May 13, 2021

Axios Capital

Situational awareness: I'm filling up my car with precious gasoline and heading north for a few days, so I'll be off next week. But Axios Capital will be back on May 27.

  • In this week's newsletter: Making money off the YOLO investing boom; the new Coinbase pay structure; gyrating consumer prices; rich states; ethical companies; ransomware; and much more. All in 1,756 words, a 6.5-minute read.
1 big thing: The gold-rush servicing boom

Illustration: Annelise Capossela/Axios

The YOLO investment world (it stands for "you only live once") is now so entrenched that entire industries are being built on top of it.

Why it matters: The people making YOLO bets on high-risk investments, be they meme stocks or cryptocurrencies or NFTs, walk in with their eyes open and know that they could lose everything.

  • The companies selling to them, on the other hand, are looking to make fast profits with much less risk.

How it works: As Mark Twain never said, when everybody is digging for gold, it’s good to be in the pick and shovel business.

  • Most obviously, that business is crypto exchanges, many of which started advertising dogecoin aggressively ahead of Elon Musk's appearance on "Saturday Night Live" last week with tag lines like "Buy Dogecoin. It's Not Too Late!"
  • The price of dogecoin went down following SNL, but by then the brokerages had successfully managed to attract a whole new cohort of fast-trading investors with huge risk appetites.

Even eBay is getting in on the action, allowing NFTs onto its platform — just like Christie's and Sotheby's before it.

  • Art securitization company Masterworks is appealing to a get-rich-quick crowd by advertising fine art as being analogous to bitcoin or NFTs.

Media companies, too, are making millions off crypto fervor.

  • A TV show called "Unicorn Hunters" claims to be "democratizing wealth creation" by making it possible for people at home to invest in private companies.
  • What they're saying: "The masses are raising their hands and want to invest," show co-creator and panelist Moe Vela tells Axios' Kia Kokalitcheva.

The bottom line: This meta-gold rush does feel a bit like a gold rush of its own.

  • The downside for these businesses is far smaller than the downside for individuals buying short-dated GameStop call options (or any kind of crypto over the past 24 hours), but at some point the feverish tales of overnight riches will peter out, and the opportunities to make money from all that storytelling will disappear.
2. Coinbase grows up
Data: FactSet; Chart: Axios Visuals

The transition from fast-growing crypto service provider to mature multi-billion-dollar public company is not an easy one.

Why it matters: Coinbase is the first big company to make that transition, and has already changed dramatically as a result.

Driving the news: Coinbase this week announced big new changes to the way it pays employees, including higher salaries all round and an ironclad "no negotiation" policy when hiring.

  • Equity grants will also vest over one year, rather than four.

Context: Coinbase CEO Brian Armstrong lost about 60 of his employees last October when they took an exit package rather than sign on to a new policy barring political discussion at work. In doing so, he staked out a clear position on one side of Silicon Valley's culture war.

  • That's created some skepticism around the new policy, which chief people officer L.J. Brock claims was designed, at least in part, to ensure than women and underrepresented minorities are not left behind.

The big picture: Many Coinbase employees became dynastically wealthy when the company went public; many others have similarly achieved massive wealth during the current crypto boom. But the days of joining Coinbase on a relatively modest salary, in the hope of a massive future windfall, are clearly over — especially with Coinbase stock falling rather than rising.

  • Coinbase therefore needs to start attracting a very different kind of employee — people who want a good, steady salary.

My thought bubble: Fairness might not be the motivation here, and it might not ever arrive, given the well-documented company culture and what Brock characterizes as "our rigorous performance management process."

  • That said, fairness (or slightly more fairness) is likely to be a side-effect — assuming that Coinbase sticks to its policy and doesn't allow rivals like BitGo to troll them into reversing it.

What to watch: Coinbase reports its first-ever earnings as a public company after the close today.

3. The wild ride out of the pandemic
Data: U.S Bureau of Labor Statistics; Chart: Will Chase/Axios

Inflation is messy and complicated. The headline figure is an attempt to aggregate a huge range of individual data points, many of which have been oscillating wildly over the past year.

Why it matters: America's exit from the pandemic economy is going to be messy, characterized by all manner of shortages and awkward transitions. That makes it hard to read too much into a single number like yesterday's inflation report.

  • Airfares, for instance, rose more than 10% in April alone, and are up 16% from last May — but are still down 17% from where they were pre-pandemic.
  • The price of car and truck rentals has had a particularly striking trajectory, falling by 23% between January and May of 2020, then rising by 87% between May 2020 and April 2021 — for an overall rise of 44%.

What we're reading: Matt Klein talking the inflation hawks down from the ledge in Barron's, and also Robin Sloan's lovely short essay on inflation:

In late 2019, the real economy could, in a way unimaginable in the 1970s, spin up additional production of nearly any good very quickly. This was especially true of electronics, which constitute so much of the world’s consumption these days. You want twenty million flat-screen TVs? They’re already on a boat!
But it’s not 2019; we live in a different world now, and the pandemic has disrupted those “perfect” supply chains.

