the Nissan share price.

  • Since Ghosn was arrested in November, Nissan's enterprise value has declined to $85 billion from $96 billion, a rate of roughly $36 million per trading day.
  • Tesla's enterprise value, meanwhile, has risen to a new high of $99.2 billion. Elon Musk's electric-vehicle manufacturer has a market capitalization greater than Ford and GM combined, and has officially become the most valuable U.S. car manufacturer of all time.

The big picture: Tesla stock closed on Wednesday at $492 per share, boosted by dreams of massive growth in China. That's comfortably above the $420 at which Elon Musk notoriously mulled taking the company private.

4. Australia's wildfire donations

Illustration: Eniola Odetunde/Axios

The Australian wildfires have elicited massive charitable donations: $33 million crowdsourced from Celeste Barber via Facebook; $1 million from actor Chris Hemsworth; $700,000 from a bikini model sending nudes on Twitter.

  • Most of the money is ending up in the coffers of the New South Wales Rural Fire Service (RFS), which is part of the state government, and which last year saw donations of less than $1 million.
  • There is no evidence that the RFS is cash-constrained. Its income comfortably exceeded its expenses last year, and it has not made any pleas for donations this year. In fact it has said that giving away the money will be a "challenge."

Between the lines: The human urge to donate money in the wake of a disaster — to feel that you're doing something — can be incredibly strong.

Why it matters: Firefighting is a central part of what governments should provide, and to that end the RFS receives hundreds of millions of dollars from the government every year. The RFS is staffed by volunteers, but it is not primarily a charity.

My thought bubble: Part of the challenge facing the RFS is going to be to spend these funds on things it doesn't need, perhaps just by passing the money on to victims of the fire. All necessities should be covered by standard government funding mechanisms.

5. The business logic behind a Netflix joke
Via Netflix India / Twitter

The first super-viral #brandtweet of 2020 came from Netflix India, which racked up almost 150,000 retweets and 700,000 "likes" by telling us all to just use someone else's account if we want to get our Netflix for free.

  • The humor in the tweet comes from its authorship: Netflix isn't exactly Abbie Hoffman, and would definitely prefer you pay for their service than you don't pay for it.

The big picture: In a way, Netflix likes it when you use someone else's account. A paying customer is better than a non-paying customer, but a non-paying customer is better than no customer at all.

  • In the platform wars, size, growth and brand recognition matter more than anything else. In a fast-growing market like India, the prime goal for Netflix is to get as many people attached to its platform as possible. Whether they're paying or not.
6. Employed but working from home
Expand chart
Sources: IPUMS USA, Ruggles et al. (2019); and St Louis Fed; Chart: Axios Visuals

The U.S. economy is shifting inexorably away from manufacturing and toward services, and with that shift comes a rise in remote work.

By the numbers: St. Louis Fed researchers found that more than 3% of American employees primarily worked from home in 2017, up from 0.7% in 1980.

  • That number rises to 4% for workers in sales, and 5% for workers in management, business and finance.
  • In Boulder, Colorado, 9% of full-time employees work primarily from home.
  • At Axios, 12% of full-time employees work remotely from home.

What they're saying: "The technological substrate of collaboration has gotten shockingly good over the last decade," wrote Stripe CTO David Singleton in May, announcing that his company's fifth engineering hub would be "Remote."

  • Some Stripe teams are comprised entirely of remote employees.

The bottom line: America's self-employed have been working from home for decades. Now full-time employees are beginning to discover the attractions of avoiding the dreaded open office.

7. Coming up: Trump signs a mini trade deal

Illustration: Sarah Grillo/Axios

President Trump will sign "phase one" of the U.S.-China trade deal at the White House on Wednesday, writes Axios' Courtenay Brown.

Why it matters: It’s a symbol of progress between the two nations. It doesn’t end the trade war — $250 billion worth of Chinese goods are still subject to 25% tariffs.

  • Calling the deal “phase one” means we can expect a push for something like a “phase two.” No word on when those negotiations get underway.
  • The actual text of the agreement hasn't been seen by the public. It's expected to be released following the signing. (We do know that the deal says China will buy more agricultural goods.)
  • China's top negotiator, Vice Premier Liu He, will sign the deal for the Chinese side.
8. Building of the week: Frogmore Cottage

Frogmore Cottage. Photo: GOR/Getty Images

Frogmore Cottage is a late 18th century cottage on the grounds of Windsor Great Park, outside London.

  • Acquired in 1813 by the British royal family from the estate of Princess Augusta (the older sister of King George III, of U.S. independence fame), it housed the Grand Duchess Xenia Alexandrovna of Russia while she was in exile in the 1920s.
  • By that point, the road in front of the cottage had been closed to the public, to give the residents more privacy.

The cottage was recently refurbished at a cost to U.K. taxpayers of £2.4 million (about $3.1 million). It had previously been five homes; the renovation turned it into just one, for the Duke and Duchess of Sussex, aka Meghan and Harry.

  • According to their new official website, the refurbishment reflected "the Monarchy’s responsibility to maintain the upkeep of buildings with historical significance."
  • Despite effectively leaving the monarchy, Harry and Meghan will continue to use Frogmore Cottage as their U.K. residence, rent-free.
Felix Salmon

Finally, a wine-related note and disclaimer. When it comes to buying delicious wines from European winemakers, one of the best things you can do is start paying attention to the importer's name on the back label.

I enjoy and trust the wines imported both by Zev Rovine and by Jenny Lefcourt's Jenny & Francois. Whenever you find an importer who shares your taste in wine, that makes it much easier to make delightful discoveries.