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Bloomberg Businessweek USA - May 14, 2018

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○ Is the economy overheating? 38
○ Abu Dhabi looks beyond oil 18
○ Cracking the horse-racing code 60
May 14
Not so much
From gender pay gaps
to international trade gaps.
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China logged stable growth in the first quarter, along with positive
structural changes By Zhou Xiaoyan
value chain and marching toward mediumand high-end production. Hi-tech and
growth gained more momentum, with
new business models are thriving. Output
than overall growth.
The Chinese economy expanded 6.8
year on robust domestic consumption
and a strong service sector, laying a sound
grew 9.8 percent, as online retail sales
surged 35.4 percent and the business volXPHRIWKHFRXULHUVHFWRULQFUHDVHGRYHU
“The growth rate has been within the 6.7- to
rate,” Xing Zhihong, an NBS spokesperson,
Japanese investment bank Nomura noted
that the “bright spot” was retail sales. “This
is a good sign that growth is rebalancLQJIURPLQYHVWPHQWWRFRQVXPSWLRQq
Nomura said in a research note. “Indeed,
underneath the very stable GDP growth
economy industrial sectors and investment, toward new economy sectors like
tech and service, as well as consumption.”
However, uncertainties in the global
economies, are casting a shadow over the
world’s second-largest economy.
Good signs
demonstrated once again that China has
driven expansion to consumption-led
contributed 77.8 percent to economic
growth, 46.5 percentage points higher
than investment.
improved. The service sector is taking
the lead as the country makes headway
in steering its economy toward highTXDOLW\JURZWKDQGDZD\IURPLQHIĶFLHQW
investment, low-end exports and polluting
campaigns has not only boosted online
and-mortar outlets.
NBS data shows.
The industrial sector is also climbing up the
“The Internet Plus strategy has been integrated into all sectors, giving birth to new
tus into the broader economy,” Xing said.
Looking ahead
“Investment in the service and high-end
signaling possible industrial structural
consumption—culture, elderly care,
healthcare and travel—will boom in the
International Economic Exchanges, told
Beijing Review.
that it could damage the Chinese economy in the long run. But NBS spokesperson
Xing said trade tensions between China
stable and resilient Chinese economy.
“China doesn’t seek trade surplus, which
has been narrowing in recent years. Our
goal is more balanced trade, which is good
years, playing a vital role in helping China
Compared with exports and investment,
China’s Economy in Q1 2018
Quarterly GDP Growth
GDP Growth by Industry
6.7 6.7 6.7
6.9 6.9
Primary industry:
animal husbandry and
6.8 6.8 6.8
Secondary industry:
and water
4 4 4 4 4 4 4 4 4
Contribution to Residential Income
GDP by Industry and Spending Growth
Primary industry
Primary Secondary Tertiary
industry industry industry
disposable income spending
Changes of Other Major Macroeconomic Indicators
Consumer price index
Producer price index
Industrial value-added output
Investment in property development
Residential housing sales
Online retail sales
Chinese economy.
growth momentum so that its economy
is resilient enough to make adjustments
based on external changes.
The spokesperson said China’s increasingly domestic consumption-led growth,
expanding innovative edge and ample
Xu, however, warned that China should not
the next three months.
imported production and technological caSDFLWLHV DUH OLNHO\ WR ßRZ EDFN WR WKH 8QLWHG
tax policies.
increase its benchmark interest rates
again in June. Combined with the possible
it could deal a blow to Chinese exports,
industries,” Xu said.
“To cope with these challenges, China
should continue to advance innovationdriven growth and supply-side structural
should be implemented
as soon as possible,
dividends.” Q
ing industry, as international capital and
Scan QR code to visit Beijing Review’s website
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May 14, 2018
⊳ Andrés Manuel López
Obrador, aka AMLO,
at a campaign stop
in Mexico City
The People Call Him AMLO
López Obrador, likely to be Mexico’s next president, is a populist, but no Trump
A World Without Ads
Most of us see sales pitches everywhere. One online community doesn’t
How to Make $1 Billion Betting On Horses
Bill Benter devised a foolproof algorithm for the racetrack
Bloomberg Businessweek
Executive shule at Facebook; Nestlé and Starbucks
Next week in Jerusalem; will Tencent’s profit shrink?
A better fix for the EU’s data-protection crisis
Amazon’s golden opportunity to boost diversity
Abu Dhabi wants to expand beyond crude—way beyond
Corporate bullies could be the next workplace pariahs
Facebook bans terrorist pages, but they keep returning
Space is getting crowded. Transponders can help
How Flipkart flipped—and won $16 billion from Walmart
Yesterday’s shipping container is today’s TerraFarm
Risk parity, the complex new way to diversify
Annuities are pricey, diicult, and underutilized
The bull market shows signs of exhaustion
PayPal, Apple Pay, and other phone buttons slug it out
Indicators flash red, but we’re not overheating (yet)
As Western companies abandon Iran, China steps up
Brazil needs money, but privatization is a tough sell
The Democrats’ un-Tea Party-like bid to win back power
May 14, 2018
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James Comey on Trump vs. his old grocery store boss
Women in Congress could see huge strides in 2018
Now’s the time to plan next year’s Caribbean retreat
Can Dominica become the first climate-resilient nation?
Critic: Baha Mar is open, and business is booming
The One: Shiseido’s sunscreen laughs at water
Game Changer: Bill Drayton’s squad of world fixers
The graphic for “Can Laws Make Us Equal?” (Features, May 7) suggested that Australia doesn’t
mandate paid parental leave. The country’s 2010 Parental Leave Act mandates leave and pay for
the primary caregiver.
Photograph by
Brett Gundlock
for Bloomberg
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○ Nestlé agreed
to spend more
than $7 billion
on rights to
sell Starbucks
products globally.
Bloomberg Businessweek
By Kyle Stock
○ Facebook reorganized
its executive ranks on
May 8, putting its product
chief oicially in charge of
Instagram and WhatsApp,
and announced the creation
of a blockchain unit.
The Swiss conglomerate hopes the
deal will fuel sales, now growing at their
slowest rate in two decades. Starbucks
will use the cash to buy back shares.
○ A fissure opened in the Leilani Estates area of Pahoa, Hawaii, on May 5. The
eruption of the Kilauea volcano has displaced more than a thousand people so far.
○ “Oh, ‘We need a
woman for a board.’
Oh, it is like, ‘We need
a plant on the table.’ ”
May 14, 2018
○ As it courts investors
for a planned IPO, Chinese
smartphone maker
Xiaomi lowered its target
stock market value from
$100 billion to a range of
$70 billion to $80 billion.
Even at the reduced level,
Xiaomi, which doesn’t yet
sell phones in the U.S.,
would have a higher priceto-sales ratio than Apple.
○ Takeda Pharmaceutical
won a long battle to buy
Shire, an expert at making
drugs for rare diseases, for
If shareholders sign off, it
would be the largest foreign
acquisition by a Japanese
Designer and fashion magnate Diane von Furstenberg spoke at Bloomberg’s
Business of Equality Summit on May 8 about the way women are viewed in
corporate settings. “I mean, women are not an accessory,” she added.
○ A shell company
created by Trump lawyer
Michael Cohen received
$4.43 million from Novartis,
AT&T, and other businesses,
as well as from a company
associated with
Viktor Vekselberg,
a Russian oligarch
with connections to Vladimir
Putin. The shell company
was used to pay $130,000
to porn star Stephanie
Cliford, aka Stormy Daniels.
○ President Trump pledged
to withdraw the U.S. from
the multilateral Iran nuclear
deal, despite warnings from
European allies. The U.S.
simultaneously restarted
sanctions that had been
halted by the agreement.
Some will go back into
efect in August and the
rest in November.
○ Malaysia Prime
Minister Najib
Razak’s party lost
its parliamentary
majority after six
decades in power.
○ French oicials warned
that Air France-KLM may
not survive a protracted
wage negotiation with
its pilots. The carrier has
canceled 1 in 5 flights
since walkouts began in
February, and CEO
Jean-Marc Janailla
resigned on May 4.
An alliance led by former premier
Mahathir Mohamad bested the United
Malays National Organisation on
May 9. Najib, who didn’t immediately
comment, had been defiant going
into the election despite having been
caught up in a corruption scandal.
○ Argentina asked the IMF for a $30 billion line of credit in an efort to stop a slide in the country’s currency.
○ Wireless giant Vodafone said it would buy $23 billion in European assets from cable company Liberty Global.
○ Nigeria shut down three cough-syrup factories after a probe found workers selling the medicine to addicts.
○ California regulators approved a measure to mandate solar panels on new homes starting in 2020.
Bloomberg Businessweek
⊲Next Week in Jerusalem
The new U.S. embassy in Jerusalem opens on May 14. In
response to the embassy’s relocation from Tel Aviv, the
Palestinian National Authority has ceased participating in
U.S.-brokered peace talks with Israel. President Trump, who
won’t be in attendance, said he’s “very proud of” the move.
May 14, 2018
⊲ Germany publishes
preliminary first-quarter
GDP figures on May 15. The
data are expected to show
the euro area’s linchpin
economy cooling.
⊲ The U.S. Army Corps
of Engineers pulls out of
Puerto Rico on May 18,
leaving the island’s battered
electric authority to keep
rebuilding on its own.
⊲ U.K. Prime Minister
Theresa May will discuss
her proposed EU
“customs partnership”
after delaying for a week
to rally cabinet support.
⊲ The top economic adviser
to Chinese President
Xi Jinping, Liu He, will visit
the White House to continue
trade negotiations.
⊲ Investors will be watching
Tencent Holdings’ May 16
earnings report for evidence
of continued shrinkage in its
profit margin.
⊲ The Cannes Film Festival
continues through May 19
with a fresh emphasis on
gender equality and a jury
led by actor Cate Blanchett.
The Wrong Way on Data
○ Europe’s new online rules are expensive, burdensome,
and all too likely to impede innovation
The European Union is embarking on an expansive efort to
give people more control over their data online. The 260plus pages of the General Data Protection Regulation are
well-intentioned yet largely wrongheaded as they articulate
dozens of goals in the service of “a strong and more coherent
data protection framework.”
Meeting these ambitions will be the job of companies—
wherever they’re located—that process the data of EU citizens.
Among other things, companies will need to obtain consent,
explain how data will be used, allow people to see what’s
been swooped up, and permit them, at any moment, to withdraw their consent or to demand that their data be deleted.
Given the backlash against data collection—and support for
the GDPR’s stated goals—this approach might seem reasonable. But look more closely, and the drawbacks are glaring.
