Jul 2, 2020

Axios Capital

Felix Salmon

The U.S. economy is getting increasingly good at producing a lot of output with relatively little actual employment.

  • Exhibit A is the incomprehensibly productive Sarah Grillo, head of editorial design at Axios, who produced four amazing illustrations for this week's newsletter, all of which arrived within a span of three hours and 23 minutes on Wednesday.
  • I know you'll enjoy the illustrations; I hope you'll also read at least some of the 1,643 words that fill the gaps between them, on subjects ranging from our cash surplus to ESG investing, fintechs, and the Facebook advertiser boycott. It'll take you about 6 minutes to read it all.
1 big thing: When the money runs in

Illustration: Sarah Grillo/Axios

There's plenty of money. It's just not moving to where it's needed. (New jobs, in case you were wondering.)

  • Today's jobs report showed 4.8 million jobs created in June, but those were overwhelmingly people beginning to return to places where they had been temporarily laid off. The number of "permanent job losers" went up, not down, rising 25% in just one month to 2.8 million from 2.2 million.

Why it matters: We just ended a quarter in which economic activity is estimated to have fallen at a 37% pace. Unemployment stands at 11.1%, while the "full recall" unemployment rate, which assumes that 100% of temporarily laid-off workers return to their old jobs, is north of 7%. Most worryingly of all, the number of newly confirmed COVID-19 cases just rose by more than 50,000 in a single day — another new record.

  • The big unanswered question: Whether money can fix any of these problems.
  • We've already thrown $6 trillion at this crisis. Much of it seems to have found its way into the stock market, which rose 20% in the second quarter. A new stimulus bill could add another $1 trillion or so. But far too much of that money just isn't being put to effective use.

The big picture: Cash is deferred expenditure. If money flows into a bank and just sits there, that's a sign of severe economic malaise — the "paradox of thrift." In a healthy economy, individuals and corporations spend freely, and that free spending causes more money to come in tomorrow. In an unhealthy economy, cash gets hoarded and does not contribute to economic activity.

By the numbers: Americans saved 32% of their income in April, and 23% in May — numbers vastly higher than all previous records. Money-market funds now hold $4.7 trillion. Corporate cash balances are similarly surging, and now stand at well over $2 trillion. And the total amount of cash available for spending in checking accounts and other readily-accessible locations is now over $5.2 trillion.

Between the lines: Insofar as the CARES Act was designed to ensure that America didn't run out of money, it succeeded. And the individually-focused elements of the act — the $1,200 stimulus checks and the $600-per-week extra unemployment benefit — worked to cushion the economic blow that hit millions of Americans.

  • The other side: Much of the corporate aid in the act — from $500 billion in emergency relief for businesses to the Fed's Primary Market Corporate Credit Facility — has ended up almost entirely untouched. Even the Main Street lending facility has lent almost nothing.

Small businesses did take advantage of $521 billion in PPP funding, but that money had no visible effect on small-business employment.

  • A huge new NBER paper by Harvard's Raj Chetty and many others takes a detailed look at the effects of the PPP on employment by looking at what happened to employment at companies just above and just below the 500-employee PPP cutoff.
  • Employment trends in the different groups turned out to be "extremely similar," whether or not they were eligible for PPP funds. "There is no evidence that employment went up" in PPP-eligible companies relative to those who didn't receive funding, the authors write, concluding that "the PPP had little material impact on employment at small businesses."

The bottom line: Until the virus lets us truly reopen the national and global economy, very little of that money is going to be spent on hiring, and America will continue to see employment lower than even during the 1950s, before most women entered the workforce.

2. Trump vs enlightened investing

Illustration: Sarah Grillo/Axios

The case for sustainable investing is a pretty simple one: Long-term investors have a clear financial incentive to back companies that will thrive over the long term. Such companies need to be well governed, have good relations with their stakeholders, and be well positioned to help humanity minimize our onrushing environmental catastrophe.

  • To sum up the thesis in three letters: ESG, for environmental, social, and governance.

Why it matters: While the Obama administration was well disposed towards such investing, the Trump administration isn't.

  • A proposed new rule from the Labor Department would effectively ban pension-plan administrators from making any kind of ESG offering part of the default option in a 401(k) plan, and would discourage them from having any ESG options at all.

What they're saying: "When investments are made to further a particular environmental or social cause, returns unsurprisingly suffer," wrote Labor Secretary Eugene Scalia in an 0p-ed announcing the new rule.

  • The rule itself claims that it will have a positive economic effect, saying that "investments' returns will generally tend to be higher over the long run" as a result of ignoring ESG factors.
  • But, but, but: ESG funds outperform their peers.

Between the lines: Scalia doesn't have a lot of support. The asset management industry is naturally wary of this rule, because it creates more work and potential liability for pension fund managers. And even his natural bedfellows are wary.

  • The U.S. Chamber of Commerce initially reacted positively to the rule, but when I asked them for comment, I was put in touch with Chantel Sheaks, the executive director for retirement policy, who praised only the fact that the Department of Labor was implementing a 30-day comment period.
  • The American Petroleum Institute represents the companies most excluded by ESG policies. But the API's Aaron Padilla, who covers ESG policy there, told Axios that he wants the government to "encourage the consideration of ESG as it is linked to companies' financial performance."

