February 03, 2024

At Markets Weekend, we believe that buying a painting is a bad investment β€” but that it's still a better investment than buying a news organization.

  • In this week's newsletter, I look at both of those, as well as what's causing U.S. economic outperformance, why Walmart split its stock, the rise and rise of money market funds, and even Evergrande debt. All in 1,510 words (6 minutes.)

1 big thing: The newspaper savior complex

Illustration: Shoshana Gordon/Axios

Deep reservoirs of individual and philanthropic wealth are being tapped in an attempt to save or rebuild the news industry. In reality, however, large amounts of up-front liquidity never seem to be the solution to the problem.

Driving the news: The demise of The Messenger this week is just the latest in a stream of headlines about small or fast news-media implosions. Its founder, Jimmy Finkelstein, wrote this in his note to staff:

Over the past few weeks, literally until earlier today, we exhausted every option available and have endeavored to raise sufficient capital to reach profitability.

Between the lines: Finkelstein, here, is saying explicitly that investing money in a news business is a way of making it profitable. In reality, however, that's almost never the case.

Why it matters: Ever since the bottom fell out of the news industry around 2008, some variation on the benign billionaire has been many analysts' savior of choice.

  • Ultra-wealthy entrepreneurs β€” including Patrick Soon-Shiong at the LA Times and Jeff Bezos at the Washington Post β€” have a lifetime of experience of investing money, using that investment to drive growth, and then seeing profits roll in once enough scale has been achieved.
  • When it comes to the news business, however, spending a lot of money generally only seems to to end up only making losses bigger.

How it works: Digital news is not an an arena where the larger the initial investment, the larger the potential return.

  • Once upon a time, Rupert Murdoch could make a huge investment in a new printing plant at Wapping, in East London, with an entirely justified expectation that his significant capital investment would pay off in the form of higher long-term profits.
  • In today's news industry, by contrast, there are precious few capital investments to be made. Nearly all investment is in recurring expenses, mostly salaries for humans, whether those humans are journalists or ad-sales folk or coders or product managers.
  • As a result, the investments made by Soon-Shiong and Bezos have caused their respective newspapers to lose more money last year than they ever did pre-acquisition. Similarly, the Messenger's breakneck pace of hiring simply meant it burned through the $50 million it raised in record time.

Meanwhile: Philanthropies like MacArthur and Knight similarly believe that with enough goodwill and cash, they can turn the industry around.

The bottom line: The amount of money available for bold, growth-oriented bets will always dwarf the amount of money available to simply subsidize a good but money-losing existing product. Even when the latter is much more desperately needed.

2. Auction pricing is about to become a lot more transparent

Illustration: Annelise Capossela/Axios

The single most annoying and opaque aspect of buying and selling items at auction is about to get a lot more pleasant and transparent β€” at least at Sotheby's, which unveiled a major transformation of its commission structure on Thursday.

Why it matters: Buyers and sellers alike have been frustrated for decades at the way in which the amount they end up paying (or receiving) can differ significantly from the hammer price in the auction room.

  • Those differences β€” effectively, the amount of the transaction that Sotheby's takes for itself β€” have risen steadily over the years. Now, they are going to fall to a multi-decade low after May 20.

The big picture: In theory, fully informed bidders are aware of the buyer's premium schedule β€” the amount a collector pays over and above the hammer price β€” before they bid. They are therefore never faced with sticker shock when they find out how much they actually owe.

  • In practice, however, auction houses have used artificially low hammer prices not only as a way to pad their own profits but also as a way to encourage further bidding.
  • Thursday's announcement from Sotheby's represents a major reset β€” and is likely to put huge pressure on Christie's to follow suit. (Christie's declined to comment to Axios on what they may or may not do.)

Between the lines: One of the biggest changes is the institutionalization of negative seller's commissions, known in the industry as "enhanced hammer."

  • Such deals have long been whispered about in the industry but have never officially been acknowledged by either Sotheby's or Christie's. Now, enhanced hammer is out in the daylight, available automatically to anybody with a $20 million object they would like to sell.

By the numbers: For a work hammered at $1 million, Sotheby's gross profit is going to fall 32% from $370,000 to $250,000.

What they're saying: "The reduction in the Buyer's Premium will incentivize more bidding from clients and result in higher hammer prices for sellers," said Sotheby's CEO Charles Stewart in announcing the move.

  • "The standardization of selling terms pivots away from private negotiations, prioritizing transparency and simplicity."