Most obvious are the costs. By one estimate, multinationals will spend $7.8 billion preparing for the GDPR. Surely
Facebook Inc. and Google can aford such costs, you might
say. Yet this, too, is a problem: The GDPR is likely to advantage
big tech companies at the expense of smaller ones. Few small
businesses will be able to fully comply with these rules, while
many of them will sufer from having less efective advertising.
Europe’s dearth of notable startups will hardly improve.
Worse, the rules could impede innovation. Blockchain
companies could be shut out entirely. Cloud computing may
become much more complicated. Artiicial intelligence could
in many cases be incompatible with the GDPR’s mandates.
While this is more or less by design, there will also be
unintended consequences. Although the GDPR aims to
improve data security, its privacy rules may compromise a crucial tool used by security researchers, thereby increasing spam,
phishing attacks, and malware. Its compliance costs could
inhibit cybersecurity investment. Its emphasis on obtaining
consent for data collection is, in practice, likely to mean endless “click to proceed” boxes that leave customers little more
informed—and signiicantly more irritated—than before.
The EU deserves credit for attempting to resolve a real
problem. European law enshrines a right to privacy. Yet the
digital economy depends on invasive data collection. The
GDPR reveals a worldwide tension: People have come to
expect free online services as well as unencumbered privacy.
Unfortunately, they can’t have both.
No solution can be universal. But in general, the goals
should be transparent pricing and more competition. The
GDPR’s requirement that personal information be “portable”—
that a user can take her data from one service to another that
treats it more responsibly—is on the right track. It would be
even better to encourage companies to explicitly charge for privacy, which would give users a better sense of what their data
are worth and ensure their consent is more informed. For more commentary, go to
New York
June 4-6, 2018
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○ Wherever it puts HQ2, the company
can make workplace history
○ By Emily Chang, Jef Green,
and Janet Paskin
By the end of the year, Inc. will announce the
location of its second headquarters. It’s hard to understate
the local impact of 50,000 new jobs, and Amazon knows it:
It’s staging a months-long reality show of a selection process
to see which city can ofer the best package of inancial incentives, real estate, and livability, alongside other requirements.
The search for a second home gives Amazon something
else: an unprecedented opportunity to deal with a problem
besetting all of big tech—a stunning lack of diversity. And
Amazon is one of the bigger sinners. Men make up 73 percent
of its professional employees and 78 percent of senior executives and managers, according to data the company reports
to the government. Of the 10 people who report directly to
Chief Executive Oicer Jef Bezos, all are white, and only one—
Beth Galetti, the head of human resources—is a woman. The
board of directors is also resisting shareholder pressure to
improve gender balance.
Amazon doesn’t make public the gender breakdown of
workers in technical roles, but anecdotal evidence suggests
they skew just as male as the leadership. At weekly Amazon
Web Services meetings, where some 200 employees come
ready to present their most recent results, it’s rare
to have more than ive women in the room. Over the
years, workers at Seattle headquarters have complained
to the Washington State Department of Labor and Industries
that there aren’t enough men’s bathrooms.
Restroom lines aside, the imbalance isn’t good for any
company. The business case for diversity has been made ad
nauseam, and most companies—Amazon included—at least pay
lip service to the idea that diversity helps the bottom line. But
even the most dedicated companies say that changing workforce demographics will take years, maybe decades.
Amazon, however, can radically change the makeup of its
workforce in a much shorter time. As it prepares to hire thousands of new employees, the company could pledge to ensure
that half of the workers at HQ2 are women, and that people of
color are represented in line with the local population. Amazon
has proven it can dramatically reshape whole, seemingly
disconnected industries. Surely it could hire more women.
“There’s no reason not to. The talent is there, technically
and nontechnically,” says Kristi Coulter, who left the company in February after 12 years in various roles. The trick is
convincing Bezos it matters. “If he cared, he’d have a team of
advisers that looked more like our customer base. If he cared,
he would be doing something really ballsy and bold that you
and I would never dream up in a million years.”
Academic literature has for years documented diversity’s
business beneits. Companies with diverse leadership teams
post better sales and inancial returns. They’re likelier to win
new markets, introduce products, and innovate. The efects
May 14, 2018
are particularly strong when internal diversity includes
people who represent a company’s customers.
The most popular explanation is diversity in itself
improves management. The idea is that men and women, or
people of diferent races, see the world in diferent ways, and
diversity of perspective leads to less groupthink and better
decision-making. Maybe Amazon should think of it in another
way. What if those companies have achieved better results
because their hiring process is better? And what if, by stripping out a bias that favors white men, they’re truly able to
identify the candidates’ talent, skill, and acumen?
It wouldn’t be the irst time that what we thought we knew
about talent turned out to be false. For a century, baseball
scouts identiied prospective major leaguers through careful,
personal observation—a process that turned out to be full of
misconceptions and bias. When Billy Beane of Moneyball fame
found a more reliable way to evaluate players, he turned a
small-market team into one of the best in baseball. He also fundamentally changed the sport’s market for talent.
In the world of classical music, the proportion of women in
professional orchestras jumped to 25 percent from 5 percent in
the 1970s and 1980s, but only after most orchestras instituted a
“gender blind” audition process that shielded musicians from
the jury with a screen. “The best thing that companies can
do is to throw out their intuition that they know whom to
hire and what to look for,” says Catherine Tinsley, the Raini
Family Professor of Management at Georgetown University.
“If you see gender diferences in placement, then you should
irst be asking if there is something about the context or the
environment that is positioning men and women diferently.”
The suggestion that Amazon has a talent problem may
sound ridiculous. It’s one of the world’s most valuable companies and, according to Glassdoor, some 2.5 million people
researched employment at Amazon in the most recent month,
making it one of the site’s most intriguing employers. (Only
1.7 million looked for information about working at Google.) By
most metrics, Amazon ain’t broke, so there’s no reason to ix it.
At the same time, it’s hard to imagine what might have
been—or still could be—if the decision-makers at Amazon
included more women and people of color. It’s a company
deined by its boundless ambition. If diversity in the workforce creates a more powerful, interesting, and innovative
Amazon—well, good luck to the rest of us.
Amazon is sensitive to this. In the pageantry of choosing a
city for HQ2, it has been looking at gender and racial diversity
in the workforce, according to people close to the process. Its
executives have also met with local public school oicials to
gauge interest in possible partnerships in science, technology,
engineering, and mathematics (STEM) ields. They’re thinking
about who’s in their hiring pipeline, now and in the future.
If that’s the case, Amazon should build HQ2 in Chicago. Or
Toronto, or Washington, D.C. We looked at the demographics
of the workforce, and among the 20 metro areas on the
company’s short list, these are the only ones that are above
average on three relevant measures of diversity: percentage of people of color in the workforce, female-to-male ratio
among programmers, and overall female participation in
the workforce. (For those trying to handicap, Toronto,
Bloomberg Businessweek
being outside the U.S., would be widely considered an
anti-Trump choice; Washington would put Bezos near the
Capitol and the newspaper he owns; Chicago lacks the political overtones of the other two.)
Whatever city it chooses, Amazon could consider making changes to its hiring process that would level the playing
ield. It could set goals for diversity across the company and
make its progress public. Smaller tech companies have shown
they can beat the averages when they try. Slack Technologies
Inc., a workplace collaboration company, made hiring women
and people of color an explicit priority three years ago. Today
women make up almost half of its managers and one-third of
its technical employees.
Or Amazon could end its employee referral bonus, a practice that, like alumni preference in college admissions, tends
to undermine diversity. Or it could tweak the bonus criteria,
rewarding employees who successfully bring people of color
and women into the workforce.
As of now, a high-ranking executive says, most of
Amazon’s hiring managers are left alone to meet recruitment goals, which often leaves them leaning heavily on their
personal networks and internal candidates—neither of which
lends itself to increased diversity. “There’s no incentive or
alignment with any sort of diversity initiative,” says the executive, who asked to remain anonymous. “Whatever you can
do to get butts in seats, that’s almost certainly what you’re
going to do without regard to any bigger mission.”
Amazon could add more support for recruiting and better
train recruiters to focus on broader candidate pools, the executive suggests, or allot additional head count to managers who
successfully add people of color and women to their teams.
And about that candidate pool: Amazon’s job applicants
do skew male, more so than rivals Google and Facebook
Inc. Although the company may be the most-searched on
Glassdoor, twice as many men as women are looking for openings there. (The site doesn’t track race.) That’s not surprising—
male STEM graduates outnumber women 3 to 1—but Amazon
makes it worse by loading up its job ads with words that
research suggests appeal to men.
We asked Textio Inc., a company that helps businesses
develop gender-neutral job postings, to analyze Amazon
employment ads. Amazon’s are much more likely than other
tech companies’ to use aggro words and phrases such as “wickedly” or “maniacal.” According to Textio, the data revealed that
about 30 percent of Amazon’s posted job descriptions skew
male in their language, whereas only 1 percent skew female, an
imbalance that doesn’t plague most of its tech industry peers.
There’s no single, simple ix for a hiring process that,
like in the rest of tech, has favored white males for decades.
If it were only about having less gendered job ads, well,
Facebook and Google are doing that, Textio says, and their
workforces aren’t signiicantly more diverse than Amazon’s.
Still, if any company can igure this out, surely it’s Amazon.
There’s at least as much value in hiring women and people of
color as there is in moonshots like reinventing grocery stores,
May 14, 2018
A City for Alexa
Female employees in finalist cities and regions* for Amazon’s new headquarters
○ Share of programmers ○ Share of total workforce
Montgomery County, Md.
Northern Va.
Washington, D.C.
Raleigh, N.C.
Newark, N.J.
New York City
Columbus, Ohio
Los Angeles
delivering packages by drone, perfecting the smart speaker,
and tackling the broken health-care system.
Recruiting is only the irst step. Amazon’s hiring process,
from the language in its job ads to an internal process that
prizes eiciency above all else, relects its broader organizational culture. More than any of the big tech companies, it’s
known to be a relentlessly demanding work environment.
Bezos likes to brag that employees work “long, smart, and
hard.” Data is king. Emotions are unprofessional.
“It’s not for everyone,” says Muge Erdirik Dogan, director
of Amazon Flex, the company’s last-mile delivery service. “It’s
an amazing place. It’s not an easy place.” In 2015, a New York
Times story revealed how bruising Amazon’s culture could be
to women (and many men). Amazon disputes that portrait.
