Oct 28, 2018

Axios Capital

By Felix Salmon
Felix Salmon

Situational awareness: Greetings from London! The cost of a new iPhone XR here is £749 for 64GB, £799 for 128GB (John Gruber's sweet spot), and £899 for 256 GB.

  • Compare that to the cost of an iPhone XR in the U.S.: $749 for 64GB, $799 for 128GB, and $899 for 256 GB. Yes, the UK price includes sales tax. But still, we're very close to £1=$1. While Brexit might be a disaster and dreadful for UK consumers, it's undoubtedly great for American tourists, or visiting bloggers.
1 big thing: Saudi agonistes
Saudi foreign ministry / Twitter

Never has a conference failed more spectacularly than this year's Future Investment Initiative. The so-called "Davos in the Desert" was meant to position Saudi Arabia as an innovative, dynamic nation with a bright tech-centered future ahead of it. Instead:

  • No one wanted to speak at the conference, and almost no one wanted to even attend. In the slots reserved for high-profile western CEOs like Jamie Dimon and Dara Khosrowshahi, we saw instead executives mostly from Russia and the kingdom itself.
  • The conference ended up shining a bright light on Saudi Arabia at exactly the time when the world was most focused on its most homicidal and mendacious tendencies. That then brought Saudi Arabia's devastating proxy war in Yemen back into the headlines.
  • The crown prince gave a speech at the conference that was interrupted by abundant obsequious applause, furthering the (true) impression that Saudi Arabia is a long way from any real freedom.
  • Even the real Davos felt tarnished by association, putting out a press release objecting to the misuse of its brand. (The press release came from the World Economic Forum, not the Swiss ski resort.)

With Saudi Arabia's reputation at a historic low, Elon Musk, for one, must be feeling quite relieved that he didn't sell his company to the kingdom. But other companies, and countries, still face a very tough decision.

  • Companies like Uber that already have a significant Saudi investment seem to be OK, so far. They're not being broadly blamed for accepting Saudi money in the past. But if they take more Saudi money in the future, all bets are off.
  • The Softbank Vision Fund, which is 45% owned by Saudi Arabia, reportedly wants to take control of WeWork, for an investment of between $15 billion and $20 billion. Softbank already has two board seats at WeWork, and the terms are surely very attractive to the board and senior management.
  • A lot of WeWork's employees, tenants, and prospective tenants would be very unhappy at such a development. There would certainly be a lot of very negative publicity, at a company which prides itself on being collegial and progressive.
  • From a PR perspective, the decision seems clear: Don't take the Saudis' money. But this decision isn't up to the PR people, it's up to the board.

At the sovereign level, the U.S. sent its Treasury secretary to sit awkwardly with the crown prince in Riyadh on the day before the conference started. The Saudi relationship is being led by Trump, who wants to rescue an underbaked arms deal in part by applying his trademark magic math to it.

  • Canada has its own, much more fully-baked arms deal with the kingdom, and prime minister Justin Trudeau says that there's nothing he can do about it: his hands are tied.

What's next? There are two possibilities.

  • The first is that it all goes away. Right now, this is a public relations disaster for the Saudis. But in the age of Trump, news memories are short, and the outrage machine will move on. Americans never much cared about Saudi human rights abuses in the past, and they'll find it hard to continue to care into the future. Business and government will then revert to the status quo ante without having to fear reputational damage for doing so.
  • The second possibility is that Saudi money becomes toxic. Saudi Arabia's sovereign investments, unlike Norway's, are targeted at private companies that can rebuff their advances. (Endeavor has already done so.)
Not all money is the same. The people that come with it and who are behind it matter. That has always been the case and remains the case and we are reminded of it from time to time. Like right now.
Fred Wilson, Union Square Ventures
2. When even great news isn't good news
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Data: FactSet; Chart: Andrew Witherspoon/Axios

Congratulations to Elon Musk, who not only missed out on being owned by the Saudis, but who also celebrated Tesla's most profitable quarter ever this week.

