Higher could mean farther to fall
It’s rates week. The Fed will join the central banks of England, Norway, Sweden and Switzerland in determining whether to raise interest rates further in an effort to blunt rising inflation. More and more economists and investors are worried that the global economy could be hobbled by the continuous tightening of monetary policy.
All eyes will be on the Fed this Wednesday. The consensus estimate is for a 75-basis-point increase, bringing the benchmark interest rate to between 3 and 3.25 percent — up from near zero at the start of the year. Higher interest rates generally slow lending and economic activity, and with it the forces that push prices higher. So far, it’s not going to plan. Last week, the government reported that consumer prices rose 8.3 percent in the past year, through the end of August.
The Fed’s rate increases are having the most direct impact on housing. Mortgage rates climbed above 6 percent last week for the first time since 2008. Rising borrowing costs have slowed home buying significantly, though the effect on home values has been more muted. Prices appear to still be rising in most parts of the country, though much slower than they once were.
Stock investors are feeling the pressure, too. The S&P 500 fell 5 percent last week, one of the market’s worst weeks of the year. Pessimistic growth forecasts are also spooking investors. Shipping giant FedEx on Friday warned of a slowdown in its business, particularly in Asia and Europe. Executives at G.E. and JPMorgan Chase have also delivered gloomy outlooks.
Some warn that raising rates could do more harm than good. The billionaire real estate developer Barry Sternlicht said last week that unless the Fed paused rate increases, the economy could fall into a significant recession. “The economy is braking hard,” Sternlicht told CNBC. In a note to clients on Friday, Bank of America economists predicted that Fed policymakers would be likely to revise their economic projections this week to include less growth and higher unemployment. Corporations, too, are in trouble. “An earnings shock is likely coming,” Candace Browning, Bank of America’s head of global research, wrote in a separate note.
HERE’S WHAT’S HAPPENING
“The pandemic is over,” President Biden says. The off-the-cuff declaration, made in an interview with “60 Minutes,” was meant to reflect the progress the U.S. has made in combating the coronavirus. But experts have warned that hundreds of Americans are still dying from Covid every day, and that much work remains.
BlackRock’s C.E.O. offers to help Ukraine’s economy. Larry Fink met via videoconference with President Volodymyr Zelensky to discuss how his money management giant could help create an economic reconstruction fund for Ukraine. An important task for Ukraine “is to achieve victories in the economy as well, and to be an attractive country for investors,” Zelensky said.
Donald Trump’s former accountants turn over evidence to Congress. Mazars USA, which cut ties with the former president and his family business this year, has begun handing over Trump’s records to House investigators. Lawmakers have been examining potential conflicts of interest, inadequate disclosures and violations of the emoluments clause of the Constitution.
Hurricane Fiona batters Puerto Rico. The U.S. territory lost power yesterday, leaving 1.5 million customers without electricity in what its governor called “catastrophic” damage. The storm has since hit the Dominican Republic and is expected to strengthen to a Category 3 as it speeds through the Caribbean.
Britain says farewell to Queen Elizabeth II. The state funeral for the late monarch began this morning, with President Biden and other world leaders in attendance. Businesses in Britain were largely closed, a broad economic pause that economists say could help to tip the nation into recession, at least technically.
“We’re kind of a weird company to buy”
We’re a competitive bunch here, but today we doff our hats to our friends at Axios. After selling their company to Cox Enterprises for $525 million, the media publisher’s co-founders — Jim VandeHei, Mike Allen and Roy Schwartz — have a new book out tomorrow, “Smart Brevity,” that offers smart and, well, Axios-y ways to communicate in a short-attention-span world. (Staff members at JPMorgan Chase once asked Axios to trim Jamie Dimon’s 32,000-word annual letter. They cut it to 1,580 words.)
VandeHei, a former reporter at The Washington Post and a co-founder of Politico, has plenty of thoughts on the media environment as well. Here’s what he told us.
How Axios got sold to Cox: Though news reports correctly noted that Axios had held deal talks with both the German media conglomerate Axel Springer and The Athletic, VandeHei said that neither was the right match. “We’re kind of a weird company to buy,” he deadpanned.
Of The Athletic, he said, “They were fun discussions, but we were not an obvious fit.” The New York Times Company ended up buying The Athletic for $550 million.
Of Axel Springer, VandeHei said it was a difference in world views. Springer favored having “a constellation of brands,” while Axios wanted to be the star of the show. Moreover, VandeHei and his team wanted to have control of their own destiny, something they worried wasn’t possible there. Springer eventually bought Politico for over $1 billion.