But shortly after, it implemented a long-planned change to
its parental leave policy. It now ofers 20 weeks of paid leave
for birth mothers and six weeks for all new parents regardless of gender. It encourages employees to use the time. It also
created what it calls a “leave-share” program, which helps
employees transfer paid time of to partners who work elsewhere but might not get leave through their own employers.
Plenty of tech companies ofer paid leave, many of them
more generous than Amazon. But it’s the irst to create a
leave program for partners who work elsewhere, a policy
that in a small way illustrates Coulter’s broader point: When
Amazon wants to solve a problem, it can. HQ2 ofers a chance
it shouldn’t pass up. Connecting.
Entrepreneurial Minds
⊲ Sultan Al Jaber,
CEO of Abu Dhabi
National Oil Co.
May 14, 2018
Edited by
James E. Ellis
○ Nike tells its
corporate bullies:
Just don’t do it
Abu Dhabi Looks Beyond Oil
Bloomberg Businessweek
May 14, 2018
Its enormous state energy company isn’t doing an
Aramco-style IPO, but it isn’t standing still, either
Bloomberg Businessweek
Behind the 65-story glass tower that houses the
shiny new headquarters of Abu Dhabi National
Oil Co. sits a remnant of the Middle Eastern emirate’s not-so-distant past: the squat, sand-colored
building that the government-owned energy giant
once called home.
The stark contrast between the old and new
buildings provides a hint of the changes afoot in
energy-rich Abu Dhabi. The tiny, but stratospherically wealthy, emirate is trying to forge an economy for a post-oil world and needs to wring more
proits from its petroleum industry to inance
the makeover.
A similar shift is taking place in neighboring
Saudi Arabia, where Adnoc’s larger rival, Saudi
Aramco, plans to sell shares for the irst time. With
a projected $2 trillion valuation, Aramco is set to
have the world’s biggest initial public ofering.
Adnoc also wants to secure an economic future for
its government owner after the hydrocarbons run
out, but it’s treading a diferent path. “Adnoc has
always been seen as a stodgy, slow-moving company,” says Robin Mills, chief executive oicer of
consultant Qamar Energy. “Now they’re striving
to set up a strategy and actually implement it. It’s
still a work in progress.”
The man in charge of revamping Adnoc and
managing its 50,000 employees is Sultan Al Jaber,
who became CEO in 2016. His efort has an existential urgency, because Abu Dhabi—like Saudi
Arabia—ofers something the world apparently
has too much of: oil. The boom irst fell in 2014,
when the price of crude plunged by more than
half, breaking a string of $100-per-barrel years
that had engorged budgets and bred complacency
across the Gulf.
Since 2017, the United Arab Emirates, of which
Abu Dhabi is the capital, has taken part in the
Organization of Petroleum Exporting Countries
program to constrain output to prop up prices.
Now—even as it’s limiting Adnoc’s revenue to satisfy OPEC—it’s also revamping the national oil
giant and pitching the company to foreign investors to tap the capital and technology needed for
its transformation.
“What became evident in 2014 and 2015 was
the fact that the energy market is no longer what
it used to be,” Al Jaber says. “You can no longer be
dependent on only oil prices. Adnoc had to come
to terms with the realities on the ground.”
Since its founding in 1971, Adnoc has been synonymous with the oil wealth that thrust the U.A.E.
into modernity. It’s the company that made possible Abu Dhabi’s glittering cityscape. It helped
keep the lights on for Dubai, too: Abu Dhabi bailed
out its lashier neighbor after the 2008 inancial
crisis, and an Abu Dhabi-owned pipeline supplies
the natural gas Dubai needs every day to keep its
shopping malls and hotels bright and cool.
For much of its ive-decade history, Adnoc has
sold crude to the mostly Western companies that
help pump it, or to traders that lipped their cargo
for proit in Asia or the Mediterranean. Reiners in
those countries turned that oil into gasoline and
diesel or feedstock for chemical plants to produce
plastics and other petroleum derivatives.
But talk in the global energy markets has
moved from peak oil—concern that reserves were
doomed to run out—to peak demand—forecasts of
continuing oversupply. Oil producers are being
bufeted by declining prices and uncertainty over
the future direction of their business.
So Abu Dhabi has decided to build a hedge
against the shifting energy market by pushing
Adnoc to get involved in the entire supply chain,
alongside the oil majors and traders. The hope
is that by dangling access to the emirate’s oil
reserves—the U.A.E. has about 6 percent of the
world’s crude—Adnoc can bring in the funds and
expertise that will help contribute to the broader
national economy.
“Abu Dhabi is reinvesting for development and
to expand the economy,” says Hootan Yazhari,
Bank of America Merrill Lynch’s chief Middle East
markets analyst. “The question of whether there
is urgency to do this depends on your view of oil.
By 2030, oil is unlikely to be where it is today.”
In an efort to ensure Adnoc has long-term buyers for all its oil, Abu Dhabi over the past two years
let Chinese and Indian companies participate in its
main oilield concessions for the irst time, alongside historic allies such as Exxon Mobil, Total, and
BP. On the downstream side of the energy business, it wants to eke out more dollars per barrel
of crude by turning its oil into reined fuels and
products such as plastics and chemicals.
The company is also looking to make its irst
foreign investments in similar plants abroad
where local demand is growing fastest. To inance
that expansion and entice lenders and investors
to the emirate, Adnoc in 2017 sold bonds for the
irst time as well as a sliver of equity—a 10 percent
stake—in its gas station unit.
All of this invites the inevitable comparison with Aramco. Saudi Arabia’s Crown Prince
Mohammed bin Salman is determined, like Abu
Dhabi’s Sheikh Mohammed bin Zayed, to maximize his country’s oil-related income and use proceeds from asset sales to build new industries and
help workers develop more sophisticated skills.
May 14, 2018
○ Unextracted oil
reserves as of Dec. 31,
2016, in barrels
301 b
Saudi Arabia
Bloomberg Businessweek
But while the strategy is the same, the tactics and
timelines difer.
Adnoc’s “not going in the same direction as
Saudi Aramco,” Bank of America’s Yazhari says.
“Abu Dhabi doesn’t have an immediate need to list
Adnoc given its healthy economic balances. What
they need to focus on is increasing access to investors. By listing smaller units, they can boost liquidity and trading on the domestic stock market, and
that can help the country as a whole.”
Instead of selling equity at the holding company level as Aramco plans to, Adnoc raised
$851 million from the sale of the minority stake
in the service station business. Adnoc’s code
name for the IPO was “Project First,” because, as
Al Jaber says, it will be “the irst of many.” While
selling shares in Adnoc itself isn’t planned, almost
every other inancial move is being entertained.
“Whether it is a financial restructuring,
whether it’s a bond issue, whether it’s a private
placement, whether it is attracting strategic investors, whether it is us going through an IPO, we
are looking at everything,” Al Jaber says. “We
have some real substantial deals that are taking
place this year.”
Adnoc’s outreach program shifts into high
gear on May 13, when it will host international oil
majors, bankers, and investors to its Downstream
Investment Forum to sample opportunities available in the emirate. Also on the schedule is a trip
to Ruwais, where Adnoc’s 817,000-barrel-a-day oilprocessing complex pumps out gasoline for local
drivers, as well as diesel and jet fuel destined for
Europe and other markets.
Ruwais, where the vast desert of the Empty
Quarter meets the waters of the Gulf, will soon
become an oil-processing and petrochemicals
hub. Adnoc aims to build a 600,000-barrel-a-day
reinery, plus petrochemical plants that would let
it triple production capacity. It plans to inance
the construction and operation of all those by
wooing investors and, potentially, selling a stake
in its reining business to a partner.
“We’re going to be announcing a series of
projects,” Al Jaber says. “We are going to invest
heavily in Ruwais,” as part of a ive-year capitalexpenditure plan of about $110 billion.
Whether investors will bite is another question.
U.S. shale oil and gas and other new supplies are
intensifying competition for Middle Eastern producers, which are shackled by OPEC’s production limits. And entering competitive downstream
businesses could mean large expenses and small
proits if the oil majors also add capacity.
“It’s not really going to revolutionize their
export revenue, but it provides some hedging
against the oil price risk,” says Hamed Ghoddusi,
of the School of Business at the Stevens Institute
of Technology and the author of a recent paper on
OPEC members pushing into downstream.
Back at Adnoc’s gleaming headquarters, the
company has installed a wall of LED panels, which
provide a supercomputer-powered overview of its
many operations. Alongside the bar charts showing oil output and revenue is a gauge that stands
out: “Emiratization of the workforce”—a nod to
Abu Dhabi’s long-term ambition to make Adnoc a
spearhead of both economic and societal reform
for the entire U.A.E. Key to that will be weaning
itself of of expatriate labor and having Emiratis
account for a greater share—Adnoc won’t say how
large—of the company’s workforce.
Creating a commercially minded and internationally competitive local workforce is diicult in
a country where the citizens are accustomed to
generous government handouts. One of the biggest challenges Al Jaber has faced so far has been
shaking up a bureaucratic corporate culture—
streamlining it into a more entrepreneurial organization, according to Haif Zamzam, a former Boston
Consulting Group adviser, who joined Adnoc’s
strategy department. “In the past we would take
on nearly zero risk. There was absolutely no room
for error,” Zamzam says. “Now we’re introducing
the idea of taking calculated risks.”
While young Emiratis have voiced strong support for Al Jaber’s changes, the process hasn’t
been without its critics. Two points of contention: Al Jaber’s unprecedented job cuts and other
cost-saving measures and the introduction of performance reviews.
Abu Dhabi’s Crown Prince Mohammed has
deployed himself more than once to show support for Adnoc’s changes, posting photos of himself and Al Jaber on Twitter and state media.
In February the crown prince and Al Jaber had
lunch together at the Abu Dhabi branch of London
restaurant Zuma with about a dozen members of
Adnoc’s Future Leaders Program, underscoring
the kind of technologically savvy workforce the
emirate wants to develop.
“With risk comes opportunity,” says Saud
Alshamsi, who works in the governance and value
assurance department at Adnoc and is one of the
members of the program. “That’s what people
really have to realize.” —Anthony DiPaola and
Tracy Alloway, with Mahmoud Habboush
THE BOTTOM LINE Abu Dhabi for decades was content to sell its
crude to foreign companies and traders. Now it wants to expand
into a broader range of petroleum markets to diversify its future.
May 14, 2018
○ Value of Adnoc’s
five-year capitalexpenditure plan
Bloomberg Businessweek
Is the Corporate Bully the
Next Workplace Pariah?
