Jan 27, 2019

Axios Capital

Felix Salmon

Situational awareness: The price of a Forever Stamp — the standard postage rate in the United States — rose by an unprecedented 10% today to 55 cents.

  • The old price of 50 cents was pretty much the same, in inflation-adjusted terms, as the original Forever Stamp price of 41 cents in 2007. So this is the first big real price hike the Postal Service has seen.
1 big thing: Billionaires, 👍 or 👎?

Illustration: Sarah Grillo/Axios

The largest gathering of billionaires in the world took place last week in the not-particularly-luxurious Alpine resort of Davos, Switzerland.

Axios' Steve LeVine reports the plutocrats were told by their host, World Economic Forum chief Klaus Schwab, that they must make dramatic changes to the very system that made them dynastically wealthy.

Turkeys don't generally vote for Thanksgiving, and, in Davos, billionaires like Michael Dell laughed at the idea that they should pay significantly higher taxes.

  • Elizabeth Warren isn't joking, however, about implementing a 3% wealth tax on billionaires. Combined with a 2% tax on wealth over $50 million, such a levy could raise $2.75 trillion over 10 years.
  • Alexandria Ocasio-Cortez wasn't joking when she said on Monday that “a system that allows billionaires to exist” is immoral.
  • Stephanie Kelton isn't joking either when she says that no one makes a billion dollars. Rather, she says, they plunder it, taking that wealth from their workers or from the public at large. The former chief economist for the Democrats on the Senate Budget Committee, Kelton is going to see very high demand for her services from various Democratic presidential hopefuls.

The very existence of the World Economic Forum is predicated on the assumption that the people who have won the capitalism lottery are best positioned to improve the state of the planet.

  • In other words: Billionaires are, and should be, a force for good in the world, as well as being a natural outgrowth of wealth creation and global prosperity.
  • They're also the natural endpoint of hustle culture: They're winners of the prize that incentivizes hard work and productivity on the part of millions of ambitious non-billionaire workers.

That narrative, however, seems to be losing its allure.

Your plutocrat religion, win-win-ism, teaches that what’s best for the winners of our age is best for all. We don’t believe you anymore. You enabled the nationalism that threatens our societies. You stiffed so many of us. You fought for rules that let you steal the future from our children. The hunt for answers to the present mess is not yours to lead. Your task is simple: stay out of the way.
— An edited-down version of Anand Giridharadas' letter to Davos delegates in Time. It's pretty short, so read the whole thing.

My thought bubble: Billionaires have historically been alluring, magical figures. The U.S. even elected one of them to the presidency. But he isn't doing so well. Increasingly, billionaires are seen as avatars of inequality and greed. When they gather in Davos, the world increasingly assumes that their prescriptions are entirely self-serving.

Bonus chart: The upward march of the billionaires
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Reproduced from Oxfam; Chart: Axios Visuals

The world's billionaires increased their wealth by $2.5 billion per day in 2018. There are now more than 2,200 of them. The amount of wealth stored in offshore tax havens was estimated at $7.6 trillion in 2015.

2. Socialism's allure
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Data: SurveyMonkey online poll of of 2,777 U.S. adults with a margin of error of ±3.5; Chart: Harry Stevens/Axios

61% of Americans aged between 18 and 24 have a positive reaction to the word "socialism" — beating out "capitalism" on 58%.

Overall, 39% of Americans are well-disposed toward socialism.

3. How Trump can help with Venezuela's debt

Illustration: Sarah Grillo/Axios

The United States officially recognized Juan Guaidó as the rightful (if interim) president of Venezuela; it has also pledged a paltry $20 million of humanitarian assistance to the country. A top sovereign-debt lawyer has proposed one huge next step the White House (and only the White House) could take. It would be much more effective than $20 million in cash — and it would cost nothing at all.

If Guaidó does take power, he will immediately be faced with more than $90 billion in outstanding debt, the vast majority of which is in default.

  • Creditors have already begun the rush to the courthouse, trying to turn those debts into judgments that can in turn be used to seize Venezuela's assets around the world. (Among those assets: Citgo, the giant oil refiner.)
  • Venezuela has an enormous and fractious range of creditors, including not only bondholders but also sovereigns (Russia and China are the two big ones), as well as corporations that have won international arbitration proceedings against the country.
  • All of those creditors have been waiting for the Nicolás Maduro regime to come to an end. At that point they will start laying claim to Venezuela's assets, which ultimately include some 300 billion barrels in oil reserves. That's the largest store of oil in the world.

If the fight over Venezuela's debts were to be halted for a few years, that would give the Guaidó regime, working with the IMF, time to get the domestic economy back on its feet. The debts racked up by the Hugo Chávez and Maduro administrations will have to be dealt with at some point, but given the scale of Venezuela's humanitarian disaster, court fights in New York should not dominate Guaidó's priorities.

