Jul 28, 2019

Axios Capital

Situational awareness: It looks like Stephen Schwarzman is going to flip the Thomson Reuters terminal business to the London Stock Exchange for $27 billion. (He bought a controlling stake 18 months ago at a valuation of $20 billion, funded mostly with debt.)

  • It also looks like Pfizer is making a deal with Mylan. The people currently running Pfizer’s off-patent drugs business would leave the company, take its drugs (foremost among them Viagra and Lipitor) with them, and run Mylan instead. Pfizer investors would end up owning most of the enlarged Mylan.

Many thanks to everybody who wrote in last week pointing out that the time it takes to close a mortgage has fallen from 74 days to 36 days over the past year and a half. It has not fallen to 36 months!

In this week's 1,951 words (a 7-minute read): The ECB's new monetary policy, the appeal of price disaggregation, the disparate impact of climate change, Les Wexner, Warren Kanders, and a very silly sports team valuation formula. Enjoy!

1 big thing: The ECB likes inflation now

Illustration: Sarah Grillo/Axios

It's the oldest inflation target in the world, and certainly the one that carries the most political baggage. This week, with very little fanfare, it changed dramatically.

Background: Germany's Bundesbank implemented an inflation target in 1975 — a full 15 years before New Zealand's target was formally adopted. Germany's target started at 4.5%, but it rapidly fell to 2% in 1987, and was never subsequently changed.

  • Over the course of the postwar era, Germany's strong currency and low inflation played a proud and central role in the country's national identity. That was all thanks to the Bundesbank, which had one primary function — to safeguard the currency. Germany's target wasn't enshrined in law, like New Zealand's was, but it helped to shape a nation.
  • When the Deutsche mark was replaced by the euro, the ECB inherited the Bundesbank's 2% inflation target. That target, then, has now been in place for 32 years.

For all those 32 years, the inflation target has been a ceiling: The aim of the central bank was to get inflation down to 2% or lower. If inflation in Germany was 3%, that marked a failure on the part of the Bundesbank. If inflation was 1%, that was fine.

Driving the news: The official ECB statement accompanying its latest monetary policy decision this week included an important new word. "If the medium-term inflation outlook continues to fall short of our aim," it says, "the Governing Council is determined to act, in line with its commitment to symmetry in the inflation aim."

What they're saying:

"The symmetry means basically that there is no cap, or 2% cap, and that inflation can deviate on both sides. We don't accept permanently lower inflation rates."
— ECB president Mario Draghi, in his post-meeting press conference

No Bundesbank president would ever have said something like "We don't accept permanently lower inflation rates." Quite the opposite. Permanently lower inflation rates were the German central bank's stated aim, and the ECB largely inherited that aim. That's now, officially, a thing of the past.

Why it matters: Draghi is painfully aware that ultra-loose monetary policy — like the deposit rate of -0.4%, which still has the power to startle — has done little to spark inflation in the eurozone. He knows too that his successor, Christine Lagarde, will need to use all her political skills to cajole Europe's governments into providing fiscal support for her monetary actions. With this action, he has given Lagarde all the headroom she needs to keep monetary policy as loose as she possibly can, even if inflation exceeds the 2% target.

2. The appeal of price opacity

Illustration: Aïda Amer/Axios

DoorDash dominated more of the news cycle than it should have this week, after an NYT article brought broad awareness to its idiosyncratic policy on tips. The company would give its "dashers" a guaranteed minimum fee for delivering food; that minimum included any tips. The result was that most tips ended up going to DoorDash rather than to the delivery workers.

The big picture: Americans encounter disaggregated prices every day. Retailers operate under a convention that prices exclude sales tax, so it's never entirely clear how much something is going to cost in total.

  • The implicit convention is that disaggregated prices reflect real-world allocations. Sales taxes go to the government; tips go to servers. The DoorDash backlash came because it violated that convention and effectively kept customers' tips for itself.
  • Ticketmaster is hated for similar reasons. The various fees it tacks on seem fake, designed primarily to hide just how much tickets really cost.
  • Buying a car from a dealership is an experience fraught with countless fees and taxes, all of which inflate the total cost of the vehicle far above its headline price.
  • Airlines and hotels are also expert at luring in customers with low advertised prices, only to surprise them with a raft of unexpected fees.
  • Banks make billions of dollars in fees; some, like Aspiration, even set their stated price at zero and make the bulk of their revenue from “tips.” Lender Earnin does the same.
  • Even auction houses selling multimillion-dollar artworks play this game, artificially breaking the final price into a "hammer price" and a "buyer's premium." Buyers bid on the hammer price and can then find themselves on the hook for millions of dollars extra.

Why it matters: Budgeting and spending decisions become much more difficult when all-in prices are mostly invisible. Retailers who disaggregate their prices end up selling more, even as their customers trust them less.

3. The disparate impact of climate change
Expand chart
Data: Moody's Analytics; Chart: Chris Canipe/Axios

The Axios Trends newsletter on climate change came out yesterday. The subject is massive and existential — but the chart above, from Moody's, goes some way toward explaining why the U.S. government, under both Republican and Democratic administrations, has done very little to address it.

  • By the numbers: Moody's calculates that some countries' economies, including America's, would actually benefit from an extremely bad climate scenario — at least for the next 30 years or so.
  • By 2100, all economies would be much worse off. And even before then, the U.S. economy would suffer if much of the rest of the world were hit by lower productivity, higher inequality and increased geopolitical conflict.

The bottom line: Climate change demands coordinated global action on an unprecedented level, and on the kind of time horizon that bears no relation to electoral cycles.

