Apr 7, 2019

Axios Capital

As sure as Washington's cherry blossoms are blooming, it must be time for the Spring Meetings of the IMF.

I'll be moderating a discussion on inequality Tuesday morning with plutocrat gadfly Anand Giridharadas and Winnie Byanyima of Oxfam: Do come join us if you're in town. On Friday afternoon, I'll be moderating the closing panel at DebtCon3, aka Woodstock for sovereign debt nerds. Again, it's free and open to the public, if you want to come along.

Tuesday also marks the launch of Axios Space, Miriam Kramer's new weekly email covering the trends, business and science of space. Sign up here to get the first edition.

1 big thing: Too much money

If you spend $450 million on this and then lose it, that's a sign you might have too much money. Photo: Christies

Saudi Aramco, the world's most profitable company, revealed this week that it had $224 billion of pre-tax earnings in 2018. Some of those earnings were paid to the Saudi royal family in taxes, while $111 billion was retained as profit for Aramco's sole shareholder, which is also the Saudi royal family. That kind of wealth helps to explain why Goldman Sachs CEO David Solomon found himself back in the kingdom this week, less than 6 months after he joined the rest of the world in publicly avoiding the country.

Jeff Bezos, the world's richest man, revealed this week that he would retain the lion's share of his marital property after his divorce from his wife MacKenzie. She is giving up any ownership stake in Blue Origin or the Washington Post, and she's retaining only 25% of their jointly owned shares in Amazon. Still, that 25% is enough to make her the world's fourth-richest woman.

  • MacKenzie Bezos is so rich — her net worth is $36 billion — that doubling her wealth might well have zero utility for her. In fact, it's entirely possible that the second $36 billion would have negative utility — so much so that, given the choice, she'd prefer $36 billion to $72 billion.
  • Abigail Disney, another extremely rich person, told The Cut that "I could be a billionaire if I wanted to be a billionaire, and I’m not because I don’t want to be a billionaire. That’s an insane amount of money."
  • Extremely rich people worry about leaving their kids too much money, and they often go to great lengths to avoid doing so. The more self-aware among them realize that if a certain amount is too much for their kids, it might well be too much for themselves. On some level, part of the utility of philanthropy is often that it is simply an easy and effective way of reducing one's net worth.

My thought bubble: For nearly all of us (Jeff Bezos would seem to be one exception to the rule), there is some level of wealth at which having more money would not make us better off in any meaningful way. Almost none of us ever become that rich. But for the very, very rich, there's real value in being able to identify that amount and take the actions necessary not to exceed it.

2. Crunch week for Britain

Illustration: Rebecca Zisser/Axios

It's crunch week. Britain is due to leave the EU without any kind of deal on Friday — an outcome only the most extreme Brexiteers want.

  • Irish taoiseach Leo Varadkar summed up the sentiment on Friday. “None of us want a no-deal next week," he said. "I know the UK doesn’t want it, and Europe doesn’t want it either.” At the same time, as the second deadline approaches (March 29 has already been and gone), Varadkar was adamant that "we don’t want to have a rolling cliff-edge" with extension after extension.
  • Brexit has already cost the U.K. 2.5% of GDP since the referendum, or about $40 billion per year, according to an estimate from Goldman Sachs, and that's while the nation was still part of the EU. The cost to the rest of the EU has been significant too, largely driven by uncertainty. While almost no one wants the U.K. to leave the EU, Europe's willingness to tolerate the deafening chaos from across the channel is shrinking to zero, especially in France.

U.K. Prime Minister Theresa May did give Remainers a glimmer of hope on Friday. Writing an official letter to European Council President Donald Tusk, she for the first time admitted that she was willing and able to hold European Parliament elections on May 23. Her party hates the idea of contesting European elections, but her government is now making all necessary preparations for that vote. May added that she would prefer to leave the EU before that date and cancel the election, but Parliament has repeatedly voted down all her attempts to do so.

  • Tusk's preferred outcome is a "flextension" that gives the U.K. as long as a year to come up with an exit deal. Under such a deal, Britain's EU membership could be cut short if and when an exit agreement is finalized. Tusk's proposal would need to receive unanimous approval from all 27 EU states at a summit meeting on Wednesday, which won't be easy. And even May hasn't signed on to the flextension idea yet, since rolling cliff-edges have to date been her only negotiating leverage.
  • How it works: The EU wants to see May making visible progress on cobbling together cross-party support for a deal. So far, there's little evidence of that.

The bottom line: If Tusk can't get unanimous approval for another extension on Wednesday, Britain's prime minister will be faced with a stark choice. Either she drives her country off a cliff by letting it crash out without a deal or she destroys her party by repealing Article 50, keeping the U.K. in the EU after all. Her words and actions to date indicate that she would probably end up choosing her party over her country — unless the U.K. Parliament somehow takes the decision out of her hands.

3. Too much debt service
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Data: Figures released by the Jubilee Debt Campaign, based on IMF and World Bank databases; Chart: Chris Canipe/Axios

Axios' Courtenay Brown writes: The world’s poorest countries are using more and more of their domestic revenue to pay down foreign debt, according to new findings released by the Jubilee Debt Campaign ahead of this week’s IMF meetings.