After Nike Inc. ousted a handful of male executives
for behavior issues over the past few months, some
media reports tied the departures to the #MeToo
movement and its revelations of sexual harassment
and assault. Interviews with more than a dozen former Nike employees, including senior executives,
however, paint a picture of a workplace contaminated by a diferent behavior: corporate bullying. The workers say the sneaker giant could be a
bruising place for both men and women, and that
females did bullying, too. On May 8, Nike signaled
as much when it conirmed four more exits stemming from an internal misconduct inquiry, including the departure of a woman with more than 20
years at the company.
The surprise announcement in March that
55-year-old Nike brand president Trevor Edwards—
who had a reputation for humiliating subordinates
in meetings—would leave following an internal investigation about workplace behavior issues suggests
the coddling of tough guys may have come to an
end. “Some companies are realizing that a bullying
boss isn’t the best way to manage a company,” says
David Yamada, a professor at Sufolk University Law
School in Boston who’s authored antibullying legislation. “Maybe we’re starting to see a tipping point.”
Gary Namie, co-founder of the Workplace
Bullying Institute, who consults with businesses
on workplace issues, says one reason some companies have long tolerated or even encouraged such
behavior is that many American managers believe
the workplace is by nature rough around the edges.
“Bullying is inextricably interwoven with capitalism,” he says. “It creates a zero-sum, competitive
work environment where people feel they need to
obliterate their competitors.”
Some former employees say that was the case
at Nike, particularly among managers who used
abusive tactics to safeguard their own position or
authority. “There are a lot of very talented people
deeper in the organization who have been marginalized both by senior and middle management trying to protect their domain,” says Shaz Kahng, who
was a senior executive at Nike for six years through
2010. “People are often promoted based on relationships, not on results.”
In response to complaints, including from departing female executives, Nike ousted Edwards, who’d
been a favorite to become the company’s next chief
May 14, 2018
○ Nike’s ouster of a top executive casts a
light on the hard-knuckled behavior common
in many workplaces
executive oicer. Edwards, according to some of the
former employees, at times bullied workers through
insults and disparaging comments. More important, once he set the tone, other people mirrored
his behavior, they say. A handful of executives who
worked for Edwards have since left Nike.
“I’ve been disturbed to hear from some
employees of behavior inconsistent with our
values,” CEO Mark Parker said in an emailed
companies are
realizing that
a bullying boss
isn’t the best
way to manage
a company”
Bloomberg Businessweek
May 14, 2018
statement. “When we discover issues, we take action.”
Nike also provided Bloomberg with the transcript of a town hall Parker held on May 3, in which
he vowed the environment will change. “We all
have an obligation—and it’s non-negotiable—to create and cultivate an environment of respect and
inclusion,” he told employees. “And that starts
with me. I apologize to the people on our team
who were excluded. … We’re going to move from a
place where the loudest voices carry the conversation to [one where] every voice is heard.”
The company declined to make Edwards available for an interview. He’s acting as an adviser to
Parker until he retires in August, when he’ll receive
a $525,000 payout, according to public ilings.
Nike says it’s reviewing how it deals with complaints, redesigning management training, and
beginning unconscious bias awareness education
for employees this year. It’s also vowed to promote
more women and minorities into leadership roles.
Currently, managers are 38 percent women and
23 percent nonwhite.
Workplace bullying is often deined as behavior—
including verbal abuse, derogatory remarks, humiliation, and undermining work performance—that
results in physical or mental harm. About 1 in 5
Americans say they’ve been the target of it, according to a 2017 survey by Zogby Analytics that was
commissioned by the Workplace Bullying Institute.
Men make up 70 percent of the perpetrators and
34 percent of the targets. “It’s a signiicant and still
underreported problem,” Yamada says. Surveys
have shown such behavior is four times more prevalent than legally actionable sexual harassment, he
says. “Bullying looms large.”
Ironically, Nike is one of the minority of companies that has a formal antiharassment policy that
calls out bullying behavior such as verbal abuse,
intimidation, humiliation, and retaliation, according to a copy obtained by Bloomberg. It also notes
that harassment not based on a legally protected
characteristic, such as gender or race, can still violate company rules.
One reason few companies have speciic antibullying policies is that there aren’t federal or state
laws in the U.S. outlawing the behavior, which
makes America a laggard when compared with
Western Europe, Canada, and Australia.
A lack of legal protections greatly reduces the
possibility of liability for employers. It’s diicult to
bring a lawsuit based on bullying, and businesses
have worked to keep it that way. Over the past
decade, antibullying bills were introduced in about
30 states, but they’ve all been defeated after opposition from corporate lobbying groups, Yamada
says. A workplace bullying bill is gaining sponsors
in Massachusetts’ legislature, but its future is uncertain. If there were antibullying laws, companies
would be liable and do more to deter the practice,
according to Namie. “It’s the only form of abuse
that hasn’t been addressed by law,” he says. “It goes
beyond gender to ‘I’m powerful, I can do any damn
thing I want.’ ”
When executives feel entitled or untouchable,
that often leads to bullying and then to other inappropriate behavior, Yamada says. In many of the
workplace environments that resulted in some of
the high-proile #MeToo moments, such as that at
Weinstein Co., an “undercurrent” of bullying created a belief that mistreatment would go unpunished, he says. “It’s that bullying atmosphere that
helps to enable and empower sexual harassment.”
According to the former Nike employees, the lack
of a fear of reprisal created an environment where
male executives, many married, could pursue and
have sexual relationships with subordinates and
assistants—behavior Nike says it tries to prevent but
doesn’t prohibit. Many times the careers of those
involved were unafected, which only normalized
the behavior, they say. And when there were repercussions, the men received little if any punishment,
while women often faced consequences. In one
instance several years ago, they say, an executive
was caught having sex with his assistant on a conference table. He wasn’t disciplined, some of the people say, but the woman was reassigned.
Several former female employees describe similar experiences of encountering several slights and
ofenses—not one egregious incident—that increased
as they moved up the ladder. One woman says her
boss, a senior director, had derogatory nicknames
for female stafers and would overtly favor men
on the team with better opportunities. A former
female manager says a male colleague had multiple
complaints of bullying made against him to human
resources, but the only punishment meted out was
a delayed promotion. Eventually, frustration with
Nike’s handling of such incidents persuaded several
women to leave the company, they say.
The situation was particularly galling to employees who’d been drawn to Nike because of its cool
and progressive reputation, burnished by such
advertising slogans as “If You Let Me Play” and its
T-shirts adorned simply with the word “equality.”
“We always wished the company would live up to
its marketing,” says one former female executive.
“But it didn’t.” —Matt Townsend and Esmé E. Deprez
○ Share of respondents
to a 2017 survey of
workplace bullying
who report:
THE BOTTOM LINE Nike’s marketing positioned the company as
a promoter of self-expression and equality. But former employees
say it allowed a culture of workplace bullying to flourish.
Currently bullied
Have been bullied
Witnessed bullying
Aware of bullying at
their workplace but
haven’t experienced
or witnessed it
Unaware of bullying
at their workplace
May 14, 2018
Edited by
Jef Muskus
and Julie Alnwick
○ How Flipkart’s
turnaround attracted a
Walmart investment
○ Fresher food from old
shipping containers
On Facebook,
Terror Is Everywhere
○ Searches quickly turned up
evidence of extremist recruiting
in plain sight
In the past month, Mark Zuckerberg has boasted to
Congress and investors that Facebook Inc.’s artiicial
intelligence programs are turning the tide against
extremism on his site. “One thing that I’m proud
of is our AI tools that help us take down ISIS and
al-Qaeda-related terror content, with 99 percent of
that content being removed before any person lags
it to us,” the chief executive said on April’s earnings
call. Facebook executives repeated that number
onstage at early May’s annual developer conference.
But it applies only to posts by those two groups.
Many others seem able to recruit more or less as
they please from the site’s audience of 2.2 billion.
At least a dozen U.S.-designated terror groups
maintain a presence on Facebook, a review by
Bloomberg Businessweek shows. That includes Hamas
and Hezbollah in the Middle East, Boko Haram in
West Africa, and the Revolutionary Armed Forces
of Colombia (FARC). The terror groups are rallying
supporters with everything from gruesome photos of death caused by their enemies to quotidian
news about social services they ofer. Several can be
found simply by typing their names into Facebook’s
search bar in English or, in some cases, in Arabic or
Spanish. Some of the groups proudly link to their
Facebook pages on their home websites, too.
“There is no place for terrorists or content that
promotes terrorism on Facebook, and we remove
it as soon as we become aware of it,” the company
said in a statement. “We know we can do more, and
we’ve been making major investments.” Facebook
appeared to shut down several pages after being
asked about them, including those for Al-Aqsa
Martyrs Brigade and Hamas’s Al-Qassam Brigades.
Hezbollah’s Al-Manar TV, a “specially designated global terrorist entity” banned in the U.S.,
has launted its Facebook use, regularly reposting stories from Hezbollah pages that Facebook
has shut down. In March, Al-Manar bragged that
Hezbollah staf quickly set up a new election page
after Facebook took one down. “Resistance supporters refollowed it, which stresses that the Resistance
voice can never be silenced,” an English-language
version of the story said.
○ Corporate satellites
need more guidance
Bloomberg Businessweek
For years, Facebook has tried to take down pages
associated with U.S.-designated terrorist groups. In
2014, within hours of Bloomberg Businessweek inquiring about pages for Hezbollah, Facebook removed
those for Al-Manar, Hezbollah news site Al-Ahed,
and the Islamic Resistance in Lebanon, a charity associated with Hezbollah. All three, however,
quickly reappeared with tweaks to make them seem
new. At the end of April, Al-Ahed’s website linked to
an Arabic Facebook page with more than 33,000 followers. Content on the page included a video of
masked snipers targeting Israeli soldiers. Another
Al-Ahed Facebook page had more than 47,000 followers, and one in English had 5,000.
Facebook’s policies prohibit material that supports or advances terrorism. The company’s deinition of the term, published last month for the irst
time, includes a ban on nongovernmental organizations that use violence to achieve political, religious, or ideological aims. It speciies that such
groups include religious extremists, white supremacists, and militant environmental groups. Facebook
also says content that violates its policies is “not
allowed” on the site.
The company only recently began scanning
more actively for content from Islamic State and
al-Qaeda after pressure from governments and is
training its artiicial intelligence systems to get better at lagging bad posts. Meanwhile, journalists and
researchers frequently ind supposedly banned content just by searching for it. A report in the New York
Times in April uncovered hundreds of fake accounts
on Facebook and Instagram posing as Zuckerberg
and Chief Operating Oicer Sheryl Sandberg. A day
earlier, science and tech publication Motherboard
noted that some pages on Facebook store stolen
data, including social security numbers.