4. Wexner unbound

Photo: Jonathan Newton/The Washington Post via Getty Images

L Brands CEO Les Wexner made an enormous error of judgment when he gave pedophile Jeffrey Epstein a broad-ranging power of attorney over all of his assets.

  • Epstein broke up long-standing relationships that Wexner had with friends and family, per the NYT; abused Wexner's position as the CEO of Victoria's Secret to sexually harass women; and ultimately managed to enrich himself to the tune of $559 million.
  • Wexner, 81, remains the CEO of L Brands, making him the longest-serving CEO in the S&P 500; he owns 16.7% of the company.
  • To find out who sits on the L Brands board of directors, or see a large photo of 8 young women in their underwear, click here.
  • L Brands shares have fallen from a high of $101 in 2015 to a closing price of $26.40 on Friday.

Meanwhile, car auction company Copart added a woman to its board this week, becoming the last member of the S&P 500 to do so.

5. When labor fights capital at the museum

Photo: Erik McGregor/Pacific Press/LightRocket via Getty Image

Warren Kanders finally resigned from the board of the Whitney Museum this week, after months of protests. Kanders owns Safariland, a company that makes the tear gas canisters fired on the U.S.-Mexico border in November.

  • Ken Griffin, the CEO of Citadel, briefly resigned from the Whitney board in solidarity, before changing his mind.
  • If you clicked on the L Brands board page, then the image at the top of the Safariland "About Us" page will educate you even further on the representation of gender in corporate America.

Why did it take so long for Kanders to resign when his presence on the board has been casting the Whitney in a negative light for many months?

  • Part of the reason is that although the protests began in December, it was only this month that 8 prominent artists joined in by demanding that their work be withdrawn from the current show at the museum.
  • Another part is that Kanders is stubborn. He believes himself to be on the side of righteousness, saving the lives of law enforcement agents, while his opponents have "a much larger and more insidious agenda."

There's financial logic, too. By occupying a prominent position on the Whitney board, Kanders benefits in 3 main ways.

  1. His position gives him privileged access to the most coveted new art: Galleries are much more likely to sell to the vice chair of the Whitney Museum than to some tear-gas manufacturer.
  2. He can steer the Whitney's acquisition committee toward the artists he likes and collects, thereby giving those artists an institutional imprimatur that will be reflected in his own art's value.
  3. In a city as rich as New York, a seat on the board of a major cultural institution confers a degree of cultural cachet and respectability that money alone can't buy.

The bottom line: Museums feel a perpetual need to collect collectors, whom they butter up with a combination of flattery and board seats. But now tensions are emerging between labor and capital. The artists who make the museum's art have rarely seemed less aligned with the plutocrats who dominate its board.

6. The era of the $4 billion sports franchise
Expand chart
Data: Forbes; Chart: Harry Stevens/Axios

The most valuable sports teams all seem to be worth $4 billion, plus or minus a billion. That's regardless of what sport they're in, or even what country they're in. It's also regardless of operating earnings: While some of these teams, like the Dallas Cowboys, are extremely profitable, others, like FC Barcelona, lose money.

By the numbers: Here's a highly scientific and reliable formula to work out how much your sports franchise is worth.

Key: b = number of billionaires who grew up supporting the team; B = number of billionaires globally; c = the propensity of the local city to cough up massive tax breaks; f = number of fans; h = historical importance of the team; L = League standing; m = size of the local media market; p = profits; r = revenues; s = the value of the stadium; u = strength of the players’ union; v = the amount of money the last team sold for; and X = a random number generator.

Go deeper: The Dallas Cowboys are the world's most valuable sports franchise

7. The week ahead: The first Fed cut since 2008

Illustration: Rebecca Zisser/Axios

The Fed will announce an interest rate cut for the first time in 10 years on Wednesday, writes Axios' Courtenay Brown.

  • What’s less certain is how big the cut will be. The market is betting on a quarter point reduction, but historically the first cut in a new cycle has been half a point.
  • Also unknown: Whether Jerome Powell will use the press conference to signal that more rate cuts are coming, as the market expects.
  • Other central banks release policy decisions this week too: the Bank of Japan on Tuesday and the Bank of England on Thursday.

On Friday, we’ll get the July jobs report. Economists see 170,000 jobs being added, while the unemployment rate should hold at 3.7%.

  • U.S. trade representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will meet with Vice Premier Liu He in China for the first high level face-to-face trade talks since May.

167 S&P 500 companies release quarterly results this week. The big one to watch is Apple on Tuesday, particularly for updates on the company's China business.

8. Building of the week: Petronas Towers
Photo by Nicolas Briquet/SOPA Images/LightRocket via Getty Images

The 1,483-foot Petronas Towers in Kuala Lumpur, completed in 1996, were the tallest buildings in the world until 2004.

  • The towers are constructed out of high-strength reinforced concrete rather than steel, which makes them heavier and cheaper.
  • The cylindrical design, by the Argentine architect César Pelli, created an astonishing 6 million square feet of column-free office space.
  • The 750-ton skybridge is 558 feet above ground.

Pelli died this month at the age of 92. His other buildings include Brookfield Place in New York (formerly the World Financial Center), Ronald Reagan National Airport in Washington, D.C., and the Salesforce Tower in San Francisco.

Elsewhere: How Bob Geldof’s African investment fund avoids paying taxes to African countries. Apollo and Leon Black start trying to deal with the Jeffrey Epstein elephant in the room. Robinhood is now worth $7.6 billion, despite exposing its users' passwords. Swiss banks are issuing negative-rate loans. The Payments Modernization Act. Wanda Sports' disastrous IPO.