The bottom line: There's no indication that price volatility is over. Many of the biggest price moves have taken place in the most recent months.

4. States' fiscal windfall

Illustration: Annelise Capossela/Axios

Remember the massive fiscal crisis that was about to befall the states, unable to print their way out of the recession? Well, it's over before it even really began.

Driving the news: California's catastrophic $54 billion anticipated budget deficit has become a $75 billion budget surplus over this fiscal year and next.

  • In New York, the 2021-22 budget is $212 billion. That's a massive 10% increase over the previous year.

The states have been helped by the aid earmarked for them in the most recent stimulus bill, as well as by an unanticipated spike in income tax revenues.

  • California, in particular, has seen incomes soar as tech companies go public and give their investors and employees one-off windfalls.
  • New York is being boosted by an increase in income taxes on the highest earners, with about 5,000 people earning more than $25 million now facing a state income tax of 10.9%.
5. ExxonMobil is more ethical than Google
Data: Axios Harris Poll 100; Chart: Andrew Witherspoon/Axios

Every year, Axios and Harris Poll gauge the reputation of the most visible brands in America — part of which is a survey of how ethical companies are perceived to be.

  • Pfizer, unsurprisingly, has led the gainers over the course of the pandemic, seeing its ethics score rise from 58.9 in 2019 to 77.4 in 2021.
  • More surprising gainers include ExxonMobil, up eight points over two years. Wells Fargo has gained a stunning 23 points since 2017.

The big losers tend to be tech companies.

  • Even though (or perhaps because) Americans were hyper-connected to their devices throughout the pandemic, their relationship with many of the world's biggest tech firms has continued on a downward trend, suggesting that people see their products as necessary evils.
6. The ransomware pandemic

Illustration: Aïda Amer/Axios

"We are on the cusp of a global pandemic," Christopher Krebs, the first director of the Cybersecurity and Infrastructure Security Agency, told Congress last week. The virus causing the pandemic isn't biological, however. It's software.

Why it matters: Crippling a major U.S. oil pipeline this weekend initially looked like an act of war — but it's now looking like an increasingly normal crime, bought off-the-shelf from a "ransomware as a service" provider known as DarkSide.

The big picture: No company is safe from ransomware, and often the lines between criminals and state actors can be fuzzy. Preventing even bigger future attacks will require a so-far elusive degree of coordination between the public and private sectors in dozens, if not hundreds, of countries.

  • Threat level: Very high. "Cybersecurity will be the issue of this decade in terms of how much worse it is going to get," IBM CEO Arvind Krishna told reporters Monday.
  • Currently, per Forrester analyst Allie Mellen, companies' main strategy is to pay up if hit — and to try to be slightly less vulnerable to attack than their competitors. "What do security pros do right now to lower their risk in the face of future ransomware attacks? Outrun the guy next to you,” Mellen says.

Between the lines: If anything, Colonial Pipeline was lucky that it is so important to the functioning of the American economy. Its systemic status helped to mobilize the full resources of the U.S. government, and even elicited an apology, of sorts, from DarkSide.

  • What they're saying: "There is no silver bullet for solving this challenge," concludes a major report on combating ransomware from the Institute for Security + Technology. "No single entity alone has the requisite resources, skills, capabilities, or authorities to significantly constrain this global criminal enterprise."

The bottom line: The Colonial Pipeline attack was so big that it couldn't help but make headlines. But most attacks are quietly paid off with no fanfare and no publicity, making it extremely difficult to gauge the true scale of the problem.

7. A banner quarter for Softbank
Data: FactSet; Chart: Andrew Witherspoon/Axios

Softbank just set a new record for the largest profit ever from a Japanese company, with earnings turbocharged by the Coupang IPO, among others.

  • More outsized profits could be yet to come, from portfolio companies like ByteDance and Didi.
8. Coming up: Measuring the housing market

Illustration: Aïda Amer/Axios

Three indicators of the housing market will be released next week, writes Axios' Hope King, starting with the National Association of Homebuilders' monthly index on Monday. Building permits and housing starts figures from April arrive on Tuesday.

Why it matters: Next week's numbers are expected to show that homebuilder confidence and buyer demand remain strong even in the face of high lumber prices and supply constraints.

  • After gaining one point in April to reach 83, the homebuilder index is expected to drop by 1.5 to 81.5 this month, according to FactSet.
  • Housing starts is expected to dip as well — from a high of 1.74 million in March to 1.69 million.
9. Building of the week: Sony Center, Berlin

Photo: Sigrid Estrada/Liaison

Sony Center, a dizzying 2.3 million-square-foot complex of eight separate buildings held together by a 56,000-square-foot soft roof, was always envisaged as the defining feature of the new, post-unification Berlin.

  • Built between 1993 and 2000, the center dominates Potsdamer Platz, an area that for decades was the part of the unique urban wasteland on either side of the Berlin Wall.
  • After the Wall fell, German starchitect Helmut Jahn was tapped to transform the intersection into a global destination.

Jahn died this week in a bicycle accident, aged 81.

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