When asked about that story on a conference call,
Sandberg said Facebook takes down such information as soon as employees become aware of it. “Posts
containing information like social security numbers
or credit cards are not allowed on our site,” she said.
To help prune out the worst ofenders, Facebook
has added content reviewers. It has 7,500, up 40 percent from the year before. They work in about
40 languages; the company plans to add staf luent in the languages that require the most attention.
Terrorists’ enthusiastic embrace of social
media has long caused angst at Facebook and its
global competitors. Like Twitter Inc. and Google’s
YouTube LLC, Facebook has historically put the
onus on users to lag content to moderators.
When pressed by Congress about the failures
to respond quickly in those instances, Zuckerberg
spoke of how, when starting the company in his
Harvard dorm, he simply didn’t have the resources
to vet everything. Having users speak up about horrors was the easiest way to get things of Facebook.
That strategy had support from Section 230 of the
Communications Decency Act, which limits websites’ liability for what users post. That protection
is being gradually weakened; last month, President
Trump approved an exception that allows prosecutors to go after online platforms if they’re being used
for sex traicking. Zuckerberg now says he considers
Facebook responsible for what’s posted on the site.
That doesn’t necessarily mean legal responsibility.
Instead, the company has tried to frame its attempts
to clean itself up as a public service.
While Facebook has made its guidelines public,
it hasn’t been clear how they evolved, and some
view them as open to interpretation. “They should
be transparent about the laws or regulations that
they’re using to underpin their policies, but they’re
unfortunately not,” says Jillian York, the Electronic
Frontier Foundation’s director for international freedom of expression. York, who’s based in Berlin, says
Facebook risks meddling in local politics by picking
and choosing which groups are terrorist. One could
argue that blocking material from Hezbollah, which
is also a party with seats in Parliament, can hand its
political competitors an advantage, she says.
It’s also sometimes diicult to determine who’s
behind a Facebook page, even if it sports the logos
and content of known terrorist groups. In the
case of Boko Haram, the Nigerian group loyal to
Islamic State, research published by the Jamestown
Foundation in December said the group went by
the name “Khairul Huda” on Facebook. A proile
under that name exists, featuring plenty of photos of
friends holding riles or wearing balaclavas. Among
them: a Facebook member who posted an appeal
in December for volunteers to ight in Jerusalem “to
raise the banner of God” and liberate the city. “Will
you join me?” he wrote. “Inbox us.”
Once Facebook kicks these groups of, it doesn’t
appear to use sophisticated means to prevent
them from coming back. In April nine Hezbollahrelated Facebook pages disappeared after the nonproit Counter Extremism Project publicized links,
including a tribute page to martyrs; it had more than
60,000 followers. Within two weeks, a replacement
popped up. Bloomberg Businessweek found it by
searching on Facebook for the website that had been
listed on the original page. All that had changed was
the language of the word “martyr,” from English to
Persian. —Vernon Silver and Sarah Frier
THE BOTTOM LINE Facebook has reduced ISIS- and al-Qaedarelated material, but posts from similar groups with thousands of
followers don’t seem to have sufered the same crackdowns.
May 14, 2018
Bloomberg Businessweek
May 14, 2018
Air Traffic Control,
Without the Air
○ As space gets more crowded, tiny transponders could help satellites avoid crashes
space is too large compared with the volume occupied by man-made objects.” That approach, however, is becoming dated.
Spent satellites, or pieces of them, become hypersonic space lotsam. One catastrophic incident,
such as the 2009 collision of a U.S. satellite with a
dead Russian craft, can mean disaster not only for
the company involved but also for other operators.
New debris increases uncertainty and requires quick
assessments to determine who needs to move out of
the way and how fast. The 2009 accident, coupled
with China’s deliberate destruction of a weather
satellite two years earlier, account for more than
one-third of all the space junk in low-Earth orbit,
according to a 2011 NASA study.
With each collision comes more debris—and
more risk for any multimillion-dollar orbiting
object. Today, satellite operators must manage
these potential disasters (known in the industry
as “conjunctions”) every month or two, but soon
they’ll become routine, Abraham says.
The U.S. Joint Space Operations Center, which
tracks about 22,000 objects in orbit, issued
1.2 million collision warnings in 2016, prompting
148 avoidance maneuvers. Usually the warnings
come about ive to seven days before a potential
collision, according to retired U.S. Navy Admiral
Cecil Haney, an Aerospace senior adviser
Orbital Obstacle Course
Objects launched into space, by year
Milestone launches ⊲
Skylab space
station, 1973
Voyager 1 space
probe, 1977
Hubble Space
Telescope, 1990
First module of the
International Space
Station, 1998
objects went up
in 2017, more than
double 2016’s total
Soviet Sputnik
satellites made it
into space in 1957
In the race to commercialize space, one premise
is undisputed: It’s getting crowded up there. From
private enterprise to universities to the military,
everyone has an eye on the sky as it comes inancially within reach. Yet it’s not clear how all these
new orbital gadgets will coexist, zipping around the
planet as fast as 17,500 mph, navigating a mineield
of debris from earlier space ventures.
Aerospace Corp., a federally funded research center, has a suggestion: Stick a small, quarter-pound
GPS transponder on each craft for tracking, ID, and
oversight. Common in civil aviation and maritime
navigation, transponders have never made it widely
to low-Earth orbit. Satellite tracking consists mostly
of ground-based radar and telescopes.
Humankind has launched some 7,500 satellites since the dawn of the Space Age, with more
than 1,500 still active. Companies including LeoSat
Enterprises, OneWeb, Planet Labs, and Elon Musk’s
SpaceX plan to put at least 20,000 more in orbit.
Defunct satellites often burn up in the atmosphere, while larger craft are sent to their doom in
a remote area of the South Paciic. Others are lown
farther into space, to an orbital graveyard. The irst
decades of spacefaring “relied upon the ‘big sky’
approach to avoiding orbital crashes,” says Andrew
Abraham, a senior researcher and engineer at
Aerospace. “The assumption was that the volume of
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Bloomberg Businessweek
and former head of U.S. Strategic Command.
“These operators don’t want to move their satellites just on a whim” given the inite fuel on board,
Haney said during a panel at last month’s Space
Symposium in Colorado. “It really is something
we have to get at, and in my mind, get at quickly.”
The Aerospace-proposed transponder, including a GPS module and radio transmitter, is the size
of a deck of playing cards, Abraham says. The idea
would be to report a craft’s location on a regular
basis, allowing trackers to narrow its position at
any time to dozens of feet. The system would operate in three modes: normal, thrust (for when the
satellite is repositioning itself ), and debris, a lowpower setting that would report less frequently for
as long as 40 years, thanks to a small solar cell.
Transponders could help satellite operators correct for the efects of gravity, too. (Depending on
their mass, size, shape, orientation, and type of
orbit, satellites tend to veer gradually of course.)
Transponders would incur additional cost, and
they wouldn’t solve the problem of what’s already
up there. It’s also not clear who would coordinate
all the data they’d provide. A government agency,
industry group, or new commercial or nonproit
organization? Aerospace says an international body
would be best.
Space traic management has little government
oversight, although the Trump administration has
proposed that the U.S. Department of Commerce
coordinate tracking with other nations. In any case,
according to Abraham, “the forecasted increase in
launch rates eliminates the status quo as a viable
option.” He’s planning to put his irst prototype in
orbit next year. —Justin Bachman
○ Walmart made an historic investment after
the Indian online retailer’s CEO reset his
company’s strategy
At the beginning of 2017, the outlook for web
retailer Flipkart Online Services Pvt. was decidedly
gloomy. Although heralded as India’s most successful startup, the private company saw its valuation
dropping, and it was getting harder to raise money
from investors. Inc. was pledging to
spend $5 billion-plus to grab market share in India,
and Alibaba Group Holding Ltd. was coveting the
same space. When Kalyan Krishnamurthy became
chief executive oicer of Flipkart in January of that
year, many observers said 2017 would be make or
break for both him and the company.
The 46-year-old former director of inance at a
hedge fund took some risks. He ired senior managers, set more aggressive sales targets, boosted
spending on promotions, and promised to dominate India’s festival season shopping.
THE BOTTOM LINE Transponders may help prevent potentially
costly collisions among the thousands of objects orbiting—or about
to orbit—the Earth.
The strategy worked, with an historic return on
those risks: On May 9, Walmart Inc. made a $16 billion initial investment in Flipkart, the biggest ever
by a foreign buyer in India. The deal helps cement
Flipkart’s lead against Amazon and Alibaba in the
world’s fastest-growing major economy. Online
shopping in India is projected by Morgan Stanley to
reach $200 billion within the next decade, compared
with $30 billion now. “His relentless focus and his
aggressive execution changed Flipkart’s fortunes,”
says Anil Kumar, CEO of RedSeer Management
Consulting Pvt. in Bengaluru. “He brought the edge
that Flipkart was missing.”
The deal also represents a signiicant part of
Walmart’s overseas expansion eforts. Since entering
Mexico in 1991, the world’s largest retailer has closed
money-losing operations in Germany and South
Korea. Two years ago, Walmart sold its Chinese
e-commerce business, Yihaodian, to Inc. in
return for a inancial stake in the parent company.
The number of Walmart’s international stores hasn’t
budged from about 6,000 since 2013, and it’s had to
shutter outlets in Japan and Brazil.
Walmart says it’s happily keeping Krishnamurthy
as CEO of Flipkart. “We are excited about this management team,” Walmart CEO Doug McMillon said
on a conference call after the deal was announced.
“They are identifying customer problems, innovating, and problem-solving. We are investing in a set
of problem solvers.” Krishnamurthy didn’t respond
to requests for comment.
“For Flipkart, this deal is more than just money,”
says Satish Meena, a New Delhi-based senior forecast
○ Krishnamurthy
The Man
May 14, 2018
analyst at Forrester Research Inc. “This deal with
Walmart can provide Flipkart the expertise of running oline stores, access to sellers and manufacturers, supply chain, and the know-how to get into
the grocery segment.” Flipkart, founded in 2007 by
Binny Bansal and Sachin Bansal (who aren’t related),
attracted powerful overseas backers including Tiger
Global Management, SoftBank Vision Fund, Tencent
Holdings, EBay, and Microsoft.
