Recently, we were blown away to discover that a 14-year-old French killer whale named Wikie has learned rudimentary human speech. Nothing, not even Elon Musk’s flamethrower side hustle, can top that. Still, we’re happy to present our take on the week’s financial innovation and economic news, which involves all sorts of whales doing big deals that have created plenty of heat:
- Health care and America’s economic future
- The big Ethereum story cooking in northern Nevada
- Come back to Brooklyn, Dr. Yellen; Big deals abound
- Super Bowl and insurtech predictions
- Direct index investing’s challenge to standard ETFs
- Company of Note: Lucena Research
Bezos, Buffett and Dimon take on health care’s brutal math.
On Tuesday, when Warren Buffet reiterated that health care costs are a hungry tapeworm eating away at the US economy, we were reminded that he’s the world’s best business communicator. Who better than Buffett to liken health care costs to a leech that grows slowly within before its effects start to harm its host?
We take Buffett and partners Jeff Bezos and Jamie Dimon at face value when they assert that helping their employees better deal with the sickening rise of health costs is a motivation for their unnamed, non-for-profit newco. But it’s not the primary one. Instead, we surmise that they, along with newco’s leadership — Marvelle Sullivan Berchtold, Todd Combs and Beth Galetti — have done the brutal math. They know that their businesses can thrive in an environment where health care consumes 18% of the economy (See JP Morgan’s and Amazon’s stellar Q4 results). But what’s likely to nauseate them is the crowding out effect coming if health expenditures rise at 5.8% per year through 2025 as predicted by CMS. If that comes to pass, even the mighty Amazon — which is guided by Bezos’s oft-repeated dictum, “Your margin is my opportunity” — could be under threat, along with the businesses of his peers. Margins won’t matter if people are forced to choose health care over Alexa devices, a mortgage financed by Chase or an engagement ring from Borsheims. So while several Wall Street analysts and brilliant people have reflexively dissed this initiative and its entry point in attacking the health care cost crisis, we’d suggest that they, along with a myriad of start-ups, get on board. This isn’t about three iconic leaders over their skis. It’s about not waiting around until the government fixes (or botches) things. It’s about killing a ruthless parasite before it sucks more vital nutrients from the American economy.
For an analysis of newco’s possible technology strategy, see Ben Thompson’s take below.
There’s something happening in Reno.
The Tahoe-Reno Industrial Park (TRI) is a quick flight from Silicon Valley. It and its surrounding area boast tenants including Tesla’s Gigafactory-1 (3,000 acres), Switch (2,000 acres), Apple (1,700 acres) and Google (1,210 acres). But these companies are tadpoles in comparison to Blockchains, LLC, a Los Angeles company that lists ten employees on LinkedIn. That’s because Blockchains, LLC recently purchased over 60,000 acres, or over 2.6 billion square feet of space, at TRI. The price paid looks to be around $175 million, but our attempts to speak with the company to obtain more details were unsuccessful. News reports, though, including this one from Blockchains, LLC-owned ETHNews, indicate that two brothers associated with Berns Weiss LLP, a class-action law firm that pursues financial services firms (and has a virtual currency and blockchain technology practice), are behind Blockchains, LLC. The scant information released indicates that Blockchains, LLC will boast a massive corporate campus and likely create distributed apps on the Ethereum blockchain. Apart from that, there’s little else other than clues that suggest Ethereum’s anticipated shift to a Proof-of-Stake algorithm and use cases that support the rights of consumers to have more control over their personal information figure into the company’s plans. Still, it’s not obvious to us why you’d need a plot of land that’s over eight percent the size of Rhode Island to work on these goals. What does seems apparent is that there’s something big going on in northern Nevada, but to borrow a lyric from Buffalo Springfield, what it is ain’t exactly clear.
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Janet Yellen: Come home to Brooklyn.
