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In today's newsletter: Global disintegration, the economics of Peloton and WeWork, tax deductions, convexity, a book about my family, and more. The whole thing is 1,758 words long, which should take you less than 7 minutes to read.
Illustration: Sarah Grillo/Axios
It's the end of the world as we know it. The world is disintegrating, and much of the highly-visible noise and chaos is a symptom of a much deeper problem.
These are high-stakes dramas, and their outcomes matter greatly. Hong Kong is a great test of whether Xi Jinping's China is remotely compatible with Western liberalism. Argentina is a great test of whether a market-friendly government, working closely with the IMF, can turn an economy around. Britain is, in many ways, a great test of democracy itself.
Zoom out: In a bigger sense, the final outcomes don't matter. In all 3 cases — and, most importantly of all, in Trump's America — what we're witnessing is the spectacle of global integration being thrown suddenly and jarringly into reverse.
The bottom line: The postwar economic order was built on ever-increasing integration, and there is no precedent in modern history for how — or even whether — the global economy can cope with its opposite.
This era perhaps now bears more similarities with the gold standard era – with its free capital mobility, its open trade, and its staggering complacency – than any other. That era came to an abrupt and violent end with world war one and its key features could not be resuscitated for decades.
Many sage figures bearing considerable similarity to our current political leadership confidently pronounced in the early 20th century that conflict was now completely impossible between developed democratic states, given their economic interconnectedness. We know how that turned out.— Ivan Rogers, The Spectator, Sept. 2, 2019
Illustration: Aïda Amer/Axios
Apparently investors love to read IPO prospectuses in August, because both Peloton and WeWork unveiled their S-1 filings last month.
The big question: How much time does a customer need to remain a customer before she becomes profitable?
In the case of Peloton, the answer is "almost immediately." Customer acquisition costs are roughly equal to the markup on the company's bicycles and treadmills. After that, Peloton makes money every month that the customer pays $39 for a fitness subscription.
WeWork's financials are harder to understand. Rett Wallace, the CEO of private-company intelligence firm Triton, has called the company's S-1 "a masterpiece of obfuscation." It's therefore hard to work out exactly what WeWork's customer acquisition cost is. But Wallace estimates that a tenant needs to stay in place for 13.5 years, on average, before they break even for the company.
The bottom line: "Customer acquisition costs always go up, not down," says Wallace. Anybody buying into the WeWork or Peloton IPOs should bear that in mind as they try to model when and whether either company might become profitable. In the case of WeWork, the company itself seems to be asking similar questions.
Trump's tax cuts were, weirdly, feared by homeowners and charities. Normally, tax cuts make people richer, and richer people spend more money on housing and charity. But both those items have historically benefited from massive tax expenditures, leading to worries that they would be worse off after the tax cuts.
Driving the news: According to the latest data from the IRS, the tax cut worked much as everybody expected it would. The number of people itemizing their taxes plunged by more than 65%, with similar falls for the number of people deducting mortgage interest and charitable contributions.
Yes, but: The other shoe hasn't dropped.
The bottom line: Tax deductions are much easier to create than they are to abolish; they're also hugely expensive. The evidence strongly implies that almost all of them are a waste of money.
Bond investors are notoriously risk-averse, and it's easy to see why. When you lend a borrower money, the best-case scenario is that they make good on their promise and pay you back. The worst-case scenario is you never get anything back, and lose all your money. The downside is always bigger than the upside.
Or nearly always.
Very long-dated bonds, like the 100-year bonds issued by Austria and Argentina in 2017, have a lot of convexity: They rise in price a lot when yields fall, more than they fall in price when yields rise. The result is that they can actually have more upside than downside.
Argentina's bond, naturally, has imploded as a debt restructuring has become inevitable. After rallying to a high of 103.60 in October 2017, it now trades at a highly-distressed level of less than 40 cents. At the same time, however, Austria's bond has soared in price as yields across the eurozone have fallen.
By the numbers: If you bought both bonds on the last day of February 2018, you would have paid $201.80. A year and a half later, at the end of August 2019, the combined bonds were worth $240.94, and you would also have received $13.84 in coupon payments in the interim.
Illustration: Aïda Amer/Axios
The president and CEO of Fortune Magazine, Alan Murray, wrote a huge story last month.
Reality check: The new statement mostly serves to make CEOs even less accountable than they were before. If they really wanted to make a positive difference in the world, there's something much easier they could do, which is to sign on to the proposal from FT Alphaville editor Izabella Kaminska that all private jets should be banned.
My thought bubble: Listen to Warren Buffett, who named his first private jet "The Indefensible." If private jets were banned, people like Prince Harry wouldn't have to contort themselves to justify using them, and WeWork CEO Adam Neumann would avoid accusations of hypocrisy. (He made his whole company vegetarian for environmental reasons, but flies around the world in a Gulfstream 650.)
The odds: It'll never happen, of course. CEOs are happy to aspire to high-minded ideals, just so long as they don't need to give up any luxuries of their own.
Illustration: Rebecca Zisser/Axios
The jobs report tomorrow is expected to show that 150,000 jobs were added last month, writes Axios' Courtenay Brown, while the unemployment rate should hold steady at 3.7%. That's a near 50-year low.
Why it matters: It's a delicate time for the U.S. economy, with many fears that we're in, or approaching, a recession. But so far the labor market has been reassuringly healthy.
Via Penguin UK
One of the reasons that I have the great privilege of writing Axios Edge is that I didn't need to spend many years buried in Salmon family archives and paperwork, writing the quite astonishing history of my own family. That's because my cousin Thomas Harding has done so instead, in a fantastic new book that's now out in the U.K.
Photo: Vano Shlamov/AFP/Getty Images
Italian architect Michele De Lucchi built Tbilisi's undulating Bridge of Peace in 2010, a bold modernist intervention in the historic Georgian capital's old town.