Krishnamurthy spent seven years in EBay’s
Asia inance operations before joining Tiger Global
Management LLC as inance director in 2011. He
arrived at Flipkart in early 2013 as interim chief
inancial oicer to support the Bansals, who each
spent time as CEO. Yet Flipkart struggled against
Amazon, which was shut out of China by Alibaba and
smaller rival JD. Amazon CEO Jef Bezos didn’t want
a repeat in India. Amazon committed $5.5 billion
to its eforts, and country manager Amit Agarwal
adapted the site to local conditions—such as simplifying the app so it didn’t crash cheap smartphones.
That helped propel Amazon to No. 2 behind
Flipkart in just four years, and the Seattle-based
company started to consider a partnership with its
rival. In January 2017, the Bansals stepped aside to
make way for Krishnamurthy as CEO. He started his
tenure by trying to change the narrative from one
of “deep-pocketed Amazon vs. startup Flipkart” to
one based on a homegrown operator knowing what
1.3 billion Indians want.
He set goals for online traic and sales, streamlined operations, and ired poor performers. He also
implemented what he called the “80-20 rule”—focusing on the 20 percent of categories that generated
80 percent of Flipkart’s revenue. Those categories included large appliances, fashion, and mobile
phones. “He would pound on the doors of vendors
to cut exclusive deals,” says RedSeer’s Kumar.
India is a medley of income levels, languages,
and cultures—a place Krishnamurthy describes as
“several countries within a country.” He’s said he
wants Flipkart to appeal to as many people as possible. The company introduced round-the-clock customer service, ofering demonstrations to irst-time
appliance buyers and typically sending technicians
to small homes to mount TVs on the wall.
Krishnamurthy himself answered customer service calls when he irst became CEO. “It is an eyeopener on how and why India buys online,” he told
Bloomberg News during a 2017 interview. “It’s been
a great investment of my time.” —Saritha Rai, with
Shelly Banjo
THE BOTTOM LINE Flipkart CEO Krishnamurthy took a handson approach to remaking his company, resulting in a $16 billion
investment from Walmart.
Container Farm
Los Angeles startup Local Roots retrofits 40-foot-long shipping
containers, turning them into “TerraFarms” that yield as many
leafy greens as five acres of farmland—only faster, using as little
as 1 percent of the water. The company leases TerraFarms to
wholesalers, restaurant chains, and SpaceX. The United Nations
is preparing to field-test them, too. Chief Executive Oicer Eric
Ellestad, a venture capitalist who’s raised about $11 million for
Local Roots, says he’ll stand by the taste of the greens grown in
the former containers, no salad dressing required. “Chefs we
work with,” he says, “that’s what sells them.” —Adam Popescu
gallons of water a day is all each
TerraFarm’s hydroponics needs. Climate
controls and LED grow lights also
help nurture crops including butterhead
lettuce, baby kale, Italian basil, and
arugula with a wasabi-like kick.
To maximize water eiciency
and recirculation, hundreds
of sensors track such
factors as airflow and water
temperature and feed the
data to TerraFarms stafers
for real-time tweaking.
Local Roots buys old
containers from the Port of
Los Angeles for about $5,000
and retrofits them for more
than double that. It owns the
farms and contracts with
clients for a set period of use.
heads of lettuce can come from a single TerraFarm
every 10 to 12 days. They grow from seed to full maturity
in 30 days. Outdoor farming takes at least 60 days.
Customers place the container
farms at food distribution
centers so they can cut out
days or even weeks of produce
travel time.
○ A new breed of
annuity could help fill
the U.S. retirement gap
○ After an awesome
earnings season, why is
the bull staggering?
○ The battle for mobilepayment supremacy
Make Investing
Complicated Again
○ Maybe diversification is too
easy. Wall Street’s new pitch is
risk parity
Wealthfront Inc., an online money manager,
attracted a following in Silicon Valley and
expanded its assets under management to
$10 billion by offering a simple proposition.
Instead of telling clients which stocks to buy or
which supposedly brilliant money manager to
pick, Wealthfront charges a low fee to help people spread their assets among exchange-traded
funds that passively track the market. It adjusts
that allocation to stocks, bonds, and other
assets according to a client’s tolerance for risk.
Customers loved Wealthfront’s passive investments. In February, however, the company added
something new. The Wealthfront Risk Parity Fund is
automatically included in accounts with more than
$100,000 in taxable assets unless the client opts out.
The fund is supposed to follow an approach taken
by hedge fund manager Ray Dalio of Bridgewater
Associates. Only a portion of clients’ money would
be invested in it, the rest going into more traditional
fare such as low-cost Vanguard funds. Rather than
cheering at the opportunity to invest like an exclusive hedge fund, some Wealthfront clients expressed
puzzlement about an unusual strategy with added
expenses. “I’m not bailing on Wealthfront yet, but
I am opting out of Risk Parity until someone can
May 14, 2018
Edited by
Pat Regnier
Bloomberg Businessweek
better explain to me why I should have it over
passive investing,” tweeted Austin Johnsen, head
of corporate development at the game streaming
site Twitch Interactive Inc.
Wealthfront’s plunge into risk parity represents
one of the biggest attempts yet to take the strategy
into the mainstream. A handful of other mutual
funds ofer some version of the approach, but
it’s largely been the domain of hedge funds and
institutional investors. There may be as much
as $500 billion invested in risk parity, making it
common enough that it’s sometimes singled out
as a likely suspect—fairly or not—for unexplained
bouts of volatility in stock and bond markets. Last
year, Paul Tudor Jones II, the billionaire founder
of Tudor Investment Corp., said risk parity could
act as “the hammer on the downside” when turmoil returns to equity markets as managers rush
to adjust their strategies.
So what the heck is it? The strategy begins from
a premise familiar to many investors: diversiication. For example, in addition to stocks, you want
to have some bonds, which won’t necessarily fall
in value at the same time as equities. The problem,
risk-parity advocates say, is that even if you’re split
pretty evenly between stocks and bonds, most of
the volatility in your portfolio will come from the
equities. In a bear market, holding even a little bit
in stocks can expose you to losses. You can equalize this by tilting more heavily to bonds, but then
you end up in a low-risk portfolio that gives up
potential return.
Many risk-parity funds try to solve this with
leverage. A manager might create a portfolio heavily exposed to the bond market but do so using
derivatives that increase the value of the fund’s
bets, magnifying potential gains as well as potential losses. The hope is that the fund will provide
some protection when the stock market drops but
deliver higher returns than a simple bond-heavy
portfolio. Throw in exposure to other asset classes,
such as commodities, real estate investment trusts,
and emerging-market bonds, and the risk is even
more spread out.
Risk parity looked really good during the inancial crisis, when stocks fell sharply. A long stretch
of strong bond returns also helped. But lately
bond yields have been rising, with the benchmark
10-year Treasury at about 3 percent. (Bonds fall in
value as yields and interest rates rise.) JPMorgan
Asset Management, Jefrey Gundlach of DoubleLine
Capital, and others say a bond bear market is on
the way. If so, some risk-parity strategies could be
in for a bumpier ride.
The approach varies in terms of how complicated
or simple it is, with each irm having its own spin.
Wealthfront’s fund gets leveraged exposure to asset
classes using derivatives called swaps. The fund
reweights investments to try to keep the portfolio
at a set level of annual volatility, but that’s just a target. The prospectus says actual volatility could fall
above or below the fund’s goal. Wealthfront’s website says it doesn’t consider this active management,
because it’s a “rules-based” approach.
Risk-parity elements such as leverage and
other complicated inputs have historically been
conined to quantitative money managers working with sophisticated investors. There’s a reason
for that. Individual investors shouldn’t be putting
money in strategies they don’t understand well,
says Maneesh Shanbhag, who, after ive years at
Bridgewater, co-founded Greenline Partners. “The
issue isn’t that it’s a bad strategy. It’s that investors
don’t know when they’ll underperform and outperform and why,” he says. “They’ll sell at the bottom,
while an informed investor stays in.”
Wealthfront has acknowledged some investor
qualms, speciically about costs. The risk-parity
fund originally had an expense ratio of 0.5 percent of assets per year. That compares with
expenses averaging 0.15 percent for other ETFs in
Wealthfront’s portfolios. Because of the backlash,
the company cut its expense ratio to 0.25 percent
just a couple of months after the fund’s launch.
Andy Rachlef, a co-founder of Wealthfront, told
Bloomberg News in April he was caught by surprise when customers were upset about the higher
fee. “We thought continuing our policy of always
delivering existing services at better prices than
available would be compelling,” he said, adding
that if he could launch the product over again, he
would have chosen the lower fee to begin with.
“Most of our clients shared our excitement on
the launch of Risk Parity, and we have signiicant
assets committed to the fund,” says Wealthfront
spokeswoman Kate Wauck. About $900 million is
committed, although some is still in the process
of being moved to the fund in a tax-eicient way.
Investing by and large has been getting simpler
for individuals, who can diversify broadly across
markets at a very low cost. But fund companies and
advisers still want to be able to ofer an edge to justify even low fees in an increasingly cost-competitive
market. “I look at it as this race occurring to add
more strategies, more capabilities,” says Devin Ryan,
an analyst at JMP Securities LLC. In short, complexity isn’t dead. —Julie Verhage and Dani Burger
THE BOTTOM LINE Wealthfront built its business on helping
people get into simple, low-cost investments. Now it’s putting some
clients into a strategy favored by hedge funds.
May 14, 2018
○ Rachlef
Bloomberg Businessweek
May 14, 2018
The Retirement
Solution Few Love
○ Annuities earned a reputation for high costs and complexity.
But the right kind could help
Saving for retirement is hard enough, but another
diicult challenge is making sure the money lasts.
Invest your nest egg conservatively, and you might
not be able to stretch the money out, especially
if you live longer than you expect. Putting more
in the stock market could keep the pile growing—
but once you stop adding money, a streak of bad
returns could decimate your stake and leave you
little chance to recover.
For years many retirement experts have pointed
to a potential solution: annuities. In its simplest
form, buying an annuity involves taking part of
your savings and handing it over to an insurance
company. The insurer then pays out a guaranteed
income for the rest of your life. In theory, putting
at least part of retirement savings into an annuity
can make sure you always have some income no
matter what the markets do.
Even so, annuities gained a bad reputation in
some circles. Many annuities are really investment
products combined with insurance, with the option
of creating a stream of annuity income as just one
of their features. The commission-based sales
model common in the insurance industry often
meant that agents and inancial advisers had incentives to push higher-cost annuities. Those products
sometimes locked up the money for more than a
decade before an investor could withdraw funds
without paying a hefty penalty. And complex rules
governing how that money was invested—explained
in ilings running 100 pages or more—left many
scratching their heads in confusion.
