Jun 23, 2019

Axios Edge

By Felix Salmon
Felix Salmon

Many thanks to everybody who clicked on one of the two links last week, saying whether you loved or hated the word count feature. (This week: 1,845 words, a 7-minute reading time.) Edge had the highest response rate among all of Axios' newsletters!

  • The final verdict: 74.5% of you loved the word count.

If you watch "Axios on HBO" tonight, you'll get to see me asking former House Speaker John Boehner whether it's fair that rich white men like him are getting rich from marijuana, while black and brown folks — who were disproportionately harmed by the war on drugs — do not have equitable access to the burgeoning cannabis industry.

In this week's newsletter: Libra, Kiva, shareholder activism, direct listings, Sotheby's, Fed dovishness, negative-yielding debt, and more.

1 big thing: Don't bother worrying about Libra

Illustration: Sarah Grillo/Axios

"Reinvent money. Transform the global economy." That's the promise at the top of the homepage of Libra, an almost parodically ambitious pecuniary exercise brought to you by the empire-builders at Facebook.

  • Facebook is no stranger to hubris. Back in 2013, CEO Mark Zuckerberg decided he was going to reinvent the smartphone. “Today, our phones are designed around apps, not people,” he said. “We want to flip that around.”

Be smart: The balance of probabilities is that Facebook Money is going to go the way of the Facebook Phone — or, for that matter, Facebook Credits, the company's previous attempt to get into payments. Facebook co-founder Chris Hughes has laid out many good reasons to worry about Libra succeeding, but the fact is that Facebook's cryptocurrency ambitions are unlikely to get all that far.

Libra's primary stated goal is to concentrate on serving the 1.7 billion of the world's adults who are entirely outside the financial system. The idea is that they should be able to send and receive money as easily as they do text messages.

  • The problem: These people — whom the industry likes to call "the unbanked" — might well be able to open up a Libra wallet on their phones, but they will still need "on-ramps" and "off-ramps." How do you convert cash into Libra, or Libra into cash? The global remittance industry has struggled with these last-mile problems for decades; Facebook hasn't even started thinking about how to address them. Even domestically, Libra doesn't seem to solve any of the problems facing the unbanked.

Libra is, literally, run by committee. It's called the Libra Association, and Facebook has just one vote. When problems arise, Facebook will point out that it does not control the currency. This will not mollify regulators.

  • Libra is global; the Libra Association is based in Switzerland. The system as a whole is designed to operate as seamlessly in Tehran as it does in Tulsa or Tegucigalpa. But that's a problem for regulators, who have sanctioned countries like Iran and who have gone to great lengths to ensure that money can't easily flow there. In the U.S., the chair of the House Financial Services Committee has already requested a moratorium on further Libra development; international regulators are similarly underwhelmed.
  • Worth noting: The long list of partners in the Libra Association includes everybody from Visa to Vodafone — but doesn't include a single bank.

The bottom line: Libra can't be successful without regulatory approval, and that approval isn't going to arrive anytime soon.

Go deeper: FT Alphaville has a whole series, "Breaking the Zuck Buck," devoted to all the problems with Libra.

2. Kiva starts bearing interest

Illustration: Aïda Amer/Axios

One of Facebook's launch partners in Libra is Kiva, a nonprofit that has married the concept of third-world microloans to first-world crowdfunding. Ordinary Americans use Kiva to lend money to some of the poorest people in the world, receiving 0% interest in dollars. The dollars go to microfinance institutions in more than 80 countries, which convert them to local currency and then lend them out to individuals who have to repay the loans with interest.

  • Kiva's model of giving its investors a 0% return has been reasonably successful: It has lent a total of $1.3 billion over the past decade, with a 97% repayment rate. But when it comes to refugees in particular, the numbers are much lower: Since it started offering loans to refugees in 2016, Kiva has totaled just $12.5 million in loans.

