Uber Changes and Index Additions
Programming note: Money Stuff will be off tomorrow, but back on Friday.
I guess the lesson of Travis Kalanick's resignation as chief executive officer of Uber Technologies Inc. is that you can be the visionary founder of a massive company, stay private to avoid the pressures of the public market, keep control of a majority of the voting power of the shares, and still be forced out in a boardroom coup led by activist shareholders:
Earlier on Tuesday, five of Uber’s major investors demanded that the chief executive resign immediately. The investors included one of Uber’s biggest shareholders, the venture capital firm Benchmark, which has one of its partners, Bill Gurley, on Uber’s board. The investors made their demand for Mr. Kalanick to step down in a letter delivered to the chief executive while he was in Chicago, said the people with knowledge of the situation.
In the letter, titled “Moving Uber Forward” and obtained by The New York Times, the investors wrote to Mr. Kalanick that he must immediately leave and that the company needed a change in leadership. Mr. Kalanick, 40, consulted with at least one Uber board member, and after long discussions with some of the investors, he agreed to step down. He will remain on Uber’s board of directors.
It is not easy to be pushed out of running the private company that you founded and still control: In Kalanick's case, it required months of terrible publicity, an investigation into workplace culture led by outside lawyers, his own confession that he "must fundamentally change as a leader and grow up," and a self-requested leave of absence to deal with tragedy in his personal life that left Uber without a day-to-day CEO. Also Uber has never come within a thousand miles of being profitable, which probably matters a bit? I suspect that if it was making billions of dollars a year, rather than losing billions of dollars a year, then the investors might have been a bit more tolerant of bad publicity and sexual harassment and discrimination and privacy violations and theft of trade secrets and obstructing government authorities and I am sure I am forgetting some things.
What if Kalanick had said no? "Uber’s board said in a statement that Mr. Kalanick had 'always put Uber first'"; Kalanick said he resigned because "I love Uber more than anything in the world" and wanted to spare it from a fight. What if he had been like "nah, fight me for it"? In some strict sense there is not much that the investors could have done: He has the votes, and they don't, and he could have just toughed it out and sat through some awkward board meetings for the next few years. But in another sense, Uber keeps raising billions of dollars from investors to pay for its losses as it grows, so it can't easily afford to alienate all the big investors it already has. The time when shareholders have clout is when you need their money. Again, if Uber was making billions of dollars a year, even if the investors weren't more tolerant of all the bad stuff, Kalanick would have been in a much better position to ignore them.
Anyway, there will be "a board-led search committee for a new chief executive," and that will be a fun job to parachute into! Take over from a visionary founder whose play for world domination is only half finished (and who is still a majority owner by votes), fix a broken workplace culture, win an existential race (and legal battle) to develop autonomous vehicles, and find a way to turn a profit in a business that has lost billions of dollars a year. I guess Marissa Mayer is available now?
Meanwhile, you'll be able to tip Uber drivers. Why? Everyone knows that tipping is terrible, and on Uber it is terrible both for the usual socioeconomic-horror reasons and also because, you know, you have to pull out your phone again after you get out of the Uber. Everyone also worries that Uber's drivers are underpaid and ill-treated, sure. But there is actually a very simple solution to this problem: Raise fares by 20 percent, and give the money to the drivers. (You can call it a "service charge" if you insist.) That way (1) the drivers would have the money, (2) the passengers would feel better about themselves without the hassle of tipping, and (3) Uber might actually get some good press for once? I mean I get that an across-the-board 20 percent price increase would probably annoy some people. But adding tipping is an across-the-board 20 percent price increase, only in a much more annoying way.
Congratulations to China's $6.9 trillion stock market, which is now officially a stock market I guess:
Chinese stocks were little moved by their addition to MSCI Inc.’s benchmark indexes, as investors weighed the symbolic importance of inclusion against the limited impact on short-term inflows.
While MSCI’s announcement was a landmark step in China’s integration with the global financial system, it will initially have a small effect on the amount of foreign money entering the nation’s $6.9 trillion stock market. Domestic shares will comprise just 0.7 percent of MSCI’s global emerging-markets gauge as inclusion begins in two steps: the first in May 2018 and the second in August of next year.
"MSCI estimates some $17 billion will flow into Chinese markets—both from passive funds that automatically track its indexes and active fund managers—when the country’s stocks are included a year from now," giving indexers something like a quarter of a percentage point of China's stock market, which is the second-biggest in the world behind America's. In some ways it's the weirdest possible result. If the emerging-markets index excludes China, then that is just definitional: China is not an emerging market, but neither is the U.S., and your investing strategy can involve allocating to China and the U.S. and emerging markets, and measuring your performance separately against the Shanghai Composite and the S&P 500 and the emerging-market index, or whatever.