The insurance industry says it’s gotten the message. It was prodded in part by Obama-era rules
from the U.S. Department of Labor that took aim
at conlicts of interest in investment advice. In
2016 and 2017, sales of annuities dropped as advisers faced uncertainty about the impact of the new
regulations. Insurers created products redesigned
to win back advisers and a skeptical public. Many
pay advisers through fees rather than commissions,
sidestepping some conlict of interest worries.
Pathway Financial Advisors, a fee-based irm
with oices in Vermont and Georgia, steered clear
of annuities for years. “Historically, insurance
products have been sold and not bought,” says
founder Scott Beaudin. Last year he added an annuity to a client’s portfolio for the irst time, largely
because the products have become “simpler.”
But the Labor Department’s conlict of interest rules are in trouble. In March a U.S. appeals
court struck them down, saying they were outside the department’s authority and “unreasonable”; the Trump administration hasn’t appealed.
And some think the improvements to annuities
aren’t enough. “From my perspective, there haven’t been any real dramatic changes in product
design,” says Ken Nuss, chief executive oicer of
AnnuityAdvantage, an online marketplace. Andrew
Komarow, co-founder of Talcott Financial Group in
Farmington, Conn., says the main diference is that
the new products are being aggressively marketed
to fee-based advisers.
Retirement funding has become a more pressing issue as baby boomers age out of the workforce. According to data from the Employee Beneit
Research Institute, total individual retirement savings in the U.S. are more than $4 trillion short of
what’s needed. Boomers are living longer than previous generations, and many worry they’ll run out
of money. “They start hoarding, and they’re afraid
to spend anything,” says Ted Goldman, senior pension fellow at the American Academy of Actuaries.
“Annuities and protection products actually
have an opportunity to solve that,” says Jamie Price,
CEO of the Advisor Group, a network of independent advisers. “The problem is some of them have
high costs, and I think that they need to rethink
how they build their products and services.”
More investors may one day buy annuities without going through advisers or agents. Under the
Obama administration, regulators made it easier
products have
been sold and
not bought”
Bloomberg Businessweek
for 401(k) retirement plans to make simple annuities an option. They also changed some regulations
to encourage so-called longevity annuities, which
don’t start payments until you’re about 80 years
old, so they can ofer more generous payments for a
smaller amount of money. Some research has found
that putting as little as 10 percent of a 401(k) balance
at retirement into a longevity annuity could signiicantly supplement Social Security.
Still, many employers worry they’ll get sued if the
insurer they choose to ofer an annuity in a 401(k)
gets in trouble. A bipartisan bill in Congress seeks
to give employers some legal protection. Whatever
the outcome of the regulatory battles, Price has a
piece of advice for the industry. “Stop building the
next whiz-bang product,” he says. Insurers should
“think about inding better outcomes for clients.”
—Katherine Chiglinsky and Ben Steverman
president of Sundial Capital Research Inc. “That
is typically a contrary sign, suggesting a mild negative for stocks.”
If it looks like the pros are trying to ind the bad
news in a pile of solid economic data, they’re really
just trying to make sense of a market that’s psychologically edgy. It was on his daily subway ride from
Manhattan’s Upper West Side, where he works
in the morning before heading to his downtown
oice, that Donald Selkin started feeling queasy.
Day after day, rallies that looked bulletproof when
he got on the train were gone when he got of.
“That was the moment I thought, ‘This is going to
be a bit of a diicult year,’” says Selkin, chief market strategist at Newbridge Securities Corp.
A bull market within spitting distance of being
the longest ever just isn’t what it used to be. Among
traders, the adage to “buy the dip” has become sell
on the pop—that is, use any rise in the market to take
some money of the table, before it drops again. The
S&P 500 has fallen in the afternoon more than half
the time since mid-March. First it was February’s
brief but hair-raising drop, when volatility returned
to the markets. The market rebounded but izzled
in March, when the S&P 500 recorded its irst backto-back monthly declines in a year. Now it’s May
and stocks are roughly where they began the year,
despite one of the best earnings seasons ever.
With projected growth of 17 percent coming
into the period, companies were poised for the
best proit increase in seven years. They ended up
doing signiicantly better: Eighty percent delivered
results that beat forecasts, the most in a quarter
century. But companies in the S&P 500 have seen
their shares fall by 0.3 percent on average the day
after reporting results.
Investors have dealt with turbulence before.
There have been at least ive corrections this bad
or worse since the bull market began. But not when
things were going so well in earnings and the economy. Corporate proit growth has been too robust
to seem repeatable—the buzz-phrase making
the rounds on Wall Street is “peak earnings.”
The realization that something had changed
THE BOTTOM LINE Americans have a $4 trillion retirement
savings gap. Guaranteed income could stretch the money out—but
people need simpler, less costly options.
Is the Long
Bull Market
Tired Out?
○ Investors are worried that good news can’t
get better and are looking for signs of trouble
One of the things that’s been making professional
traders nervous this year: you. Or at least individual investors a bit like you. In March daily trades
from just two retail brokers—E*Trade Financial
Corp. and TD Ameritrade Inc.—accounted for
more than a quarter of the volume on the New
York Stock Exchange.
Small investors’ recent interest in stockpicking stands in contrast to the long-term trend in a
bull market that’s more than nine years old. For
the most part, Main Street hadn’t seemed all that
interested in Wall Street—investors were gravitating to index funds and exchange-traded funds
that let them ignore stockpicking and just ride
the market. “The individual investor returned in
a big way over the past year,” says Jason Goepfert,
May 14, 2018
○ The portion of
companies that recently
beat earnings estimates
THE BOTTOM LINE Corporate America has been turning in
terrific earnings, but the market is focused on rising interest rates
and the return of volatility.
When you buy something with your phone
or online, you may see multiple buttons
that allow you to pay with a single click.
The war to be the one button that rules
them all is heating up. —Jenny Surane
Visa Checkout,
AmEx Express
These are run by the
big card networks. But they
want to reduce the button
clutter. Along with Discover
Financial Services,
they plan to create a single
service, yet to be named.
Apple Pay
Its edge is the iPhone.
Users load their cards into
a digital wallet and
use Touch ID or Face ID to
authenticate purchases.
The one to beat in the U.S.
It has the most accounts
globally and is accepted by
the most merchants.
Promises to be a lowercost option for merchants,
which pay fees on digital
transactions. It works only
with Chase Visa cards.
Lets shoppers on other sites
pay with their
accounts. To entice retailers,
the e-commerce giant
will pass along the discounts
it gets on credit card fees.
Chase Pay
Amazon Pay
Share of
mobile wallets
(among those
who accept
at least one)
Apple Pay
Visa Checkout
Android Pay
AmEx Express Checkout
Samsung Pay
Chase Pay
combined users
Ant Financial’s Alipay and Tencent Holdings
Ltd.’s WeChat Pay together have 90 percent
of the Chinese market. Alipay, with 520 million
users, is making deals with payment processors
in the U.S. as it seeks to follow customers as
they travel. It works in some New York taxis.
hit Vincent Delisle like a tractor two weeks ago. A
Caterpillar tractor, to be exact. He’d been out west,
meeting with clients of Scotiabank on the morning
of April 24. Caterpillar Inc. shares started of great
that day following stellar earnings—they were up
almost 5 percent. Just as fast, they sputtered and
reversed, ending the day with their worst decline in
two years. Why? Perhaps because the company also
said those earnings “will be the high watermark” for
the year. “You’re getting earnings that are blowing
out estimates and are phenomenal, and the market
is not happy,” Delisle says. “This is an illustration of
when the positive story is all priced in. It’s hard to
do anything to surprise the market.”
The threats all have the same ring: There’s too
much good news, so what if it’s all downhill from
here? Ten-year Treasury yields, stuck below 3 percent for six years, crossed that threshold in late
April and have hopped around it since then. Higher
rates are generally a sign that the economy is
returning to health, but they can also make bonds
a somewhat more attractive alternative to stocks
and mean higher borrowing costs. In the low-rate
environment, companies leveraged up—and the
ones with the most debt are suddenly pariahs with
equity investors.
But here’s the thing: Earnings growth may be
about to slow, but S&P 500 income is still projected to rise 10 percent in 2019 and 2020. Priceearnings ratios based on those earnings are
smack in the middle of the historical average.
There’s also no sign companies are getting stingier with share repurchases. “Using a baseball
analogy, we’re in the ninth inning of the bull market, but we are dealing with a very bad pitcher,”
says Delisle—meaning this thing could go for a long
time before the bull strikes out. There’s no rule
that says a rally has to end just because it’s been
going for a while.
Individual investors who tuned out the exuberance of recent years may want to ignore Wall
Street’s current angst as well. Turns in the market are hard to call, and most people are better
of picking a strategy they can stick with through
the ups and downs. But the past few months
are a reminder that owning stocks does require
a little steel. “I try to help clients understand
that this volatility is just part of the game,” says
Peter Waterloo, a senior portfolio manager at
UBS Wealth Management USA. “And the fact that
we had low volatility for a long period is not the
norm.” —Elena Popina and Sarah Ponczek
Pay Buttons
“I’ve watched cockroaches run across
Robert Acosta
○ Trump drives Iran
deeper into China’s
○ Privatization is no
longer a dirty word
in Brazil
○ Some indicators are flashing
red, but there’s still a little slack
in the system
Want ads for truck drivers to haul crude oil in Texas
are touting salaries as high as $150,000 a year. Some
nurses are getting $25,000 signing bonuses. The
U.S. unemployment rate just fell to 3.9 percent,
one tick away from its lowest since the 1960s. And
on May 8 the Bureau of Labor Statistics reported
there are 6.5 million unilled jobs in the U.S., the
most on record. Some employers say they’re
feeling the squeeze. “Rising labor costs remain the
primary contributing factor to our margin erosion,”
Chatham Lodging Trust, a company in West Palm
Beach (Fla.) that owns more than 130 hotels either
by itself or in joint ventures, said on May 1.
Is the U.S. economy overheating? Yes and no.
There are plenty of inlationary bottlenecks, and
not only in the labor market. Backlogs of orders
are the highest since 2004, according to the
Institute for Supply Management. Transportation
costs have jumped in part because of driver
shortages. Strong U.S. oil and gas production has
helped push up the prices of essential inputs such
as steel pipe and specialty sands used in fracking.
On the other hand, the bottlenecks aren’t yet
causing high inlation across the economy, which
would require the Federal Reserve to speed up its
interest rate hikes. The U.S. central bank passed
up the opportunity to raise the federal funds rate
at its May 1-2 meeting while noting that the rate of
inlation has “moved close” to the bank’s 2 percent
target. “In my judgment, the Fed is ready to accelerate [rate hikes] if they need to, but they’re not
getting ahead, which I think is appropriate,” says
Josh Wright, chief economist at ICIMS Inc., which
makes software to ind and hire talent.
