Axios Capital

A globe and stand made out of dollar bills.

May 12, 2019

Situational awareness: Facebook co-founder Chris Hughes has joined Nobel Prize-winning economist Joe Stiglitz and Sen. Elizabeth Warren in calling for Facebook to be broken up. Another Nobel laureate, Paul Romer, thinks a progressive tax on targeted ads could be much simpler. Facebook itself, of course, wants to stay big.

1 big thing: Uber's underwater investors

Illustration of the Uber app icon caught in a giant wave

Illustration: Sarah Grillo/Axios

Uber's IPO this week came with predictable headlines about the rich getting richer — after all, when a company goes public at a valuation of more than $80 billion, that's what usually happens. This particular offering, however, created a whole lot of losers.

By the numbers: From 2016 onwards, per PitchBook, Uber raised $15.35 billion at $48.77 per share; it then raised another $8.6 billion in its IPO on Thursday at the slightly lower price of $45 per share. Those numbers dwarf the $5.6 billion that Uber raised before 2016. As of the close of trade on Friday, the market has now spoken: Uber shares are actually worth $41.57.

  • The bottom line: A whopping 81% of the $29.55 billion in equity that Uber has raised is underwater. IPO investors have lost $655 million, while investors from 2016 and 2018 have between them lost $2.27 billion.
  • Losers: Investors who bought Uber shares 3 years ago have lost 15% of their money, before fees. The opportunity cost is even greater: Investors in the S&P 500 have seen their money grow by 50% over the same period.
  • Winners: Lyft shares are also trading well below their IPO price, which didn't help the Uber offering. But so far all of Lyft's pre-IPO investors remain in the money. The most that any of them paid was $47.35 per share.

Why it matters: Uber is the ultimate minotaur — a company where billions of dollars of private-market funding were supposed to create a self-fulfilling prophecy of dominance and market power. It hasn't worked out like that. To make billions of dollars out of Uber, like Benchmark Capital did, the secret is to invest millions of dollars in the Series A and then allow other investors to invest the extra billions needed to scale the business and fund ongoing losses.

Our thought bubble, from Axios' Dan Primack: Uber loses more money than any other company to ever go public. It's the sort of thing that everyone ignores until they don't.

Go deeper: Uber's IPO got caught in a perfect storm

2. Trade talks become trade war

Illustration of Trump emerging from flames

Illustration: Rebecca Zisser/Axios

The first rule of trade negotiations is that they take place in private. The minute either side starts setting out goals and demands in public, positions become hardened and compromise becomes an embarrassing climbdown.

Why it matters: With the imposition of massive new tariffs this week, accompanied by explicit threats, Trump has taken Sino-American trade negotiations outdoors, into a public arena where they have much less chance of success. Even before announcing retaliatory countermeasures, China has similarly gone public with its own red lines. Resolving this dispute is not yet impossible, but it has become exponentially harder. Among the dangers:

  • Recession: Bank of America is already warning that "a trade war could cause a global recession." As Axios' Dion Rabouin has written, this is a war the world cannot afford.
  • Inflation: American tariffs on Chinese goods will increase the price of those goods. If that ends up contributing to domestic inflation, Trump's desire for a rate cut will look even less realistic.
  • Food dumping: As the FT's Alan Beattie notes, Trump has already started talking about using the tariffs as an excuse to dump America's agricultural surplus onto poor countries, undercutting their domestic markets.

The big picture: "When you have both sides convinced that they have the upper hand, you get the kind of conflict that you have right now," China trade expert Patrick Chovanec told Foreign Policy. He added:

"If we want China to embrace structural reform, that requires real commitment—it’s not something we can just twist their arm to do, they have to buy into it. And they have to believe that it is not going to sink them or hurt them. When you basically strongarm them into doing something they really don’t want to do, and they’re convinced it’s harmful to their interests, at some point they are going to cheat, push back, or scuttle it, and it’s just a question of when."

The bottom line: Trump's trade negotiator, Robert Lighthizer, might consider these tariffs to be a tough way of forcing China to make concessions. And the market seems hopeful that the trade war will be temporary, on the grounds that ending it would be rational for both sides. But Trump himself wanted these tariffs all along.

Go deeper: Farmers across the Midwest struggle to cope with Trump's trade war

3. Free trade comes to Africa

Adapted from World Economic Forum; Map: Axios Visuals
Adapted from World Economic Forum; Map: Axios Visuals

It's the largest free trade area in the world, both by area and by population. It's formally going to come into effect on May 30, now that Gambia has become the 22nd country to formally ratify the Africa Continental Free Trade Area, or AfCFTA.