If the emerging-markets index is dominated by China, then you can compare your performance to that of the emerging markets as a whole, including China, while understanding that you will probably not be able to match the index's China exposure because of access difficulties. "The emerging-markets index was up 15 percent, but I was up only 12 percent because it's hard to invest in China": a perfectly sensible description of reality. Just because an index can describe "the market" doesn't mean that you can invest in it seamlessly.
But if the emerging-markets index is 0.7 percent China, then ... what ... is it ... an index ... of? It's an index of, like, "emerging markets weighted by how much big money managers want to invest in them." That weighting feels a bit like cheating, an index based on investor choice and convenience rather than market definition.
Meanwhile, MSCI will sort of function like an activist investor, pushing China to liberalize its stock market if it wants a higher weighting in the MSCI indexes. John Authers notes that MSCI's "leverage remains almost total" to drive change in China:
There is something ungainly in the way such power has been outsourced to MSCI, a relatively small for-profit organisation based in New York. Such a momentous matter as the terms of trade in which capital flows between China and the rest of the world might seem more naturally to belong to democratic or governmental institutions. Either that, or this should be an issue for the market to decide, without intervention by governments, or heavy guidance from MSCI.
Elsewhere, will Elizabeth Warren ban index funds?
A small set of institutional investors—BlackRock, Fidelity, Vanguard—holds stock in a vast percentage of public companies, so even sectors that look somewhat competitive are less so than they appear. CVS and Walgreens, for instance, have a strikingly similar set of major shareholders. The same is true for Apple and Microsoft.
Furman argues that such business concentration is a leading cause of inequality and wage stagnation. Warren has come to believe in this same idea.
That's from Franklin Foer's story about the decline of the Democrats and the rise of populism; on Twitter, Matt Yglesias called the bit about institutional investors "the sleeper issue of our time." We talk about it a lot around here, and yet it does still feel pretty sleepy. When the government bans index funds, you can probably say you heard about it here first, but I would not hold my breath for that. Banning index funds is like getting rid of the mortgage interest deduction, in that it's one of those progressive-populist ideas that would probably be incredibly unpopular.
Here is sort of a strange story about a money manager who thinks that robots will eventually dominate trading of straightforward liquid assets -- "Algorithms are already reading, processing, and trading the news even before the photons have hit your retina," he says -- and that the right approach for human money managers is to put their clients' money into weird illiquid stuff where the computers can't compete:
To survive, Ganti says, money managers should look beyond the multitrillion-dollar stock exchanges, bond-trading platforms, and big deals backed by private equity and venture capital. To a greater or lesser extent, computers can see all those markets, assess how they’re performing, and start detecting patterns that could reveal profitable trading strategies.
Ganti’s answer is to look for what are known in the industry as esoteric assets—the most obscure stuff he can find. He’s arranged alternative funding for charter schools in the U.S. and paid cash upfront to collect judgments due at Brazil’s supreme court. His team also has purchased nonperforming loans at a discount in Portugal and partnered with local experts in Mexico to fund government infrastructure programs. It’s even provided interim financing for refugee camps in Italy. The point about these investments, he says, is that they require “high human capital” to manage, even if they’re plentiful. “It’s like dark matter,” Ganti says. “They dwarf the visible stuff lit up by markets.”
What is the argument here? Is it:
- Returns in public markets won't be that good, for whatever reason. (Maybe because efficient robot-and-index investing have raised valuations and lowered future expected returns?)
- Returns in weird markets will be better, for whatever reason. (Because robots haven't gotten involved yet, or because you're getting paid more for taking liquidity risk?)
- Therefore human money managers should put their clients' money in weird stuff, because the weird stuff will be better for the clients.
Or is it instead:
- Computers are better at public-market investing than humans are.
- Humans are better at weird-market investing than computers are.
- Therefore human money managers should put their clients' money in weird stuff, because then the clients won't be able to compare their performance with the computers'. "Oh sure I underperformed the S&P 500, but you can't compare me to the S&P 500," the manager can say. "I was investing in refugee camps, where of course the risk/return profile is entirely different."
