May 6, 2021

Axios Capital

Situational awareness: It's World Password Day! If you've been meaning to get around to installing a password manager, or to updating all those identical or easy-to-remember passwords, now's the time to do it.

  • In this week's newsletter: Recovering from chaos; the Robinhood debate; the death of Nuzzel; the question marks over the Gates Foundation; Peloton's woes; David Swensen; and much more. All in 1,844 words, a 7-minute read.
1 big thing: A year of dislocations

Illustration: Aïda Amer/Axios

Chaos arrives quickly and leaves slowly.

  • Ripple effects from the broad and sudden economic shutdown in March 2020 are manifesting themselves across the economy, in areas as far apart as lumber and microprocessors. Those disruptions are unlikely to sort themselves out any time soon.

Why it matters: As vaccinations rise and the economy grows back to its pre-pandemic size, Americans are tantalized by the prospect of the country reverting to something approaching the familiar old normal. While that might happen eventually, it could take a surprisingly long time for a new equilibrium to establish itself.

  • Until then, expect a constant stream of headlines about supply being unable to meet demand across a large range of industries and sectors.

The big picture: Shortages have appeared in multiple areas.

  • In lumber, high prices are a consequence of the decision by sawmills to shut down production a year ago, in anticipation of an economic slump.
  • In autos, supply constraints are a result of decisions by chip manufacturers early in the pandemic to concentrate on making semiconductors for consumer electronics — which were expected to boom — at the expense of making chips for vehicles, which were expected to be hit hard by the broader slump in travel.
  • In the restaurant industry, which is struggling to find workers, experienced servers found themselves with almost a year to find other jobs with better job security and fewer health risks.

Be smart: These shortages don't mean the economy is overheating. If anything, they mean it isn't yet hot enough. As industries like sawmills and semiconductor fabricators grow out of their downturns, supply will increasingly meet demand and prices will be more likely to go down than up.

  • In an advanced economy, supply chains and lead times can be extremely long and complex, even for seemingly simple items like lumber. Disruptions to global shipping — an industry that has never been nimble — only make it harder to get back to normal.
  • Rebuilding those supply chains for a reconfigured economy, and finding the new natural state of dynamic equilibrium, is extremely difficult and time-consuming.
  • Pockets of sticker shock on things like rental car prices are therefore likely to remain for at least the rest of this year.

The bottom line: If price rises in certain items are caused by temporary shortages, then the inflation is also likely to be temporary.

2. Buffett vs Robinhood

Illustration: Rae Cook/Axios

Warren Buffett is the ultimate buy-and-hold, long-term investor; Robinhood is filled, at least in the popular imagination, with day-trading teens rushing in and out of meme stocks and crypto. So it's hardly surprising they've started trading barbs.

What they're saying: Buffett and his partner Charlie Munger described Robinhood at their annual meeting last Saturday as being a "casino group" that is "deeply wrong."

  • Robinhood hit back with a blog post accusing Buffett and Munger of being "the old guard" who have been "driving a deep wedge between the haves and have-nots."

Where they agree: Robinhood's post takes pains to point out that "a majority of Robinhood’s customers are buying and holding." Pointing to the buy-and-hold investors as paragons of rectitude, however, is an implicit rebuke of the company's most profitable customers.

  • By the numbers: Thanks to Robinhood day-traders, the brokerage took in a stunning $331 million in payment for its customers' order flow in the first quarter of 2021. Of that, exactly $0 came from the virtuous users holding on to long-term investments and not trading at all.

What they're saying: SEC chair Gary Gensler, in congressional testimony today, took Buffett's side of the debate, making it clear that he's not a fan of "gamification, behavioral prompts, predictive analytics, and differential marketing" — all tools that Robinhood uses to drive growth.

The other side: Even Buffett made mistakes early in his investment career — that's how people learn. And the YOLO crowd is well aware of what they're risking when they go all-in on speculative vehicles like dogecoin.

  • Robinhood is also correct to point out that the people who made fortunes by investing alongside Buffett were overwhelmingly white and upper-middle class, in an era when most Americans were effectively shut out from any access to the stock market at all.

The bottom line: The speculators making (and losing) money on Robinhood don't want to be protected from taking risks. The paternalistic instincts of Buffett and Gensler are understandable, but trading can be fun, especially when, as now, the Extremely Online teens are wildly outperforming their grandparents.

Bonus: Dogecoin to the 🌙
Data: YCharts; Chart: Axios Visuals

If you got drunk and invested $100 into dogecoin on New Year's Eve, that investment would be worth $10,000 today. (Don't even ask me what that works out to in terms of annualized IRR.)

What they're saying: "Dogecoin is surging because many cryptocurrency traders do not want to miss out on any buzz that stems from Elon Musk’s hosting of Saturday Night Live," says Oanda analyst Edward Moya.

  • "The more active money managers view the current retail-driven dogecoin environment as too easy to pass up."

What to watch, or not watch: Musk is set to host SNL this Saturday with musical guest Miley Cyrus.

3. Why we can't have nice things

Illustration: Annelise Capossela/Axios

Nuzzel, the fastest and easiest way to get caught up on stories shared by the people you admire most, is now dead, killed off when Twitter acquired its parent company.