  • The Model 3 has proved to be a big hit, and Tesla hasn't even started selling it internationally yet, in countries where gasoline is a lot more expensive and demand for electric cars is correspondingly higher.
  • Tesla stock rose on the news. After closing last week at $260 per share, it closed this week at $315. That's a rise of more than 20%.
  • And yet: The stock is still 20% below its highs of 2017, when Tesla was losing billions of dollars a year. Great news at the corporate level isn't always good news for the stock market, especially when criminal probes still hang over the company.

At Netflix, blow-out earnings this week sent the share price soaring to $370 per share. By the end of the week, however, the stock had lost more than 15% of its value. It now trades more than 25% below the high it set in July.

The economy as a whole has now printed two blockbuster back-to-back quarters of 4.2% and 3.5% GDP growth respectively. The stock market, on the other hand, is basically flat year-to-date, and is down 10% from its early-October highs. That's correction territory.

The bottom line: Stock-price valuations are weird, and don't do a great job of reflecting present-day fundamentals. Corporate America, as a whole, is looking very healthy right now. It's worth remembering that current share prices would look fantastic if they hadn't been so ridiculously frothy in the recent past.

3. Puerto Rico's unlikely financial bounceback
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Data: FactSet; Chart: Chris Canipe/Axios

Puerto Rico was the poorest and most struggling part of America even before Hurricane Maria hit in September 2017. Its bonds had been in default for over a year, and were trading at around 60 cents on the dollar before the hurricane knocked them down to a low of less than 23 cents in December 2017.

  • Today, those bonds are back to their pre-hurricane levels, and Puerto Rican debt has proven to be 2018's top bond investment.

Very few people are happy about this development, beyond the distressed-debt specialists who own the bonds.

  • The back-of-the-envelope math is simple: If Puerto Rico has $70 billion in debt, and it gets paid off at (say) 71 cents on the dollar, that's $50 billion being sent off the island at precisely the moment that the Puerto Rican economy needs all the financial help it can get.
  • That $50 billion outflow will do nothing to help, and quite a lot to harm, the island's recovery from Hurricane Maria.
  • Puerto Rico will end up receiving about $82 billion of disaster relief money — much more than most people expected it would get, this time last year.
  • As ever, official disaster-relief sums dwarf charitable inflows: The Red Cross raised $72 million for Puerto Rico, including the value of donated goods. That's less than 0.1% of what's going to end up being spent by the federal government.
  • Trump has accused “inept politicians” in Puerto Rico of using disaster relief money to repay their debts. And though all disaster relief money is going to be used on disaster relief, it's certainly true that without the $82 billion coming in, there's no way that Puerto Rico could afford to spend $50 billion paying back its debts.

Puerto Rico needs that $50 billion, even after the disaster relief inflows. Its pension liabilities alone are more than $50 billion.

  • More than 40% of the population currently lives below the poverty line, including about 60% of children on the island.
  • Since the financial crisis, Puerto Rican GNP has shrunk by 20%, labor participation has hit a record low of 38%, and the island’s population has fallen by 10%.
  • Student enrollment has declined by more than 50% since its peak in 1980, and by about 33% in the past decade.

Puerto Rico has mind-boggling amounts of debt, given its size and the fact that its population is going to continue to shrink indefinitely.

  • The island's debt load is 55% of GDP, compared to a US state average of 2.6%. It’s also equivalent to 102% of state personal income, vs an average for U.S. states of just 2.9%.

The bottom line: Bondholders will always push to receive as much as they can possibly get. But Trump and the island's elected politicians are right to worry about money flowing out, just when Puerto Rico needs it most.

4. The good news about student loans
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Data: Federal Reserve Bank of St. Louis via S&P; Note: Total CPI is the Consumer Price Index. Chart: Andrew Witherspoon/Axios

There's some unexpected good news in the student-debt universe, according to a new research paper from S&P Global Ratings.

  • For the first time since the early 1980s, tuition inflation is lower than the rate at which consumer prices are rising. Baumol's cost disease, which says that tuition fees are always going to rise faster than inflation, might not be an iron law after all.
  • It's been a decade since Congress increased the amount that undergraduates could borrow from the government, which is effectively constraining tuition increases.

Is there a crisis in student loans? Maybe not.