So Kiva is introducing the Kiva Refugee Investment Fund, a lending vehicle aimed at impact investors seeking a positive return. The fund will be part of Kiva Capital Management, a new shop that will join what the Global Impact Investing Network estimates as the $502 billion market for investments aimed at positive social change.

  • "Impact investing" is not particularly well defined. The RealReal, for instance, a luxury-goods marketplace going public this week, has attracted capital from impact investors like DBL Partners on the grounds that it "promotes sustainability by extending the lifespan of upscale goods."
  • The impact investing universe is also relatively small: The $502 billion stock of impact investing funds globally is significantly less effective than the $428 billion flow of funds donated to charity by Americans alone in 2018.

The bottom line: A recent UBS survey of 443 asset managers controlling more than $20 trillion among them found that 78% of them actively take ESG (environmental, social and governance) factors into account when making investments. But it's hard to see what difference that has made. More focused impact investors tend to be keener on quantifying their impact — and efforts to do that on a comparable basis are still at a very early stage.

Go deeper: Global refugees face increasing risk of long-term displacement

Bonus: Shareholder activists go behind the scenes

Illustration: Aïda Amer/Axios

You don't need to own a lot of shares in a company to make a difference on how it's run. For decades, "gadfly" shareholder activists have bought a handful of shares and then pushed for reforms at annual meetings and via proxy votes.

Those activists are getting more sophisticated, reports Axios' Courtenay Brown. Behind-the-scenes negotiations have led to fewer ESG proposals making it onto the ballots at companies’ annual shareholder meetings.

  • "Companies are more willing to discuss, more willing to listen, and it de-escalates the situation," Jason Day, a partner at the law firm Perkins Coie who advises public companies on stockholder activism, tells Axios. “Or the company has a nice conversation, and it doesn't move to the public sphere."

Go deeper: Wall Street plays nice with shareholder activists

3. Slack proves that direct listings WORK

Illustration: Aïda Amer/Axios

Slack went public this week via the most elegant and efficient way possible — a direct listing. The opening auction of the stock cleared around noon on Thursday, at a price of $38.50. It then traded smoothly (under the ticker symbol WORK) for the rest of the week within a pretty narrow range between $36.50 and $42.

  • No one received preferential treatment: There was no possibility of the kind of scandalous behavior whereby banks like Goldman Sachs receive millions of dollars' worth of kickbacks from clients they place into hot IPOs.
  • Slack insiders sold $1.8 billion of stock in the opening auction, largely because the price was so high. In an auction system, sellers of stock can increase the amount they want to sell as the price goes up. Slack saw the perfect combination of a high stock price with a high volume of shares traded.
  • Traditional IPOs are "archaic and nepotistic," as venture capitalist Bill Gurley says. The direct model allocates stock to the highest bidders, which is much more logical.

What to watch: Slack and Spotify — which also opted for a direct listing — didn’t raise any new equity capital when they went public. But they can do so at any time, now that there's a deep and liquid market for their stock. And future IPOs might also use an auction system to allocate stock, a bit like Google did in 2004.

The bottom line: No matter how plugged in to the markets they are, IPO bankers will only ever be able to talk to a small subset of investors before they take a company public. The Slack auction — just like the Zoom IPO before it — shows just how unexpectedly large the bid can be when a hot, fast-growing company hits the market. It's silly for companies not to take full advantage of that upside.

4. The Sotheby's auction
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The rise of global inequality notwithstanding, the global auction business has been going sideways since 2011. Data: Artnet; Chart: Harry Stevens/Axios

The opposite of an irrevocable offer is an irrevocable bid.

  • In the art auction world, irrevocable bids, also known as "third-party guarantees," are what happens when a bidder promises in advance of an auction to bid a certain amount. That in turn allows the auction house to guarantee to the consignor that her painting will be sold for a certain minimum price.
  • French billionaire Patrick Drahi — a collector of paintings by the likes of Théodore Géricault and Eugène Delacroix — has now entered an irrevocable bid to buy Sotheby's, one of the two great global auction houses. The price: $2.7 billion, plus the assumption of another $1 billion in debt.
  • Sotheby's is a trophy, not unlike an instantly recognizable painting by Warhol or Rothko. Sotheby's is not particularly profitable, and the market isn't growing, but owning an auction house is attractive for non-financial reasons.