This week marked Dr. Janet Yellen’s last as Fed chair, and she was bid farewell by an upbeat jobs report on Friday. Still, we’d love to welcome her back to her home borough of Brooklyn to talk about long-term trends. Because as the podcast below discusses, Yellen remains mystified by the absence of inflation in our growing economy. We’d ask her to meet us at the Carroll Street subway stop and escort her down Smith Street, through affluent South Brooklyn. As she walked, she’d observe the slew of boarded-up storefronts that used to be occupied by healthy retail businesses. But these blocks also are punctuated by glitzy coffee shops serving absurdly priced lattes to gig economy workers who either voluntarily or involuntarily left their W-2 jobs and now comprise 20 percent of the US workforce. We’d then invite her to our co-working office and introduce her to the underemployed, remotely employed, and intentional and accidental entrepreneurs wired on free coffee and beer. She’d find several people earning a solid living or sitting on valuable assets. But in most cases, she’d be hard-pressed to meet folks who have the leverage over companies to demand raises or fee hikes or dictate terms of any kind. Indeed, today’s Brooklyn is much different than the one known by the one-time kid from Bay Ridge.
A whale of a week for deals and capital raisings.
This week, Blackstone made waves with its purchase of a 55% stake in Thomson Reuters’ financial and risk business for $17 billion. Another giant, Alibaba, announced that it would buy 33 percent of its Ant Financial affiliate, but some are skeptical that this deal implies Ant is set to go public. Meanwhile, eBay announced that it’s dumping PayPal as its primary processing partner after 15 years in favor of Netherlands-based Ayden. On the financing side, London fintech standout Duco bagged $28 million in Series C-food to propel its cloud-based data services offering. Also, investor Ashton Kutcher, who does some acting on the side, backed Berlin insurtech Wefox this week. Finally, Andrew Ng has made his new fund official, announcing $175 million in commitments for a “Betaworks-style” AI fund.
Super Bowl and insurtech predictions.
On Wednesday, Analytic Investors, the $15-billion quantitative management arm of Wells Fargo, once again made its annual Super Bowl prediction. Despite the dominating performance turned in by the Philadelphia Eagles in the NFC Championship game, AI says that according to its “NFL Alpha” model, the Patriots will cover the 4.5-point spread. But for those more interested in insurtech prognostications than the game’s outcome, we’d suggest you pick up a recent book on insurance innovation by Andrea Silvello and our friend Matteo Carbone. See below for a recent interview in which Carbone, in essence, predicts that IoT applications in insurance will also cover the spread.
Is direct index investing a threat to ETFs?
Last Sunday, The Wall Street Journal’s Sarah Krouse reported that Fidelity will begin to charge new 401(k) corporate customers a recordkeeping fee of five basis points on assets that are put into Vanguard funds. This decision came in response to ongoing dialogue between the two firms, in which Fidelity tried (unsuccessfully) to persuade Vanguard to pay servicing costs. In reading this story, we wondered if anyone or anything is capable of slowing down Vanguard. That’s why we’re watching direct index investing initiatives, such as the one announced by Orion Advisor Services this week. The new feature seeks to make it easier and cheaper for advisors to create customized, separately managed portfolios for clients in lieu of standard ETFs. Boosters of this trend also include Parametric Portfolio Associates, Smartleaf, RobustWealth and Wealthfront.
COMPANY OF NOTE: Lucena Quantitative Analytics.
Founded by renowned machine learning expert Tucker Balch and technology entrepreneur Erez Katz, Lucena is a four-year-old Atlanta-based start-up that seeks to be a bridge between traditional and alternative data providers and investment professionals who are eager to take advantage of Big Data analytics. Through its platform or in partnership with NASDAQ’s Analytics Hub, Lucena provides data as derived signals. RIAs, family offices and fund managers purchase Lucena’s research and/or make use of its platform for building and backtesting their ideas, even if they can’t write code themselves. In addition, the company plans to broaden the reach of its technology by soon announcing a partnership that will extend its core technology into the next generation of ETFs and indices, according to CEO Katz, who adds that the company’s machine learning technology “can do much of the heavy lifting” for its partners.
QUOTE OF THE WEEK
“Only lazy people are busy.”
~ C.S. Lewis