  • Student debt burdens can be extremely unpleasant for individual borrowers, but they don't seem to be impeding the progress of the economy more broadly. The Americans with the highest student-debt burdens also tend to be the Americans most able to repay those loans: doctors, lawyers, and other professionals.
  • The highest student-loan default rates are found among the students with the lowest student debt burden: borrowers who owe the government less than $5,000.
  • The median ratio of educational debt to income for households under 35 fell 5 percentage points between 2013 and 2016. The situation isn't great, but it's getting better, not worse.

Yes, but: The stock of student debt is already dangerously high, at $1.5 trillion and rising. It has grown by 157% in the past 11 years, even as mortgage and credit-card debts outstanding have remained largely flat.

  • More than 10% of borrowers are more than 90 days behind on their student loans.

The bottom line: "Stronger income growth and slower cost increases are working to bend the leverage trend," as S&P puts it. "This trend of rising student debt isn't necessarily a bad thing. Education is an investment in human capital, and if the skills acquired are valued by employers, then going to college carries a positive net present value — even with debt financing."

5. The attention economy in one chart
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Data: Chartbeat; Chart: Andrew Witherspoon/Axios

When YouTube goes dark, people don't put down their devices and enjoy the real world instead. They don't even turn on the TV. They just visit different websites.

  • Chartbeat analyzed the YouTube outage on October 17 using global traffic data across a sample of more than 4,000 sites which are Chartbeat customers, writes Sara Fischer.
  • About half of the increased traffic went to general articles on publisher sites. The other half went to articles about the YouTube outage.

Go deeper.

Bonus: The attention economy in another chart
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Data: Insider; Chart: Andrew Witherspoon/Axios

People watch an enormous amount of video, often for hours on end. The big question is whether the future of television is online, or whether the future of television is... more television.

The chart above, from Business Insider's video arm Insider, shows just how hard it is for publisher websites to attract sustained attention for video content. By the end of 2017, the company's videos were proving very popular online, and their length had increased from 45 seconds to more than 3 minutes. But it's not easy to increase the amount of time that people spend watching: Only a minority of viewers stayed engaged for more than 30 seconds.

  • When you tune in to Axios on HBO, which starts on November 4, please give us more than 30 seconds before you change the channel!
6. Tim Cook becomes a leader
Justin Sullivan / Getty

Tim Cook never wanted to be Apple's CEO: rather, he was thrust into the role by the untimely death of Steve Jobs.

  • Cook was an introverted operations guy, not a charismatic outward-facing leader like Jobs.
  • Cook became CEO in August 2011. Now, seven years later, he is becoming visibly comfortable in the position of leading the world's most valuable company.
  • He's pulling no punches when it comes to privacy rights. "Our own information, from the everyday to the deeply personal, is being weaponized against us with military efficiency," he said this week in Europe.
  • He's out and proud. Being gay is "God's greatest gift to me," he told CNN.
  • He's willing to go fight the press, demanding a retraction from Bloomberg for its story about Chinese spy chips.

The bottom line: It took a while to get here, but Cook is no longer operating in Jobs's long shadow. In fact, he's arguably the most powerful and important CEO on the planet. Go deeper.

7. This week: Bolsonaro's ascent

Expect far-right strongman Jair Bolsanaro to win Brazil's presidential election today.

  • A victory for the combative ex-military captain could lead Brazil back down an authoritarian path, writes Courtenay Brown.
  • It could also do wonders for the Brazilian stock market.

Corporate earnings season is winding down, but look forward to Apple, the most valuable company in the world, reporting on Thursday.

On the economic front, we'll find out how much the Eurozone economy grew in the third quarter. And in the U.S., Friday sees the monthly employment report.

  • The economy is expected to have added 190,000 jobs in October, while the employment rate likely held steady at 3.7%.
8. Building of the week: The Museum of Lebanon
Oscar Niemeyer's Museum of Lebanon, Tripoli. Photo © UNESCO Beirut Office

Oscar Niemeyer’s Rashid Karami International Fairground in Tripoli, Lebanon, was only partially completed before Lebanon’s civil war broke out in 1975. A new grant from the Getty Foundation will help to develop a conservation management plan for this neglected yet boldly modernist compound.

Felix Salmon

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And, please, do keep your building suggestions coming, especially if they're accompanied by photographs I have permission to use.