If the dark-matter stuff will have better performance than the public stuff, then you should invest your clients' money in it regardless of what the computers are up to. But if it will have worse performance than the public stuff, then you should tell your clients to hire a computer to invest their money in public markets, and then close up shop. You can't start your thinking about what human money managers should do from the premise that they should keep their jobs. Maybe what human money managers should do is flee into assets where computers can't follow them, but maybe what they should do is quit. It depends on whether the weird assets are a good idea.
Elsewhere: "Rise of Robots: Inside the World's Fastest Growing Hedge Funds."
CDS are good.
Credit default swaps are, among other things, a way for banks to hedge their exposure to the credit risk of their borrowers. That is good: We want banks to be safe, and hedging is a good way to reduce risk. But it is also bad: We want banks to be banks, to make carefully considered credit decisions, and if they can quickly pass on their credit risk to public-market investors who are not in a position to monitor the borrowers, then they may make worse lending decisions and increase the overall risk in the system. (In Nicholas Dunbar's telling, that is the central story of the financial crisis.) Here is a Deutsche Bundesbank discussion paper that looks at the "Small Bang," a 2009 revision of contract terms for European CDS that improved liquidity in that market, to try to figure out which effect is more important:
Because our estimates imply that following the Small Bang more hedging through CDS and subsequent safer lending took place, and that only banks properly hedged before they may take more risk, we provide first-hand evidence on the benefits of financial innovation for risk mitigation. Hence policies that foster financial innovation and spur the usage of credit default swaps are not necessarily associated with more moral hazardous bank risk-taking, but rather with more risk mitigation.
Blockchain blockchain blockchain.
Here is a story about how it is profitable to sell picks and shovels during a gold rush:
Nvidia Corp. and Advanced Micro Devices Inc. have all but erased losses that began June 8, with each rallying at least 5 percent in the past two days, even as broader measures of tech shares remain more than 2 percent from recent highs.
Thank cryptocurrency miners for the latest round of bullishness, says Pacific Crest Securities analyst Michael McConnell. They’re buying up Nvidia and AMD graphics cards in an attempt to unlock the code to digital coins like ether and bitcoin.
It is too late for me to get into graphics-card manufacturing, but wouldn't it be fun to move out to the frontier near the ether mines and open up a saloon? I picture the ether miners as a hard-livin', hard-drinkin', hard-cussin' crowd, and I bet they could use a saloon. Ugh wait never mind someone has already had that idea.
People are worried about stock buybacks.
Cardiff Garcia argues that "short-termism is as much consequence as cause of weak growth":
If you want companies to return less money to shareholders, then you should be able to defend an alternative choice for what they should do instead with their cash.
But in times of slow economic growth, all options are problematic.
People are worried about unicorns.
Theranos Inc., the Blood Unicorn, is still doing stuff:
Theranos has told its investors it has reached an agreement in principle to settle a lawsuit by Walgreens Boots Alliance Inc. that had alleged the embattled laboratory startup breached the companies’ contract, people familiar with the matter said. Walgreens’ stores once hosted about 40 Theranos blood-testing centers, providing a main conduit to consumers.
The settlement is for "less than $30 million," considerably less than the $140 million that Walgreens had put into the partnership, but about half of the $54 million in cash that Theranos now has left. It "has been spending about $10 million a month since, much of it on legal costs." And it "still faces a civil investigation by the Securities and Exchange Commission and a criminal investigation by the Justice Department." Do you think ... I hardly dare to type it ... do you think that we'll soon see Theranos raising money? What if it does a new funding round? "We are raising money from investors to pay lawyers to fight charges that we defrauded the investors we previously raised money from," the offering memo could say. I expect it would be a down round.
How did Argentina pull off a 100-year bond sale? Saudi King’s Surprise Shakeup Clears Son’s Path to the Throne. German lender cancels interest payments on bonds. Trump Plan a Potential Bonanza for Trust Banks. KKR muscles into US leveraged loan business. Low Interest Rates and Bank Profits. A $112 Billion Fund Wants to Stop CEOs Making Too Much Money. Big Prize in Amazon-Whole Foods Deal: Data. Where manufacturing jobs are plentiful, Trump’s supporters want better. America’s Massive Retail Workforce Is Tired of Being Ignored. Trump seeks sharp cuts to housing aid, except for program that brings him millions. "Claiming that prospective hires are too slow to pick up the phone or respond to emails, employers are trying out apps that allow them to screen candidates and conduct early-stage interviews with texts." Narrative flowcharts for Choose Your Own Adventure books. Dad-bod man-bun Ken doll. Lizard penis being passed off as 'lucky' plant in wide-ranging scam.
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