Why it matters: Jubilee examined the lowest-income nations, defined by the World Bank as having a gross national income per capita of $995 or less. They found that when debt payments rose, public spending per person fell.

  • The last time more debt service was this high among low-income countries was in 2004 — before the IMF, the World Bank and the African Development Fund launched a debt relief program for the most indebted countries.

What's happening: Per the World’s Bank count, 11 low-income economies are in debt distress or at a high risk of debt distress, up from 6 in 2015.

  • "The problem is not enough responsibility is required of lenders. Lenders are able to lend money in secret and then if a country is in debt crisis they normally expect to be bailed out by the IMF,” says Tim Jones, head of policy at the Jubilee Debt Campaign.

One example: Mozambique, already in default on about $2 billion of external commercial debt thanks to the tuna bonds scandal, put 25% of its government revenue toward debt payments last year. That's nearly triple the equivalent number in 2017.

  • The IMF suspended lending to Mozambique in 2016, but is considering emergency financial assistance after a deadly, destructive cyclone ripped through the country.
  • UNICEF projected that Mozambique's debt payments in 2018 were higher than the amount it spent on agriculture, water, sanitation, hygiene, the judicial system, transport, communications, social action and job creation — combined.
4. Lyft's rocky IPO

Illustration: Lazaro Gamio/Axios

Lyft has been a public company for just over a week now, during which its market capitalization has fluctuated between $30 billion (the high, just after the stock opened for trading on March 29) and $22 billion (the low, on Tuesday).

  • Stock market investors can be forgiven for being unclear how much Lyft is really worth. Lyft doesn't break out how much it's spending on discounts and incentives, for instance, and it doesn't disclose key metrics such as acquisition costs or churn rates, either for passengers or for drivers.
  • The two big sellers of Lyft shares in recent weeks were the company itself, in the IPO, and Carl Icahn, a large early investor with greater-than-usual visibility into Lyft's finances thanks to his seat on the board. Icahn sold his entire stake in Lyft to George Soros shortly before the IPO.

Trading in Lyft shares was rocky in the early days, with the stock falling below its IPO price. (It’s slightly higher now.) At one point, short sellers needed to pay an interest rate of more than 100% if they wanted to borrow the stock. Things got so nasty that Lyft threatened to sue Morgan Stanley, one of the underwriters of the rival Uber IPO, claiming tortious interference in its stock trading.

The next big test for Lyft shares will come when Uber files its own S-1. If Uber provides significantly more transparency into its unit economics than Lyft did, investors are likely to conclude that Lyft had something to hide and rushed to go public before anybody could demand like-for-like comparisons with its larger rival.

The bottom line: "You can be a ride-sharing bull and still hate the Lyft IPO. You can even be a Lyft bull and hate the Lyft IPO," as Rett Wallace, the CEO of private-company intelligence firm Triton, wrote to his clients on Wednesday. "Lyft made obvious, avoidable, and un-forced errors that the other unicorns coming behind will only repeat if they are not paying attention."

5. The World Bank's Malpass era begins

Photo: Brendan Smialowski/AFP/Getty Images

David Malpass, running unopposed, became the new president of the World Bank on Friday. As the FT's James Politi drily notes, the former senior adviser to Donald Trump's presidential campaign "still does not yet enjoy the benefit of the doubt among foreign officials, the development community or World Bank staff."

  • Malpass is a critic of the World Bank, and he has repeatedly denounced the very multilateralism upon which the Bank was founded.
  • Trump followed up his nomination of Malpass to the World Bank by saying that he wanted both Stephen Moore and Herman Cain to serve on the Board of Governors of the Federal Reserve — a move that the FT editorial board has described as deliberate sabotage of a respected and politically independent institution.

Why it matters: The malign neglect of the executive branch detailed in Michael Lewis' "The Fifth Risk" has now been extended to multilateral institutions and even the Federal Reserve. This is uncharted territory. Medieval mapmakers would put dragons in areas they had yet to explore, denoting unknown dangers. Perhaps these nominations should come with dragon-shaped asterisks.

6. The upside of printing money

Illustration: Lazaro Gamio/Axios

Is the deficit too small? A growing consensus is forming that the answer might be yes — despite the fact that it hit an all-time high in February.

  • Warren Buffett has learned to stop worrying about the deficit, as have many economists on both sides of the political spectrum.

What we're reading: The NYT's Patricia Cohen reports on how a long list of Wall Street heavyweights is embracing Modern Monetary Theory, or MMT. Quoted in her article: Jan Hatzius, chief economist at Goldman Sachs; Paul McCulley, former chief economist at Pimco; Mohamed El-Erian, former Pimco CEO; Ray Dalio, founder of Bridgewater Associates; Richard C. Koo, chief economist at Nomura; and Dan Alpert, managing partner at Westwood Capital.

While none of the Wall Streeters can be considered doctrinaire adherents of MMT, they all find it useful in terms of understanding the point at which government spending stops being a productive investment in the economy and starts risking harmful levels of inflation. None of them think we're anywhere near that point today.

