Aug 11, 2019

Axios Capital

By Felix Salmon
Felix Salmon

Firstly, an apology for suggesting last week that this week might be boring and that you could easily take a day or two off. I was ... wrong. I have located the source of the problem in the fact that I haven't had a proper Swabian laugenbrezel in far too long, so I'm off to rectify the situation and shall be back at the beginning of September. We might even experiment with changing the day this newsletter goes out...

  • This week's newsletter is a biggie, thanks in part to all that housing content I promised you a couple of weeks ago. The 2,178 words should take you about 8 minutes to read, but feel free to take 3 weeks. See you on the other side.
1 big thing: The scared planet

Illustration: Sarah Grillo/Axios

Everybody's scared. After the Fed cut rates at the end of July, the pessimistic moves kept on coming, with India, New Zealand and Thailand all cutting rates on Wednesday alone. Safe-haven asset prices keep on hitting new highs: A record $15 trillion of bonds around the world now carries negative interest rates, and the price of gold has hit $1,500 per ounce, up 25% in the past 12 months.

The big picture: Sometimes, as in 2008, a global crisis feels like an exogenous shock — something that hits the world unexpectedly, and requires a unified and coordinated response. This time is different: Insofar as the world is headed for recession, it's a recession where government actions are the problem rather than the solution.

Driving the news: The Trump administration this week declared China a currency manipulator, in a move that the FT's Alan Beattie described as "both incoherent and impotent — indeed, counterproductive." If anything, it was the U.S. government that caused the latest weakening of China's currency by imposing extra tariffs on Chinese exports, thereby reducing the demand for Chinese yuan and accelerating capital flight to the safety of the U.S. dollar.

  • Threat level: The currency-manipulator designation has little practical effect beyond antagonizing the Chinese government — persuading them to buy even fewer U.S. agricultural exports, and maximizing the probability that the trade war will escalate even further. It's now more likely than ever that all Chinese exports to the U.S. will end up being taxed at a punitive 25% rate.
  • What they're saying: "Mr. Trump’s willy-nilly trade offensive could be the mistake that turns a slowdown into the Navarro recession," says the reliably Trump-supporting WSJ Editorial Board. (Peter Navarro is reportedly the only adviser who supported President Trump's new tariffs on China.)

Context: The U.S. seems happy to fight multiple economic wars at once, if the full embargo this week on Venezuela is any indication. That action also seems calibrated to maximally annoy the Chinese, who are simultaneously facing possible recession in a febrile and angry Hong Kong.

Why you’ll hear about this again: Boris Johnson's Britain is headed for no-confidence votes, constitutional crises and — very possibly — a catastrophic no-deal Brexit. Even before Brexit, it saw negative growth in the second quarter. The full implications of Brexit for global trade are unknowable, but they're almost certainly going to be dreadful.

  • The rest of the world has no shortage of other flashpoints with potentially enormous economic consequences: Pakistan, for instance, has ended its bilateral trade with India, and Russia's exports are declining sharply.

The bottom line: The world as we know it — of complex global supply chains and countries playing to their best Ricardian advantage — is rapidly transforming into an atavistic place of trade barriers and bellicose rhetoric. If countries increasingly retreat into their nationalistic shells, no amount of fiscal or monetary stimulus will be able to head off the inevitable economic and financial consequences.

2. Pay me now!

Illustration: Aïda Amer/Axios

An ideal payment mechanism should do 2 things: It should take place in real time, and it should clear at par.

  • That's how cash works. If you give me $50 in cash, then I immediately become $50 richer, and you immediately become $50 poorer.
  • Checks fail the test: They clear at par (the amount you pay is the same as the amount I receive), but they can take many days to do so. Much the same thing happens when you transfer money from Venmo to your bank account.
  • Venmo Instant Transfer also fails the test: If I use it to move money from my Venmo account to my bank account, the transfer happens immediately, but the amount I receive will be 1% lower than the amount I send.

The new Apple credit card became reality this week — but, like all credit cards, it too fails the test. Getting the card onto your phone is easy, but if you pay a merchant $100, they receive significantly less than $100.