Flashback: The commission structure at Sotheby's and Christie's has a history full of controversy. Former Sotheby's chairman Alfred Taubman was sentenced in 2002 to a year in prison for conspiring with Christie's to fix his commission rates.

The bottom line: This is a very aggressive move from Sotheby's owner, French telecoms billionaire Patrick Drahi, and one that's aimed squarely at gaining market share. It's likely to be welcomed by collectors around the world.

3. The Phoenix Economy

GDP growth among G7 nations
Data: January 2024 WEO; Chart: Axios Visuals

This chart, from Axios' Neil Irwin, understates the degree to which U.S. economic growth has dwarfed that of its international peers. If you measure 2023's growth as the amount by which U.S. fourth-quarter GDP grew from a year previously, the country's growth rate last year was actually 3.3%.

Why it matters: The high growth and boom in productivity β€” not to mention January's astonishing rate of job growth β€” are a function of what I called in my book "shaking the Etch-a-Sketch."

  • The huge spike in U.S. unemployment in March and April of 2020 β€” something not mirrored in most other developed countries β€” presaged an even bigger "great resignation" in which Americans quit jobs they didn't like for more appealing alternatives.

Be smart: We're now reaping the benefit of that great shake-up.

  • "The enormous labor market churn of COVID in 2020-21 had the unintended benefit of moving millions of lower income workers to better jobs, more income security, and/or running their own businesses," Adam Posen, president of the Peterson Institute for International Economics, tells Neil.
  • "We are reaping the benefits of it now in labor force participation, wage growth, and improved productivity."

The bottom line: In burning down much of the old economy, we created the preconditions for a phoenix to rise from its ashes.

4. Why Walmart split its stock

Hours a Walmart employee needs to work to buy one share
Data: YCharts, Axios research;Β Chart: Tory Lysik/Axios Visuals

Walmart stock splits used to be a regular event β€” there were six of them just between November 1980 and June 1990. But it's now almost 25 years since the last one, in March 1999.

Why it matters: Nowadays, almost every brokerage, including Walmart's own Associate Stock Purchase Plan, allows the purchase of fractional shares, making a company's nominal share price less important than ever.

The other side: Walmart's own press release this week announcing a new stock split quotes CEO Doug McMillon as saying that "Sam Walton believed it was important to keep our share price in a range where purchasing whole shares, rather than fractions, was accessible to all of our associates."

  • Walton stepped down as CEO in February 1988, when an entry-level Walmart associate would have had to work more than 8 hours to amass enough pre-tax income to buy a single share.
  • After this month's stock split, that ratio is going to plunge to an all-time low of less than 4.

The bottom line: The stated reason for splitting the stock doesn't seem to make a lot of sense β€” especially given that the split is going to significantly dilute Walmart's contribution to the Dow.

5. Evergrande, in context

Data: Debtwire; Chart: Axios Visuals
Data: Debtwire; Chart: Axios Visuals

Chinese property developer Evergrande, which has now been ordered to liquidate, has an astonishing $300 billion in liabilities.

Why it matters: That places it near the very top of the all-time list of corporate bankruptcies.

Between the lines: A lot of Evergrande's liabilities are down payments that Chinese homebuyers made on apartments that remain unbuilt. But even just looking at the bonds and loans outstanding, the amount is greater than $80 billion.

My thought bubble: In 2020, there was a lot of talk of a "tidal wave" of bankruptcies coming as a result of the pandemic. Turns out, that never really happened. Evergrande's implosion can't primarily be attributed to COVID.

By the numbers: China is no stranger to mega-bankruptcies, as can be seen by the presence of CEFC China Energy and Peking University Financial Group on this list. But Evergrande dwarfs them all.

  • What's more, creditors' expected recovery on most of that debt is effectively zero. Insofar as there's still value in Evergrande, expect that to go to the homebuyers rather than foreign bondholders.
  • That places Evergrande in stark contrast to Lehman Brothers, which was the largest corporate bankruptcy of all time. While the investment bank had much greater total liabilities, creditors ultimately got paid back in full.

6. The rise and rise of money market funds

Data: ICI: Chart: Axios Visuals
Data: ICI: Chart: Axios Visuals

More than $6 trillion is now held in U.S. money market funds, up $1 trillion just since mid-March, when the banking crisis hit.

  • That's just under $46,000 per U.S. household.

Thanks to Kate Marino for editing this newsletter, and to Jay Bennett for copy editing it.