Enter Cox, the cable and media company that first invested in Axios last year. Cox encouraged Axios to grow, and eventually offered to buy the company outright to help it expand, especially in local news. VandeHei’s reporting on Cox persuaded him to trust his suitor. “We never took the deal out for a bidding war,” he said. “We told them exactly what it would take, and they delivered it almost verbatim.”
Why the future of (some) media companies is bright: VandeHei said Axios would keep expanding all of its offerings, including subscriptions-based products for professionals, a local news offering that he hopes will eventually cover over 100 U.S. cities, and Axios HQ, the software affiliate that helps Axios-ify corporate communications.
But while many news publishers are struggling, VandeHei notes that older (including The Times and The Wall Street Journal) and newer media companies (like The Information, Punchbowl and the upcoming Semafor) are poised to do well by marrying good journalism with things readers want. “If you can build a relationship with an audience and be sane with business economics, you can succeed,” he said.
New cops on the crypto beat
The Justice Department just turned 150 federal prosecutors nationwide into crypto cops. This network — announced Friday along with a report mandated by an executive order from President Biden in March — includes fraud, tax, environment and other specialists, along with the obvious tech types, said the director of crypto enforcement, Eun Young Choi. “One thing that really stood out to us about digital asset crime is that, unlike other cases, these are really multidisciplinary and international,” she told DealBook.
The Darknet and other gray areas are in focus. Illegal markets for drugs, child sexual abuse material, firearms, fake and stolen information, and hacking are “a significant focus” of the department’s efforts. Crypto use has grown to billions annually on the Darknet, Choi says. And new unregulated markets, like decentralized finance, or DeFi, platforms, have popped up in more accessible areas of the internet that also pose investor risks and consumer protection issues.
“DeFi is an area of particular concern,” Choi said. Potentially complicating the department’s efforts is the fact that DeFi is still loosely defined, particularly as it pertains to what makes these platforms or products decentralized. DeFi champions often say that code, and not humans, are in control of these platforms, and therefore developers should be mostly out of police reach. Choi disagrees. “Code is like any other tool. There is a person behind it.”
The issue has sparked a feud among crypto insiders. “Decentralization is a spectrum, and where the line is drawn between centralized and decentralized is a policy choice that Congress will eventually have to make,” said Miller Whitehouse-Levine of the DeFi Education Fund lobbying association.
The department’s approach will be global in scope. “These are fast-moving, complicated, challenging situations” and they cross continents, Choi said. “It’s a lot of coordinating and early info-sharing.”
Crypto experts in and out of government gave the department mixed reviews on this front, with some lauding its engagement with other agencies and others telling DealBook that the report fails to address gaps in international coordination.
“The way you can go viral is to be really vulnerable. Old school LinkedIn was definitely not like this.”
— Joel Lalgee, a recruiter who has racked up followers and engagement on the social network by delving into un-LinkedIn-like personal sharing.
VW puts a price tag on Porsche
Volkswagen announced last night that it planned to sell shares in the luxury sports-car brand Porsche at a valuation of up to $75 billion. The news marks one of the last steps in setting up one of the biggest I.P.O.s in years, at a time when the market for taking companies public is particularly challenged.
The pricing details: VW aims to sell preferred shares in Porsche at between 76.50 and 82.50 euros ($76.29 to $82.27). The Porsche and Piech families, VW’s biggest shareholders, have agreed to buy 25 percent of the offering at a 7.5 percent premium to the I.P.O. price, while three sovereign wealth funds and T. Rowe Price, will also buy significant stakes.
Volkswagen expects to use proceeds from the offering for a special dividend and investment in electric-vehicle technology.
Porsche’s offering would break a drought of big-ticket I.P.O.s, as volatile stock markets have cooled interest in new offerings. At its expected valuation, the deal would be Europe’s third-biggest debut, defying negative news — like the war in Ukraine, rising inflation and a spiraling energy crisis — that have weighed on stock markets and Europe’s in particular.
Porsche is expected to begin trading on Sept. 29.
THE SPEED READ
A federal appeals court cleared a Texas law that lets users sue major social media platforms for “viewpoint discrimination” if they remove political content. (NYT)
UBS will hire content police to ensure its Chinese research reports are free from “‘sensitivities.” (FT)
The Fed is reportedly taking a close look at Marcus, Goldman Sachs’s online banking arm aimed at retail consumers. (Bloomberg)
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