Feb 3, 2019

Axios Capital

By Felix Salmon
Felix Salmon

Five years ago, venture capitalist Ben Horowitz bet $50 million and a pair of alpaca socks on bitcoin. The dollar bet has done well for him. As for the alpaca socks, I was his counterparty on that bet. Did he win? Planet Money has the answer.

1 big thing: America's resurgent hegemony

Illustration: Sarah Grillo/Axios

America is back. Donald Trump's White House is pushing his international agenda aggressively, with the rest of the world allowing the Trump administration to take the lead.

  • This is not diplomacy. Treasury is front and center, with other departments, including Trade, Defense, and Justice, playing an important role. State is certainly involved, but this is a full court press.

On Venezuela, the U.S. was the first country to formally recognize Juan Guaidó as interim president.

  • The U.S. lead was followed by most Western democracies, first in the Americas and then in Europe.
  • Treasury then imposed wide-ranging sanctions on PdVSA, Venezuela's state-owned oil company. The move essentially halted trading in PdVSA's widely held bonds, which remain part of the EMBI emerging-market bond indices. Squeals of protest from Wall Street were notable by their absence: For the time being, investors seem to be OK with the U.S. action.
  • Global energy markets were upended by the unexpected sanctions, with a formerly steady flow of heavy oil from Venezuela to U.S. refineries coming to a sudden stop.

On China, trade talks seem to be going as well as could be hoped, with China buying American soybeans in a gesture of goodwill. The base-case market expectation is now that tariffs will not jump up to 25% on March 1, but that the U.S. will reserve the right to hike them at any time if it feels that China isn't upholding its end of any bargain.

  • The Justice Department escalated tensions this week by bringing a broad-ranging set of charges against Huawei, a leading Chinese telecommunications company. The company's CFO, Meng Wanzhou, is currently out on bail in Canada, pending extradition to the U.S. to face fraud charges.
  • The U.S. has been pressuring its allies to ban Huawei from building 5G networks in their countries. It has met with success in New Zealand and Australia, and now Europe is reportedly close to following suit.
  • The repercussions of U.S. antagonism to China can hit even non-Chinese companies very hard. MoneyGram is now worth less than $120 million, after its deal to get acquired by China's Ant Financial for $1.2 billion was scuppered by U.S. regulators. Its competitor WorldFirst has a similar deal, for £700 million ($915 million), and will cease U.S. operations entirely to avoid a similar fate.

On Russia, geopolitical relations remain on edge after the U.S. announced it will be withdrawing from the Intermediate-Range Nuclear Forces Treaty, eliminating a key set of nuclear shackles from Moscow.

  • Treasury removed Russian aluminum giant Rusal from its sanctions list this week after its owner, Oleg Deripaska, reduced his stake in the company to less than 50%. The news sent global aluminum prices plunging, even though U.S. aluminum importers, who hated the sanctions, had persuaded Treasury to postpone enforcement.

The bottom line: U.S. executive-branch actions are having an increasingly profound effect on companies, markets and government policies around the world. In stark contrast to previous administrations, this White House is utterly unafraid to throw its weight around, with little regard for unintended consequences.

2. The U.S. still controls the World Bank

Photos: Ngozi Okonjo-Iweala by Shaun Curry/AFP/Getty; David Malpass by Mario Tama/Getty

The next big test of U.S. dominance is going to be what happens when the Trump administration announces its nomination for the next president of the World Bank.

  • The front-runner is David Malpass, currently undersecretary for international affairs at Treasury. Malpass would be a divisive figure at the Bank. If Malpass were to be nominated by the U.S., other shareholders might well nominate a rival candidate, probably former Nigerian Finance Minister Ngozi Okonjo-Iweala.
  • On paper, Okonjo-Iweala is far more qualified for the job than Malpass is, not least because she spent many years holding senior positions at the World Bank and knows how it works. She is also now a U.S. citizen and has interviewed at the White House for the World Bank job.
  • If the White House doesn't nominate Okonjo-Iweala, Malpass would probably win a competitive race against her. European countries would be very hesitant to vote against the U.S. candidate, lest the U.S. vote against their candidate when the IMF job next comes up for a vote.

The bottom line: If the U.S. were interested in forging consensus at the World Bank, it would nominate someone like Okonjo-Iweala, or former PIMCO chief Mohamed El-Erian, or former PepsiCo CEO Indra Nooyi. That candidate would then probably coast in unopposed. If Malpass gets the nod, that's a sign that Trump is uninterested in keeping the rest of the world happy.

3. Facebook economics
Expand chart
Data: Company filings; Chart: Axios Visuals

Facebook makes the majority of its revenue off of users in the U.S. and Canada, writes Axios' Sara Fischer, but its user growth in those countries has slowed dramatically. 

  • A Facebook user in the U.S. is 3 times more valuable than a Facebook user in Europe, 10 times more valuable than a Facebook user in the Asia-Pacific region, and 15 times more valuable than a user in the rest of the world. 
  • The U.S. is by far the world's most lucrative ad market, worth over $200 billion, per estimates from Zenith, a global media agency. China, where Facebook is blocked, is the second biggest, at $87 billion. Japan is a distant third at $43 billion. 
4. Solving the problem of American poverty
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Data: Robin Hood Poverty Tracker/Columbia University Population Research Center survey of 2,877 New York City adults between 2015 and 2018; Chart: Chris Canipe/Axios

42% of New Yorkers have lived in poverty at some point in the past 3 years. That's according to a tracking survey operated by Columbia University and Robin Hood, which polls 4,000 households every quarter. (Not all of them were trackable across 3 successive years, but 2,877 were.)