Drahi could yet get outbid: The New York Post reports that "at least two counteroffers" are in the works. But, just like a third-party guarantor, Drahi would win even if he lost. He receives a $100 million termination fee in the event that Sotheby's ends up selling to someone else.

5. The most aggressive dove

Neel Kashkari treats a tree on his property as though it were the current 2.5% Fed Funds target rate. Photo: Linda Davidson/The Washington Post via Getty Images

This week's decision to keep interest rates on hold was not unanimous. For the first time in Jay Powell's tenure as Fed chair, there was a dissent: St. Louis Fed president James Bullard said the Fed should have cut rates by 25 basis points.

Minneapolis Fed president Neel Kashkari was even more dovish. (He was also present in the room, but doesn't get a vote until 2020.) Once the final decision was made, Kashkari went public with his position on Medium:

"I advocated for a 50-basis-point rate cut to 1.75 percent to 2.00 percent and a commitment not to raise rates again until core inflation reaches our 2 percent target on a sustained basis. I believe an aggressive policy action such as this is required to re-anchor inflation expectations at our target."
— Neel Kashkari, president of the Minneapolis Fed

Kashkari's logic is pretty simple: Inflation is too low, and so the Fed needs to keep on loosening monetary policy until it gets up to the target level.

  • By the numbers: The Fed adopted its 2% target for core PCE inflation in 2012. The target is supposed to be symmetrical: Inflation is meant to be above 2% and below 2% roughly equally. But since the target was set, the inflation rate has been consistently below 2%, making the target seem like more of a ceiling.

The bottom line: Cutting rates with the stock market at a record high might seem odd, but it's happened before. If the market continues to rally through the next Fed meeting, it might well happen again.

6. The resurgence of negative-yielding debt
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Data: Bloomberg; Chart: Axios Visuals. Note: Data is daily from 2017 onwards; prior to that it is monthly.

U.S. interest rates might be low, but they're a lot higher than interest rates in most of the developed world. The benchmark 10-year bond yield is negative in Germany, the Netherlands, Switzerland and Japan; it's also thisclose to going negative in France.

  • Even Greece has seen its 10-year bond yield fall to just 2.4%, an all-time low.

Be smart: You'll see a lot of chatter about how the investors in these bonds would get a better return were they to just stash cash under a mattress. Ignore that chatter. If you're an institutional investor managing trillions of dollars in assets, you can't convert that money into cash, and while a bank will probably pay you 0% for that money, you still end up taking significant counterparty risk. Bonds have negative yields for good reason.

7. The week ahead: The G20 in Japan

Illustration: Rebecca Zisser/Axios

The G20 summit begins on Friday in Osaka, Japan, writes Courtenay.

  • President Trump will have an “extended meeting” with Chinese President Xi Jinping. In the best-case scenario, the two sides will commit to continued trade negotiations, reducing the power of Trump's threat to put tariffs on all remaining Chinese imports.
  • French President Emmanuel Macron and Japanese Prime Minister Shinzo Abe will also reportedly meet to talk about the Renault-Nissan alliance.
8. Building of the week: The 2019 Serpentine Pavilion

Photo: Niklas Halle'n/AFP/Getty Images

Every year, London's Serpentine Gallery commissions a pavilion for its front lawn from an architect who has never built anything in the U.K. This year's architect is Junya Ishigami, from Japan. He used 67 tons of Cumbrian slate to build a "stone hill" emerging from the ground.

Felix Salmon

Elsewhere: Texas dominates in the list of cities with the highest percentage of working seniors. Fiverr workers write about the Fiverr IPO. Why rock music's greatest riffs might not be protected by copyright. Facebook's Calibra logo looks like the Current logo.