  • Africa has 1.2 billion people — more than double the EU or NAFTA. Almost every African country has signed the treaty; the one big exception is Nigeria.

AfCFTA came together in record time, after first being proposed by Rwandan President Paul Kagame in March 2018. As a result, a lot of the implementation details are a bit fuzzy. "What’s been really impressive is how quickly they’ve agreed to and then ratified the deal," says Grant Harris, the CEO of Harris Africa Partners. "Now the real world begins in terms of how issues are worked through in practice."

Reality check: Africa's trade problems won't be solved overnight. The continent needs some $50 billion per year in infrastructure investment, and truckers are still likely to spend hours or days idling at international borders.

  • By the numbers: The World Bank's Paul Brenton calculated in 2012 that passenger traffic between Brazzaville and Kinshasa — on opposite sides of the Congo River — was just 20% of the amount of traffic between East and West Berlin before the wall came down.

Why it matters: Almost every African country exports more outside the continent than it does within it. African supply chains are extremely weak, and the amount of prosperity that could be generated by strengthening them is enormous. AfCFTA, on its own, is not sufficient to create a booming market in intra-African trade. Still, it's an extremely important milestone on the way there.

4. Moody's carbon rating

Illustration of a 5-leaf rating system in the style of an online review.

Illustration: Aïda Amer/Axios

Climate change is an enormous risk to the economy and markets. If the world manages to solve its collective action problem, investors will cheer — but, as with any major change, there will be winners and losers.

What to watch: Moody's, the ratings agency, is putting together what it calls a "framework to assess carbon risks." Individual companies will be given a carbon transition assessment, or CTA, which measures how well they'll be able to operate in a low-carbon economy.

"Issuers assigned the highest scores, CT-1 and CT-2, exhibit advanced positioning for carbon transition. These companies typically have a business model that benefits from the transition to a low-carbon economy. By contrast, companies assigned the lowest scores, CT-9 and CT-10, exhibit poor positioning and typically have business models that are fundamentally threatened by carbon transition over any time horizon, including the long term."
— Moody's Investors Service

Why it matters: Carbon transition risk is already built into Moody's existing credit ratings, but it's not a large part of those ratings, largely because it's far from clear that a major carbon transition is actually going to happen. Now that Moody's is separating out this risk into a discrete CTA score, investors will be able to get a much clearer idea of which companies are successfully positioning themselves for a green future.

Bonus chart: The decarbonization trend

Source: OECD via Bespoke Investment Group; Chart: Axios Visuals
Source: OECD via Bespoke Investment Group; Chart: Axios Visuals

Advanced economies are emitting less carbon now than at any time since the 1980s. Even if countries don't achieve their Paris Agreement goals, decarbonization is a long-term trend worth investing in. As countries get richer, they invariably also get cleaner. This week Britain burned no coal for electricity for the first time since the Industrial Revolution.

5. Gig economy ETF of the week


Illustration: Sarah Grillo/Axios

Financial startup SoFi isn't just about lending you money to refinance your student loans, writes Axios' Kia Kokalitcheva. It wants to invest your money too — and to that end it unveiled this week a “gig economy”-themed exchange-traded fund, trading under the ticker symbol GIGE.

  • The actively managed fund comes with an expense ratio of 0.59%, unlike SoFi’s first two ETFs, which have a zero expense ratio.
  • At launch, GIGE has 44 stocks, many of which aren't obviously related to the gig economy. Apple, Alphabet and PayPal might have enabled the existence of companies like Lyft and GrubHub, but it's hard to see how they themselves are gig economy stocks.

We asked SoFi to explain why some of them made the cut:

  • Workday, Box, Cloudera: These companies’ software can be used by individual entrepreneurs (or “solo-preneurs”) to run their businesses, says SoFi.
  • MongoDB: Because its foundation is open-source database software, it can be helpful to freelance developers.
  • Camping World, Thor Industries: These companies sell RVs, which relates to the gig economy because they provide workers with geographic flexibility.
  • Stratasys: This company makes 3D printers that can be used in an office to make prototypes — which solo-preneurs can theoretically use to compete with bigger companies.

The bottom line: SoFi's on-trend new ETF is being branded as "Gettin' GIGE with it." But if you really want to invest in the gig economy, it's far from clear that the best way to do that is to pay an extra 0.59% per year to buy RV stocks and Apple shares.