The solution to the debt problem is presented in an important paper by Lee Buchheit and Mitu Gulati. Buchheit, the doyen of sovereign debt restructurings, explains that the U.S. government can unilaterally call an effective standstill to court proceedings by declaring Venezuelan assets temporarily immune from attachment by U.S. courts.

  • The Obama administration did exactly that for Iraq in 2011, 2012 and 2013. All it took was an executive order from President Obama.
  • Obama's executive order was a matter of national security. Today, the U.S. foreign-policy and national-security apparatus is focused on the Americas. Trump says that he "will continue to use the full weight of United States economic and diplomatic power" in Venezuela.

The bottom line: It is extremely rare for the U.S. government to prevent established legal mechanisms from running their natural course. But it can be done and has been done in the past. If Trump were to sign an executive order preventing creditors from attaching Venezuela's assets, that would be by far the greatest gift he could bequeath a fledgling Guaidó administration.

Bonus chart: Venezuelan oil production
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Data: OPEC via FactSet; Chart: Harry Stevens/Axios

The official figures for Venezuelan oil production show it falling almost by half since 2013. Unofficially, Venezuela observers think even these numbers are exaggerated and that the country is producing barely more than 1 million barrels of oil per day.

  • It will take many years to fix PDVSA, Venezuela's state-owned oil company, and start turning these numbers around.
4. Venezuela's new world order, in one map
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Adapted from a Bloomberg map; Map: Axios Visuals

Venezuela is shaping up to become a major geopolitical flashpoint, with both Russia and China opposing the U.S. stance in very strong terms. The U.K. stands with the U.S. and has reportedly refused a request from the Maduro government to liquidate $1.2 billion of gold reserves held at the Bank of England.

5. Podcast picks

  1. Mitu Gulati, who co-wrote that paper about how to halt sovereign debt litigation, was interviewed by Bloomberg's Tracy Alloway in a fantastic recent episode of her Odd Lots podcast. It's well worth 35 minutes of your time, especially since you'll learn everything you need to know about the Mozambique tuna-bond scandal.
  2. John Paulson, a billionaire hedge fund manager, was interviewed by Michael Samuels for his According to Sources podcast. Paulson is uncharacteristically open about the way his career has been motivated by money and how, when your fund gets very big, "the fees just pour out of the sky." It's fascinating as a glimpse into the billionaire mindset, and you'll also learn a lot about merger arbitrage.
6. Wells Fargo gets a minor serif reduction

Birds do it, bees do it, even Mastercard and We do it. Now Wells Fargo is joining the rebranding bandwagon.

  • The good: The new red-and-white color scheme works much better on computer screens than the muddier colors of the old logo.
  • The bad: Just look at that F.
7. Ryan Mac's Davos
Via Ryan Mac/Twitter
Via Ryan Mac/Twitter
8. This week: A focus on China

Illustration: Rebecca Zisser/Axios

In the wake of George Soros' broadside against China in Davos, expect to hear much more about China this week, writes Axios' Courtenay Brown.

  • The U.S. and China will hold another round of trade talks on Wednesday — this time in Washington. Vice Premier Liu He “may be bringing an offer of more significant structural concessions,” says Bill Bishop of Sinocism, but don’t expect major breakthroughs.
  • Caterpillar said last quarter that it was reeling from tariffs, so a lot of China watchers will be looking to its earnings tomorrow.
  • Apple is out with earnings on Tuesday. We already know the company had a rough quarter. Expect CEO Tim Cook to field a lot of questions from analysts about China, and none about his lunch with Brazilian President Jair Bolsonaro in Davos.
  • Microsoft and Amazon report earnings on Wednesday and Thursday, respectively. Also watch for reports from Facebook and Tesla, which is expected to be profitable for a second consecutive quarter.

The government is back open, but we may not get the final 2018 GDP report on Wednesday. The release may be postponed if there’s a big backlog of prep work for the Bureau of Economic Analysis employees who were furloughed.

  • The Fed concludes its two-day policy meeting on Wednesday. No rate hike is expected.
  • One report that’s coming for sure is the first jobs report of 2019, which will be released on Friday at 8:30 am. Economists estimate that 160,000 jobs were added in January. The unemployment rate is less predictable, as a lot of government workers will have been counted as unemployed for the reference week of Jan. 6–12.

Brexit is still an omnishambles. Reuters has an excellent guide to the various amendments you can expect this week, and which ones have a chance of passing.

  • Tl;dr: Don't be surprised if the government loses control of parliament, allowing MPs to draft and vote on their own Brexit policies.
9. Building of the week: Intercontinental Hotel, Davos

Photo: Oikos

The Intercontinental Hotel, designed by Oliver Hofmeister of Oikos, was built in 2013, largely to meet the needs of the World Economic Forum. Set well apart from the main town of Davos, it has much tighter security than most of the other hotels and features large suites for heads of state and other high-profile delegations.

  • The champagne-colored facade features 691 unique laser-cut panels designed to shimmer in the high-altitude sun.
Felix Salmon