Our thought bubble: The tech economy has always done a lousy job of supporting products that have small or medium-size markets, writes Axios' Scott Rosenberg, including news aggregation tools like Nuzzel, personal information management systems, and other software products that attract devoted niche followings. (See: Google Reader, Delicious, and other beloved, defunct services.)

  • Venture investors are looking for products that can scale up to billions of customers. Founders and CEOs are taught to go big or get out. Big companies aren't interested in medium-sized bets.

Also dead: All of the blog posts ever published at Reuters were vaporized this week, including thousands of my own. "As we moved to a new Reuters.com site last month, some blog pages were removed because the legacy infrastructure is no longer supported," says a spokesperson.

  • Reuters has retained the (unsearchable) blog archives, and says they "will be migrated to the new website in the coming months" — where, presumably, they will live on behind the forthcoming $35/month paywall.
4. Whither the Gates Foundation?

Illustration: Sarah Grillo/Axios

The Bill and Melinda Gates Foundation — the largest and most powerful private philanthropy in the world — is controlled by three trustees: Bill Gates, Melinda Gates, and Warren Buffett.

Why it matters: The $50 billion or so that the Foundation controls does not belong to any of those individuals; they have given it away. And yet, they still control the Foundation's most momentous decisions.

  • Oxford University's controversial decision to license its vaccine to AstraZeneca, rather than making it open source, was strongly supported by Melinda Gates and the Foundation.
  • The U.S. is taking the other side of that debate, signaling it will waive patent protections on coronavirus vaccines.

What they're saying: “President Biden and U.S. Trade Representative Katherine Tai have recognized that Pharma’s ‘business as usual’ is killing us," says Oxfam America CEO Abby Maxman. "In this moment of crisis, we applaud their willingness to pursue a new path that prioritizes public health over private profits."

Where it stands: Bill and Melinda Gates said they have "committed the vast majority of our assets to the Bill & Melinda Gates Foundation." Those private assets are estimated to be worth about $144 billion.

  • That commitment is unenforceable, however.
5. The anhedonic treadmill
Data: FactSet; Chart: Axios Visuals

Peloton has lost more than half its value since its mid-January high, when it was valued at $60 billion — and it's still trading at more than double its pre-pandemic high.

Why it matters: Most of the recent decline is a function of the economy reopening faster than expected, leaving people with much less desire to spend thousands of dollars on at-home exercise. But a lot of the drop is also self-inflicted.

Flashback: In mid-March, Peloton pushed back against the Consumer Product Safety Commission, which had recommended that consumers stop using its treadmill. CEO John Foley wrote:

We have fully cooperated with CPSC and responded to all of their requests, with one exception: we resisted their demands for personally identifiable information of certain Members because those Members had specifically requested that we not provide that information...
You may also have read news reports suggesting that CPSC believes that we should stop selling or recall the Tread+. I want to assure you that we have no intention of doing so.

Driving the news: We now know that while Peloton was supposedly protecting the personal information of its members, its website allowed anybody to access Peloton users' age, gender, city, weight, and workout statistics.

  • Peloton has also changed its mind on its treadmill, and now says the machine should not be used and should instead be returned — any time between now and November 2022 — for a full refund.
  • Many of the treadmills were financed by Affirm, which effectively bought them from Peloton at a significant discount to the retail price. So Peloton will be paying more to buy back those machines than it originally received.

The bottom line: Peloton likes to think of itself as a subscription media company, rather than as a hardware manufacturer. Subscription media companies, however, don't generally have to worry about one child dying in a treadmill accident, alongside another "29 reports of injuries to children that resulted in serious abrasions, broken bones, and lacerations."

6. David Swensen, 1954-2021

Photo: Peter Foley/Bloomberg via Getty Images

Yale's legendary investment manager David Swensen had one major insight that utterly transformed the world of endowments, foundations, and sovereign wealth funds: that investors pay a substantial premium for liquidity.

  • As the steward of a perpetuity (the Yale endowment) that brings in fresh donations every year, Swensen realized he didn't need liquidity.
  • The growth of venture capital over the past 30 years owes much to Swensen, as does similar growth in other alternative assets such as private equity, hedge funds, and even timberland.

The big picture: As Swensen would be the first to say, don't try this at home. Liquidity is fantastic for individual investors. Nevertheless, Swensen's core insight now underpins the investing philosophy of major institutional investors around the world.

7. Coming up: Jobs and inflation

Illustration: Aïda Amer/Axios

The April jobs report is out tomorrow, while the inflation report arrives on Wednesday.

Why it matters: The Fed's dual mandate requires it to maximize employment while keeping inflation under control; good news is expected on both fronts.

  • By the numbers: Roughly 1 million new jobs are expected to have been created last month. Prices grew 2.6% year-over-year in March, but expectations for April's figure are lower.
8. Building of the week: Berlin Tegel airport

Photo: Sean Gallup/Getty Images

Berlin's Tegel airport was officially decommissioned this week.

  • Designed in a stunning Brutalist style by neophyte architects Meinhard von Gerkan and Volkwin Marg, the airport features no real central terminal.
  • Instead, you just walk a few steps straight from the road into your gate — a system that worked a lot better before modern security protocols were implemented.

The bittersweet news for lovers of Tegel is that it will live on, in a much-transformed manner, as an "Urban Tech Republic."