  • Their message: For the time being, the government should keep on spending, even it doesn't raise taxes. The economy — and the market — will only benefit as a result.
"For me an economic approach must help me understand the world, and provide me with some useful insights (preferably about my day job — investing). On those measures let me assure you that MMT thrashes neoclassical economics, hands down."
James Montier, strategist at GMO
Bonus: The upside of printing money
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Data: Federal Reserve; Chart: Chris Canipe

When the government runs a budget deficit, it has to borrow money by selling Treasury bills — instruments that need to be repaid in full on a certain maturity date. Alternatively, it can literally print money. We're doing the latter with abandon.

  • The number of $100 bills in circulation has been rising at an unprecedented rate of 1 billion per year over the past two years. There are now 13.4 billion such bills — that's a billion more than the number of singles.
  • The total value of U.S. currency in circulation is now more than $1.6 trillion. That number grew by more than $100 billion per year for a period of 16 straight months until December 2018.
  • Remember Y2K, when everybody loaded up on bills in fear that all electronic money might become inaccessible on Jan. 1, 2000? That looks like barely a blip by today's standards.

Why it matters: That $1.6 trillion is effectively an interest-free loan that the U.S. government never needs to pay back. Economically, it makes perfect sense for us to print as much currency as there's demand for. Better yet, that demand doesn't seem to be diminishing in the slightest.

7. Rupert Murdoch's political legacy

The cover of today's New York Times Magazine, by Craig Cutler and Matt Willey

Worthy of your time: the NYT Magazine's 20,000-word deep dive into the Murdoch empire. The cover image is a riff on Shepard Fairey's legendary OBEY poster, while also referencing Apple's equally iconic "1984" Super Bowl ad. The message from the NYT's Jonathan Mahler and Jim Rutenberg: Rupert Murdoch is exactly what those dystopian visions were warning against.

  • In 3 of the world's richest democracies — Australia, the U.S., and the U.K. — Murdoch has used his media holdings to successfully foment an atavistic populist nativism. Were it not for the Murdoch media, the chances are that Britain would not be leaving the EU, Australian politics would not be dominated by anti-immigrant rhetoric, and Trump would not be president.
  • When Murdoch personally took over Fox News following the departure of Roger Ailes, the network lurched visibly to the right, which is not something most observers even thought possible. Fox Corp is now a $23 billion company run by Rupert's son Lachlan, who is if anything even further to the right than his father. The more moderate son, James, has left the family business entirely.
"To see Fox News as an arm of the Trump White House risks missing the larger picture. It may be more accurate to say that the White House — just like the prime ministers’ offices in Britain and Australia — is just one tool among many that this family uses to exert influence over world events."
— Jonathan Mahler and Jim Rutenberg, "How Rupert Murdoch's empire of influence remade the world"
8. Don't worry about layoffs
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Data: Federal Reserve Bank of St. Louis and Challenger, Gray & Christmas, Inc; Chart: Axios Visuals

Rarely has the employment situation looked this good. The official unemployment rate is down to 3.8%, and a record-low number of individuals made their first claim for unemployment benefits last week. Meanwhile, as Axios' Dion Rabouin points out, the number of job cuts has hit a new high.

  • In an unhealthy economy, job cuts are bad news. But in a vigorous economy, they're a robust sign of creative destruction. Successful companies supplant unsuccessful ones and take their employees. So long as we're at full employment, layoffs should not be anything to worry about.
9. The week ahead: Bank CEOs go to Washington

Illustration: Rebecca Zisser/Axios

For the first time since the financial crisis, the CEOs of America's biggest banks — Goldman Sachs, Citi, Bank of New York Mellon, JPMorgan, Bank of America and Morgan Stanley — will testify together before the House Financial Services Committee on Wednesday, writes Courtenay.

  • Do expect: Attacks on banks being too big to fail, CEO pay and lack of diversity.
  • Don't expect: A ton of substance, given that 6 CEOs will be testifying at once.

The banks will also be in focus on Friday when JPMorgan and Wells Fargo report first-quarter profits, marking the official start of earnings season.

  • Expectations for earnings generally are low: Analysts expect a year-over-year earnings decline for the first time since 2016.

In Europe, the European Central Bank isn't expected to announce any rate changes after its policy meeting on Wednesday. Attention will be on what ECB president Mario Draghi says about the fragility of the eurozone economy and whether he gives more details on the ECB's new, cheap long-term bank loan program.

  • That same day, EU leaders will hold their all-important emergency Brexit summit.

Probably not happening this week: Former Nissan Motor chairman Carlos Ghosn likely won't hold a scheduled press conference on Thursday, considering he was re-arrested in Japan on new allegations of financial misconduct.

Correction: Per the House Financial Services’ hearing posting, Wells Fargo will not be testifying this week, but BNY Mellon will.

10. Building of the week: The Bauhaus Museum

Photo by Martin Schutt/picture alliance via Getty Images

The Bauhaus Museum Weimar opened Friday night, marking the 100th anniversary of the founding of the most important art, design and architecture school of the 20th century. Heike Hanada's minimalist cube incorporates 24 horizontal LED light strips. The total budget was about $25 million.