My thought bubble: This rule looks like lame-duck hippie-punching from a beleaguered administration wanting to throw a bone to climate-change deniers.

The bottom line: As the Environmental Defense Fund's Gabe Malek told Axios: "ESG is a key part of fiduciary duty in the EU. The U.S. is just lagging behind other countries."

3. When fintechs outpace regulators

Illustration: Sarah Grillo/Axios

Did you know that "fintech" is an anagram of "regulatory arbitrage"?

  • Wirecard is a prime example of a company that fell between the regulatory cracks — until it was too late.

The story of Wirecard, a fraud-ridden German payments giant, is well known at this point; it's best told by the FT's Dan McCrum, who broke most of it. Along the way, Wirecard used its inflated valuation in Germany to buy legitimate if not particularly profitable card processing businesses in the U.S. and U.K.

  • Background: Reloadable prepaid debit cards are becoming increasingly popular as an alternative to bank accounts. But when you sign up for one, it's rarely clear which companies you're actually relying on.

Driving the news: After Wirecard imploded, its U.K. regulator, the Financial Conduct Authority, hurriedly shut down the U.K. subsidiary. The result was that some 1.8 million individuals and 20,000 businesses were locked out of their accounts.

  • Those customers didn't even know they had a relationship with Wirecard. They had signed up with other fintechs, bearing names like Curve, Anna, and Pockit.
  • The apps used Wirecard to move money in and out of bank accounts at Barclays Bank. That money, it seems, was safe — but it couldn't be accessed while Wirecard U.K. was shut down.
  • The FCA unlocked the accounts this week.

Could the same thing happen here? Yes.

  • How it works: Wirecard North America is up for sale and isn't responding to requests for comment. But payments expert Richard Crone says that any number of entities might have had the ability to follow the FCA's lead and shut down Wirecard's U.S. operations, including private-sector companies like Visa and Mastercard, as well as partner banks like Fifth Third Bank.
  • Wirecard North America's primary regulator was the FTC, says Crone, and the FTC is not really a financial-services regulator. The company would also have been technically regulated by a patchwork of state-level money-transfer licenses.

What they're saying: "When banks were doing all the processing, it was pretty straightforward who the regulators were," says Crone. "The FTC is far less aggressive."

The bottom line: America's banks are generally well regulated; our fintechs generally aren't. Even if they don't hold customer money, their failure could still cause real hardship for millions of Americans.

4. Why advertisers mistrust Facebook

Illustration: Sarah Grillo/Axios

More than 400 major advertisers, including Unilever, CVS, and Verizon, have pulled their ads from Facebook and Instagram as part of the #StopHateForProfit campaign organized by advocacy groups including Color for Change, NAACP, the Anti-Defamation League, and Sleeping Giants.

Why it matters: The ease with which the campaign has signed up advertisers is only in part a function of its intrinsic merits. It's clear that brand advertisers and their agencies kinda wanted to make this move anyway.

Background: Agencies have been reconsidering their social-media spending for years. Procter & Gamble cut $100 million from its digital marketing spend in 2017 and said it saw "little impact on its business," while Adidas admitted last year that it had "over-invested" in digital.

How it works: It's normally impossible for an agency to persuade a client to turn off social entirely, even if they would love to do that just to see what effect it has. But when turning off social comes with an easy PR win, while staying on Facebook is a PR loss, then the conversation becomes a lot easier.

  • Marketing budgets are being slashed anyway as a quiet summer approaches. Cutting one huge line item is more elegant than trying to find savings in many different places.

The bottom line: Most agencies working for large brands will admit that they often wonder just what they're getting out of their social-media ad expenditure. This boycott gives them a perfect opportunity to find out.

5. Picture of the week

Fed chair Jay Powell and Treasury Secretary Steven Mnuchin bump elbows after testifying before the House Financial Services Committee on Tuesday. Photo: Tasos Katopodis/Getty Images

6. Coming up: The Fourth of July

Illustration: Aïda Amer/Axios

Saturday is the Fourth of July, notes Axios' Courtenay Brown. You likely won't be gathering for fireworks or a huge BBQ to celebrate the anniversary of America's independence from Britain in 1776. (Black Americans didn't find out they were free from enslavement for another 90 years, and it would be another 100 years after that before Jim Crow legally ended).

  • Of note: There will be one notable difference to signal you're heading into the long weekend. No stock market headlines on Friday — at least from the U.S., where markets will be closed.
7. Building of the week: Volkswagen Glass Factory, Dresden

Photo: Michal Fludra/NurPhoto via Getty Images

Volkswagen's Glaeserne Manufaktur — its Glass Factory, or Transparent Factory — is a car manufacturing facility located in the heart of Dresden, Germany.

  • Architect Gunter Henn finished the building in 2001 to rapturous acclaim. The Guardian's Jonathan Glancey called the factory "an industrial revelation," praising "airy, timber-floored halls" that feel transposed from the Tate Gallery or the Guggenheim in Bilbao.
  • Since 2017 the factory has produced the electric version of the Golf. Once finished, the cars are stored in a 15-storey glazed drum, ready to be shipped to their buyers — or picked up in person and driven away. The factory is easily accessible by tram.
Felix Salmon