  • The Apple Card is a "World Elite" Mastercard, which carries the highest possible interchange fee in all circumstances. That fee, which can range as high as 3.25% plus 10 cents, is taken off the top of any payment before the merchant receives anything. The fee is the same whether you use the physical Apple Card or the virtual one on your phone.
  • The Apple Card is the first card without an annual fee to get World Elite status, payments consultant Richard Crone tells Axios. And it's almost certainly the first to get issued to subprime borrowers.
  • Apple controls about 2/3 of all contactless payments in the United States, estimates Crone — which means that if the Apple Card starts to dominate the Apple Pay ecosystem, contactless payments in general are going to be very expensive for merchants.

Everybody loves instant payments. As rapper A1 told the WSJ: "You got bottles. You got models. You have strippers. They want to get paid right away." But the instant payments system built by some of America's largest banks, known as RTP, has struggled to gain traction. Even if banks have it, they don't tend to use it.

Driving the news: The Federal Reserve announced its own instant payments system this week, which is due to arrive in "2023 or 2024." What happens then is anyone's guess.

  • 25 countries already have instant payments, including the U.K., Switzerland, India and China. There, the fast-and-on-par ideal is already a reality. Will American banks similarly embrace a system that allows anybody to send money from any bank account to any other bank account, immediately and at par, without the recipient having to sign up for anything? I'm not holding my breath.
3. The big homeownership trend
Expand chart
Data: U.S. Census Bureau; Chart: Naema Ahmed/Axios

The housing market is showing signs of life. Mortgages are being refinanced at astonishing rates, housing is more affordable thanks to lower interest rates, and Fannie Mae's housing sentiment index is at an all-time high.

The big picture, however, is different. Homeownership rates have plunged over the past 15 years, in a trend that won't (and shouldn't) reverse itself.

  • The homeownership rate started to decline in 2004-2005 in the middle of the housing boom. For all the record issuance of subprime mortgages, option-ARMs and NINJA loans, the rate declined, at almost exactly the same rate at which it continued to deteriorate during the worst years of the financial crisis. Even the post-crisis recovery didn't change things. Only in the past couple of years have homeownership rates ticked up a tiny bit.
  • Student loans are part of what's going on, but only part. Most homeowners are college graduates, after all. And college graduates who have defaulted on a student loan, for any reason good or bad, are going to find it very hard to get a mortgage.

How it works: House prices have been rising where they're already unaffordable, and falling where they're within reach. To put it another way: If you want to make a good investment, you can't afford it; if you can afford it, it's not going to be a good investment.

Demographic trends also work against homeownership.

  • There's a broad move out of rural areas and into urban ones, which is to say a move from where homeownership levels are generally high to where they're generally lower.
  • Homeownership among the white population is about 70%, but it's well under 50% for the black population and Hispanics, and even Asians are well below the white level. As America becomes increasingly non-white, the culture will continue to move away from the homeownership ideal.

The bottom line: Homeownership has long been at the heart of the American dream, and it accounts for a huge proportion of middle-class wealth. But it's on the decline, and it's not coming back.

4. The roots of the rental economy

Illustration: Rebecca Zisser/Axios

While American households don't have a lot of liquid savings, the capital markets are positively sloshing with liquidity. They're a key source of funds for companies like Opendoor and Zillow, which are building enormous businesses buying houses for cash, at algorithmically-generated prices.

  • What they’re not saying: While these companies are happy to talk about how easy they make selling a house, they talk less about the people who buy those exact same houses. That's because, a very large part of the time, the homes never end up in the hands of individuals at all. Instead, they end up in massive rental portfolios.
  • That makes economic sense. Companies with excess liquidity are buying housing stock as long-term investments; they rent them out to relatively illiquid families who prefer to rent than buy. It's a good trade on both sides.

Why rent? Job security is a large part of the story. Median employee tenure is less than 5 years for anybody under the age of 45, and the expectation of how long you're going to stay with your current employer is probably even lower. Which is to say, your house is going to last longer than your job is, and no one likes being saddled with a mortgage when they lose their job.