  • The key result from the poverty tracker is that people experience poverty in waves. Roughly 28% of New Yorkers who exit poverty will re-enter within 3 years. That number rises to 39% for black New Yorkers.

Tomorrow, Robin Hood will announce a $25 million program that's intended to fund research aimed at not only bringing households out of poverty but keeping them out of poverty. The ideas will be exported nationwide, with the help of Tipping Point Community and the Gates Foundation.

  • One proven intervention: CUNY ASAP is a scheme designed to ensure that college students graduate with an associate's degree within 3 years. It effectively doubles graduation rates, and that in turn slashes the probability that the graduate will ever return to poverty.
  • Another key policy is New York Mayor Bill de Blasio's plan to extend public health insurance to 600,000 currently uninsured residents. When people return to poverty, it's often because of unexpected health care expenses.

The bottom line: Philanthropy can't fund these schemes, only government is big enough to do that. But philanthropists can certainly fund studies that demonstrate what works. Those studies, in turn, make it much easier for city and state governments to enact new laws and policies.

5. Media data points

Illustration: Rebecca Zisser/Axios

The good:

  • Podcasting startup Gimlet is in talks to be bought by Spotify for a reported $230 million.
  • The New Yorker is profitable, per a spokesperson. It generated $115 million in subscription revenue in 2018, bringing its total revenue to about $175 million.
  • Vox Media is also profitable, on revenue of about $185 million.

The bad:

The profligate:

6. The bankruptcy dodge

Illustration: Aïda Amer/Axios

If you're an executive who doesn't feel like making tough decisions about corporate priorities, there's always an alternative: file for bankruptcy.

  • PG&E, the solvent California utility, filed for Chapter 11 protection this week, citing assets of $71.4 billion and liabilities of $51.7 billion. PG&E no longer needs to pay out money to the victims of the devastating Camp fire; instead, it gets to punt all decisions about how much those individuals will receive to the bankruptcy judge.
  • Citgo, the oil refiner owned by Venezuela, is also reportedly considering bankruptcy, even though it is so valuable that it is the crown jewel of Venezuela's foreign assets. (Citgo denies the report.) Filing for bankruptcy would stop the refiner's executives from having to choose which Venezuelan president they are loyal to. A judge, instead, would need to make all ownership determinations.

My thought bubble: These problems are not what America's bankruptcy regime was designed to solve. Bankruptcy is messy and expensive; what's more, judges don't tend to make great corporate executives. But it's easy to see why an executive holding a hot potato might be tempted to pass it on to someone — anyone — else.

7. Brexit gets worse

Illustration: Sarah Grillo/Axios

In the face of clear incompetence on the part of the leadership of both major parties in Britain, Remainers were hopeful that Parliament would assert its sovereignty this week and seize control of the Brexit process. Those hopes were dashed as two key amendments (Cooper and Grieve, for anybody following along at home) failed to pass.

  • We're now back to the status quo ante, with clear majorities against all three of the possible outcomes (no Brexit, no deal, May's deal). There also seems to be neither time nor stomach for a second referendum.
  • Of the three, the most catastrophic outcome, no deal, is also the only outcome that can take place without commanding a majority in Parliament.

The bottom line: 😰

8. Coming up: State of the Union

Illustration: Rebecca Zisser/Axios

President Trump will give his second State of the Union address on Tuesday, writes Axios' Courtenay Brown. If the past is any indication, there will be bragging about the stock market (don’t expect a mention of December’s rout), job growth and a strong economy.

  • Still no word on when the BEA will release the final GDP report of 2018, which was delayed by the shutdown.

Stock markets in China are closed this week, as the country brings in the Year of the Pig — symbolic of wealth. That also means five days without any disappointing data out of China.

  • In Europe, virtually no one expects the Bank of England to raise interest rates on Thursday, but watch for warnings from Governor Mark Carney about the risks of a hard Brexit and how the U.K.’s split from the EU could impact future monetary policy.

On the earnings front, 97 S&P 500 companies will release quarterly results this week, including Disney, Alphabet, Twitter and Snap.

9. Building of the week: Ford Assembly Building

Photo: Craneway

The Ford Assembly Building was built by legendary industrial architect Albert Kahn in 1931, becoming Ford's largest factory on the West Coast. Located in Richmond, on the north San Francisco Bay, it was converted in 2011 by Marcy Wong Donn Logan architects into a solar-powered industrial office space and public venue. This week, it hosted the Micromobility Conference, "an event focused on unbundling the car."

Felix Salmon

Elsewhere: Chinese electric car reboots on Changan Avenue, trapping driver and passenger for over an hour. Italy is in recession. $137 million in cryptocurrencies is irretrievable because the guy with the password (allegedly) died. What to do if you have a Rothko or a Murakami and it doesn't fit where you want it on your yacht. Evacuate the Queen.