6. How to stop credit card interest rates from rising

Source: Federal Reserve via FactSet; Chart: Axios Visuals 
Source: Federal Reserve via FactSet; Chart: Axios Visuals 

The average interest rate on credit cards is higher than 15% for the first time since 2001, according to the Federal Reserve. If you just look at cards carrying a balance, the rate is almost 17%. And the average interest rate on retail cards is more than 25%.

Driving the news: Sen. Bernie Sanders and Rep. Alexandria Ocasio-Cortez have introduced a bill that would cap credit card interest rates at 15%.

The big picture: Credit cards are a particularly insidious form of credit, often filled with what Elizabeth Warren calls "tricks and traps." By bundling a loan with a very convenient payments device, banks deliberately make it easy to rack up large debts and interest charges. Capping rates at 15% would significantly reduce unintentional consumer indebtedness.

  • Capping credit card interest rates would force banks to start unbundling their lending activities from their payment-card services.

My thought bubble: It's fine for lenders like Affirm to charge simple interest rates higher than 15% when borrowers are deliberately borrowing a specific amount for a specific purpose. Consumer credit is a public good — but loans should be entered into intentionally.

7. The ever-rising flack-to-hack ratio

Data: Bureau of Labor Statistics; Note: Salaries in April 2019 dollars. Data shows “public relations specialists” vs. “reporters and correspondents” as defined by BLS; Starting in 2003, BLS excludes “news analysts” from the “reporters and correspondents” category; Starting In 1998, BLS excludes “publicity writers” from the “public relations specialists” category; Chart: Lazaro Gamio/Axios
Data: Bureau of Labor Statistics; Note: Salaries in April 2019 dollars. Data shows “public relations specialists” vs. “reporters and correspondents” as defined by BLS; Starting in 2003, BLS excludes “news analysts” from the “reporters and correspondents” category; Starting In 1998, BLS excludes “publicity writers” from the “public relations specialists” category; Chart: Lazaro Gamio/Axios

Axios' Courtenay Brown writes: There are now more than 6 PR professionals for every journalist in the U.S., as Bloomberg notes.

Why it matters: PR jobs have doubled in the past two decades, even as newsrooms shrink, deal with buyouts and sometimes disappear altogether.

  • Flacks are more in demand than journalists are, if pay is any indicator. The average PR worker took home about $20,000 more last year than journalists did — a gap in pay that's moderated in the last few years, but is still much bigger than it was in 1997.

The bottom line: Corporations — which often have PR folks within the company while simultaneously being repped by outside PR shops, too — are inevitably telling the crafted stories they want to tell.

Go deeper: Media salaries lean higher for writing than video, photo

8. Tweet of the week

Mooch tweets
Via Anthony Scaramucci/Twitter

If you don't know who either of these men are, I envy you, and I'm not going to be the one to tell you.

9. The week ahead: More trade noise

coming up

Illustration: Rebecca Zisser/Axios

Expect more talk about trade this week, writes Courtenay, even as U.S-China talks stall.

  • Saturday marks Trump's deadline to decide whether or not to put tariffs on car and car parts imported from Europe. A delay is entirely possible.

Two of the world's largest retailers release quarterly results this week: Alibaba comes on Wednesday, while Walmart reports on Thursday. Executives at both companies have been outspoken about trade and tariffs.

China-based coffee chain Luckin Coffee will go public on Friday, looking to raise $565 million with shares priced between $15 and $17.

10. Building of the week: Apple Carnegie Library

The new Apple Store DC

Photo: Apple

Apple Carnegie Library, writes Axios' Mike Allen, is the company's most extensive historic restoration project yet. It opened yesterday in the Carnegie Library on Mount Vernon Square in Washington, built by Ackerman & Ross. The renovation was overseen by Foster + Partners.

  • The Beaux-Arts style building, once home to D.C.’s Central Public Library, opened in 1903, christened by President Teddy Roosevelt.
  • It was funded by Andrew Carnegie, the steel magnate who died in 1919.
  • The area that housed the book stacks is now the Genius Grove, per Apple.

Elsewhere: Wells Fargo is having difficulty finding a CEO willing to work for a mere $15m–$20m per year. Kevin Costner denies he has $20 million in a Swiss bank account. Why airplane boarding got so ridiculous. "There are at least 3.8 billion rewards memberships in the United States, more than 10 per consumer." 46 million Australian banknotes have a typo.