  • Wages are also increasingly volatile. Income goes down as well as up, which makes it extremely difficult to know in advance how much of a mortgage payment you're going to be able to afford over the next decade or more.

The bottom line: Homeownership reduces optionality. We all know people who bought a home and then regretted it. As Americans delay homeownership, they're more aware of the possible downsides, more attuned to the idea that their home could turn out to be more of a liability than an asset. If the financial crisis taught us anything, it taught us that.

5. The financiers' hour
via Giphy

This was a big week for financiers looking to make enormous profits from the empire-building ambitions of businesses with dubious business models.

Exhibit 1: WeWork is planning to go public next month, raising some $3.5 billion. But this is a world where Uber can lose $5.2 billion in a single quarter, and potential shareholders are worried that $3.5 billion still won't be enough. So WeWork is raising $6 billion in debt, too.

  • Leading both deals: JP Morgan, whose CEO, Jamie Dimon, has been buttering up WeWork executives for years.
  • Be smart: WeWork (or just We, as it now wants to be known) is generally considered an office-rental company, even if its CEO likes to say that it's more about energy, spirituality and elevating the world's consciousness. In reality, WeWork is a creature of the international capital markets, upon which it is reliant and without which it could never have been born in the first place. As a vehicle for funneling fees to Wall Street, it has few equals. Hence the personal attention from Dimon.

Exhibit 2: The huge media merger of the week is the acquisition of newspaper chain Gannett by its smaller rival GateHouse. In order to get the deal done, GateHouse parent New Media Investment Group is borrowing $1.8 billion from Apollo at an eye-popping interest rate of 11.5%.

  • Between the lines: The interest rate worries GateHouse shareholders: It clearly reflects an extremely high probability of default, in which case their equity would go to zero and Apollo would end up owning the combined company.
  • It's possible Apollo wants GateHouse to default on its loan. The private-equity giant has already quietly accumulated a very large position in local TV and local radio; local newspapers could fill out the portfolio nicely.

The bottom line: Whether WeWork and GateHouse succeed or fail, JP Morgan and Apollo are likely to come out ahead. It's a nice position to be in.

6. 1 📺 thing: Succession S2

Kendall Roy (Jeremy Strong) enters a digital-media subsidiary. Photo: Peter Kramer/HBO

Tonight is the premiere of Season 2 of Succession, the greatest show on TV. It airs on HBO at 9 pm EST, but most likely you'll just stream it, since technology is taking over the media business and legacy media companies need to — actually, I'll stop there. No spoilers.

  • If you're like Axios' media reporter Sara Fischer and haven't seen Season 1, get to it. Once you've watched tonight's episode (but only once you've watched tonight's episode), check out my recap on Slate Money tomorrow morning with Emily Peck of the Huffington Post and special guest Edmund Lee of the New York Times. Yes, I'll be recapping every episode on Monday mornings for the next 10 weeks, because ... obviously.
7. The week ahead: 2 IPO hints

Illustration: Rebecca Zisser/Axios

Tomorrow, for the first time, Saudi Aramco will hold an earnings call with investors, Axios’ Courtenay Brown writes. It comes as there is once again speculation that the world’s biggest oil company is planning to go public.

  • Meantime we might get the first complete look at WeWork’s financials, if it makes its confidential IPO filing public sometime this week, as Bloomberg reports it will.

Two of the biggest retailers in the world, Walmart and Alibaba, release earnings on Thursday.

8. Building of the week: The Milam Residence

Photo by Robert Champion. Courtesy the Paul Rudolph Heritage Foundation

A piece of architectural history is on the market, asking $4.445 million. Paul Rudolph's Milam Residence, built in 1961, is probably his greatest residential project, set 60 feet above the Atlantic Ocean on 200 feet of Ponte Vedra Beach, Florida.

  • “The brises-soleil also serve as mullions for the glass, turning the exterior wall into a series of deep openings filled only with glass," explained the architect.
  • The main house has 4 bedrooms; there's also a 1-bedroom guest house on the 2-acre site.
Felix Salmon