Feb 8, 2020

Axios Future

By Bryan Walsh
Bryan Walsh

Welcome back to Future. Have your siblings signed up?

Send your ideas and comments by replying to this email, or reach me at erica@axios.com.

Today's issue is 1,222 — a 4 1/2-minute read. To start...

1 big thing: The coronavirus threat to China's grand plans

Illustration: Eniola Odetunde/Axios

China's plan to dominate the 21st century hangs in the balance as the deadly coronavirus outbreak spreads.

The big picture: Coronavirus is stress-testing Chinese President Xi Jinping's industrial and economic vision for the future as factories, supply chains and companies navigate the crisis.

What's happening: The outbreak, which has already taken more than 700 lives around the world, is soaking up all of China's resources and attention. "It reinforces an inward-looking China," says Samm Sacks, a fellow at the New America foundation.

  • "[E]very organ of the Chinese state has been harnessed to enforce an unprecedented quarantine on 50 million people across 15 cities," TIME's Charlie Campbell writes in the magazine's latest cover story.
  • "China’s government has unleashed a 1 billion yuan ($142 million) war chest to fight the outbreak amid a frenzy of construction work that, among other feats, erected a 1,000-bed hospital in just 10 days."

On top of commanding all government resources, the outbreak is upending China's industrial centers. "This will put a damper on China’s access to foreign technology and slow the transition to high-value-added high-technology manufacturing," says Eswar Prasad, a China and world trade expert at Cornell University.

  • Wuhan, the epicenter of the crisis where most industrial activity has halted, accounts for 4% of China's economy, reports the Nikkei Asian Review. It's a region key to the country's automotive industry and "Made in China 2025" plan to dominate the technologies of the future, per the Review.
  • Even factories that are starting to re-open are dealing with labor shortages as travel continues to be restricted across China, reports WSJ. Thousands of smaller Chinese factories may permanently shut down as a result of the outbreak, one Chinese executive told the Journal.
  • And major foreign companies, like Apple, Ford, Toyota and IKEA, are rethinking their China supply chains and presence.

The other side: As the outbreak spotlights China's reliance on the foreign technology and global supply chains, it "might also spur the government to further intensify its efforts to promote domestic innovation" and double down on its "Made in China 2025" plan, Prasad says.

The bottom line: The panic around the coronavirus outbreak could push Xi and the Chinese Communist Party to exert even greater control over all parts of the country — including the high-tech private sector, which has led China in the development of cutting-edge technologies and been afforded relative freedom by the Chinese Communist Party, says Sacks.

  • A sweeping expansion of party control — the new standard being set by the outbreak — could threaten that innovation. "The Party will have to loosen its grip a little bit."

Go deeper: Track the latest cases and developments in the outbreak.

2. The vindication of Elon Musk

Photo Illustration: Sarah Grillo/Axios. Photo: Jörg Carstensen/picture alliance via Getty Images

Tesla stock has been in Ludicrous Mode for the past few days. Given its bonkers gyrations, it's now easy to see why CEO Elon Musk might feel that he was right all along in wanting to take the company private back in 2018, Axios' Felix Salmon writes.

"As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders."

— Elon Musk, "Taking Tesla Private" blog post, August 2018

How it works: Tesla's rising share price this year has been good for Musk's pay package and his wealth, but it has also turned the stock into an arena for short-term, high-stakes gamblers.

  • In the first three days of this week, $157 billion of Tesla stock changed hands. For gamblers, it was more popular than Bitcoin, which saw $96 billion of volume in those three days. Tesla even approached $198 billion of volume in SPY, the benchmark S&P 500 ETF that's the most popular playground for day traders.
  • Compare Apple, with its awesome $1.4 trillion valuation: It had $107 billion in volume over three days, much less than Tesla, which is worth roughly a tenth as much.

The stock market is failing at its primary role of price discovery, the determination of how much securities and companies are worth. There's no rational reason — and certainly no news — explaining why Tesla's value should have fluctuated by more than $20 billion per day.

  • This wasn't a short squeeze like the famous VW run-up in October 2008, when the German carmaker briefly became the most valuable company in the world. In that case, the quantity of shares available to buy was much lower than the amount that short sellers had sold. But in this case, even if all the Tesla shorts were forced to cover their positions at the same time, that would account for less than one day's trading volume.
  • Other possible explanations like delta-hedging call-option volume (don't ask) similarly can't come close to explaining the magnitude of the price swings and high volume that Tesla stock is seeing.

Be smart: A stock that can melt up for no particular reason can just as easily melt down.

When the share price is as volatile as this, valuation feels more like a sugar high than the true wisdom of the crowds, and a buy-and-hold strategy feels like utter foolishness. Hedge fund manager Cliff Asness has argued that the price opacity of private markets has significant positive value. If that's the case, then Tesla in particular should probably be private.

3. The great toy slump

Photo: Axel Heimken/picture alliance/Getty Images

Americans are buying fewer toys in the post-Toys "R" Us era.

The big picture: As we've reported, the demise of the toy giant kicked off a war among U.S. retail titans Amazon, Target and Walmart to vacuum up its toy sales. But the end of Toys "R" Us dealt the multibillion-dollar American toy market a blow that it still hasn't recovered from.

  • Target and Walmart both added floor space for toys. And Target partnered with Disney to sell exclusive products in its stores.
  • Amazon attempted to dominate the online sale of toys. Its products topped 95% of online search results for toys in 2019, according to the research firm Gartner L2.

But all that wasn't enough to revive the toy market.

  • Toy sales fell 4% between 2018 and 2019, according to research from the NPD Group, cited by Retail Dive.
  • American retailers also sold fewer toys during the 2019 holiday season. That might be partially explained by the fact that last year's peak holiday shopping season — the weeks between Thanksgiving and Christmas — was unusually short, per NPD.

The bottom line: The American toy industry is likely to eventually bounce back, but it's a testament to the ubiquitousness of Toys "R" Us that it has temporarily dragged down the entire market.

4. Worthy of your time

Illustration: Sarah Grillo/Axios

Team Trump's 5G misfires (Kyle Daly, Margaret Harding McGill — Axios)

Facial recognition's new front: schools (Davey Alba — NYT)

How AI is tracking the coronavirus outbreak (Will Knight — Wired)

The neuroscience of picking a presidential candidate (Sue Halpern — New Yorker)

The lucrative, unregulated, misunderstood world of vaping (Amanda Chicago Lewis — California Sunday Magazine)

5. 1 online thing: The digital footprint you don't think about

We safeguard our Facebook and Instagram accounts and limit our post visibility to our friends.

  • But there are other, rarely discussed traces we leave across the internet that allow strangers to track our lives.

The latest example: Fans of ABC's "The Bachelor" are stalking Venmo payments to try to figure out who Peter, this season's bachelor, chooses at the end of the season, reports WSJ.

  • Indeed, if you haven't set your Venmo account to private, anyone can visit your profile and see a real-time log of whom you've been paying, and for what.
  • Another example is music streaming. If you're on Spotify, anyone can follow you (without giving you a notification) and track — again, in real time — what songs you're listening to and what playlists you're creating.

The bottom line: If you aren't super diligent about adjusting privacy settings for every aspect of your digital life, you're leaving behind breadcrumbs that you didn't even think about.

Bryan Walsh

Thanks for reading!