Some of the factors driving up the U.S. inlation
rate—in particular, the jump in crude oil prices to
about $70 a barrel from less than $50 a year ago—
have external causes and don’t relect overheating in the domestic economy. Rising commodity
prices caused in part by new steel tariffs cost
General Motors Co. and Fiat Chrysler Automobiles
NV at least $200 million each in the irst quarter.
Tarifs have also helped drive lumber prices to a
record. Other external factors are the high price
of imported alumina for aluminum smelters and
the weather-related runup in prices of vanilla from
Madagascar and cocoa from Ivory Coast and Ghana.
The U.S. economy performed below capacity for
so long that it can be hard for managers to remember how to operate without lots of spare resources.
Half of the surveyed members of the National
Federation of Independent Business say there are
Bottlenecks Are Emerging …
The unemployment rate has been lower
than this just once since 1970.
The share of small-business owners
reporting few or no qualified job applicants
has climbed.
A measure of the backlog of orders is at its
highest point in 14 years.
Backlog increasing
May 14, 2018
Edited by
Cristina Lindblad
Current rate
Bloomberg Businessweek
“few or no” qualiied workers for job openings. Yet
on May 8 the NFIB reported that in April the net
percentage of small-business owners who reported
improved earnings trends was the highest in the
survey’s history. “There is no question that small
business is booming,” William Dunkelberg, NFIB’s
chief economist, said in a statement. (Big companies are, too: First-quarter earnings for companies
in the S&P 500 are expected to be 24 percent higher
than a year earlier, Bloomberg calculated on May 9.)
Sectors with strong pay growth generally confront special circumstances. Those truck drivers
being ofered as much as $150,000? They’re being
hired by oil producers in the Permian Basin who are
desperate to get their crude to market. Hospitals,
whose median expenditures for contract labor rose
19 percent in the past year, face their own special
problems, according to John Morrow, a managing
director of Franklin Trust Ratings who analyzes hospitals. People whose skills are in high demand and
work under temporary contract rather than salary can take full advantage of shortages for their
talents, according to Morrow. “This is a level of skill
that requires advanced-level training that involves
medicine, technology, and science, and all of those
things are costly,” he says.
An important sign that rising costs remain manageable is that most companies haven’t passed
them along to customers. Walmart Inc., the nation’s
largest private employer, raised starting wages
to $11 an hour in January and announced annual
bonuses of as much as $1,000. But it’s cutting prices
to remain competitive with Inc. and
low-cost supermarket chains Aldi Inc. and Lidl
US LLC. The same goes for packaged-goods companies. General Mills Inc. has acknowledged that
attempts to hike prices for its Progresso soup and
Yoplait yogurt ultimately hurt sales by driving shoppers to other brands. In freight transportation,
BNSF Railway Co. has picked up market share from
Union Paciic Corp. by underpricing it.
“We have to be a little bit cautious in inferring that wage growth is going to be a major constraint for business,” says Gregory Daco, head of
U.S. macroeconomics for Oxford Economics Ltd.
While some economists warn that rising inlation
is a “late-cycle” phenomenon—i.e., a precursor
of recession—“we don’t have clear evidence that
we’re at the end rather than the middle of the
cycle,” says Michael Englund, chief economist of
Action Economics LLC in Boulder, Colo.
A key statistic to watch is unit labor costs, which
are wages adjusted for productivity. They rose at an
annual rate of 2.7 percent in the irst quarter. But
over the past year as a whole, the increase was only
1.1 percent. As long as companies’ unit labor costs
don’t rise faster than the prices they charge, tight
labor markets won’t be a problem.
… But
May 14, 2018
They Aren’t Fueling Inflation Yet
Annual growth in average hourly earnings
remains modest.
Consumer spending growth, adjusted for
inflation, is weak.
The Fed’s favorite measure of inflation has
just reached its target.
Excluding food and energy
2Q '07
1Q '18
Bloomberg Businessweek
The Fed’s preferred measure of inlation,
the price index for personal consumption expenditures, is going to look high for a few months
because a brief dip in prices for clothing, hotel
rooms, airline fares, and other items has ended,
says Ian Shepherdson, chief economist of Pantheon
Macroeconomics. That might inluence the Fed, he
says. There’s a risk that Fed rate setters could react
too quickly to signs of overheating. “As inlation
climbs, so too will the risk of recession, because
at some point policymakers will feel impelled to
respond,” Ellen Zentner, chief U.S. economist of
Morgan Stanley, wrote in a note to clients on May 2.
—Peter Coy, with Katia Dmitrieva, Tatiana Darie,
Craig Giammona, and Jamie Butters
May 14, 2018
THE BOTTOM LINE While the job market is tight and the costs
of some widely used commodities such as oil and steel are rising,
companies are largely holding the line on prices.
Iran’s New BFF
○ The return of U.S. sanctions will solidify China’s hold over the Middle East’s second-largest economy
experts say they’d likely show a similar trend.
The bonds between Iran and China will only
strengthen following President Trump’s May 8
announcement that the U.S. will withdraw from
the seven-nation nuclear agreement and reintroduce sanctions. Chinese investors “have the contacts, the guys on the ground, the links to the local
banks,” says Dina Esfandiary, a fellow at the Centre
for Science and Security Studies at King’s College
London and co-author of the forthcoming book
Triple Axis: Iran’s Relations With Russia and China.
During a 2016 trip to Europe that included
stops in Paris and Rome, Iran’s president, Hassan
Rouhani, and a delegation of Iranian business
executives signed memorandums of understanding worth almost €50 billion ($59 billion). But
most of the promised investment never materialized, in part because the U.S. continued to enforce
China has been a
key supplier for the
Tehran Metro
Tehran traic is gridlocked half the time, and the
city spends most of the year engulfed in smog,
so it’s no surprise that locals travel underground
when they can—on a metro system that carries as
many as 2 million riders a day. During the decade
when international sanctions were in place, efectively turning Iran into a no-go zone for Western
companies, the capital’s authorities managed to
steadily expand the network, roughly doubling its
size. It wasn’t easy. Often “the parts we needed,
we had to build ourselves,” says Ali Abdollahpour,
deputy managing director of the Tehran Urban &
Suburban Railway Operation Co.
A constant of those years was Chinese help with
everything from building rails to making subway
cars. The 2015 multicountry agreement to mothball Iran’s nuclear program, and lifting of the most
punishing sanctions a year later, were supposed to
broaden Abdollahpour’s options. He had his eyes on
Europe—“their tech is better”—for essential braking
and signaling systems. Yet when the metro launched
a tender for more than 600 wagons, the contract
went to a unit of China’s CRRC Corp., which beat
out two European rivals for a deal valued at more
than $900 million, according to local press reports.
The tender is part of a pattern where European
companies have been edged out of a coveted
emerging market by Chinese competitors. Iran’s
trade with China climbed from $12.5 billion in
2006 to $27.9 billion last year. Italy, France, and
Germany all saw their commerce with the Middle
East’s second-biggest economy, after Saudi Arabia,
shrink in the same period. Data on foreign direct
investment in Iran are harder to come by, but
Bloomberg Businessweek
some restrictions on commerce with Iran, but
also because European companies feared Trump
would follow through on his campaign pledge
to pull out of the nuclear deal. Airbus Group
Inc. has delivered only three of the 98 jetliners
Iran ordered, a contract worth about $19 billion.
Total SA and China National Petroleum Corp. have
a $5 billion contract to jointly develop the South
Pars natural gas ield. The French oil major has
signaled it would pull out if it couldn’t secure a
waiver if sanctions were reinstated. (The Iranian
government has said Total’s stake would then be
transferred to CNPC.)
Chinese companies have shown more willingness
to defy U.S. pressure to isolate Iran. That doesn’t
mean they’re beyond the reach of U.S. authorities.
The FBI and two other U.S. agencies are said to be
investigating Huawei Technologies Co. for possible violations of sanctions, according to two people
familiar with the matter. Its compatriot ZTE Corp.
was banned from buying American components for
a similar ofense. “Chinese companies have become
much more multinational and global. They have
more of a brand reputation” that they need to protect, says Esfandyar Batmanghelidj, founder of the
Europe-Iran Forum, an annual gathering for executives. That gives the U.S. leverage “to discourage
them from engaging in Iranian markets,” he says.
Many Chinese companies still have zero exposure
to the U.S. and, consequently, nothing to lose from
their forays into Iran. State-run enterprises in particular have no diiculty setting up special-purpose
vehicles for dodging sanctions. “All they have to do is
create a subsidiary that’s separate from the original
entity,” says Esfandiary of King’s College.
The politics are diferent, too. France, Germany,
and the other European Union countries that lobbied to keep the Iran deal intact are longtime U.S.
allies and wary of a direct clash with Washington.
But China, along with Russia, is a main U.S. strategic rival. Central to its geopolitical ambitions is a
plan to crisscross Eurasia with a web of transportation and infrastructure links. Persia was on the old
Silk Road, and Iran is at the heart of President Xi
Jinping’s new one.
China is now the biggest buyer of Iranian oil, with
sales totaling about $11 billion a year at current volumes and prices. Chinese companies have signed
deals in the past year valued at more than $2.2 billion to pay for upgrades to a rail link to the eastern
city of Mashhad and for the construction of a new
railway to Bushehr, a Gulf port city. India was supposed to be developing the port of Chabahar on the
Arabian Sea, but repeated delays have prompted
Iranian oicials to turn to China in the hope of
speeding up construction. China looks at relations
with Iran “from a strategic perspective,” Minister of
Foreign Afairs Wang Yi said last year during a meeting with Iranian oicials in Beijing.
At the Tehran Metro, it won’t be the irst time
politics have swayed investment decisions. When
building got under way in the pro-Western Iran of
the 1970s, it was under French managers. Within
a year of the Islamic Revolution of 1979, they were
gone. That’s business, says Abdollahpour. “In the
world of commerce, one day you’re friends with
someone, one day you aren’t.” —Ladane Nasseri
May 14, 2018
THE BOTTOM LINE Chinese companies are lining up to do
business with Iran while European investors anticipating a return of
U.S. sanctions have stood on the sidelines.
Selling Brazilians
On Privatization
○ Presidential candidates are trying to tap into popular anger about
corruption at state companies
In one of the most iconic photo moments of his
presidency, Luiz Inácio Lula da Silva waves a pair
of hands slicked with crude from a petroleum
platform operated by Brazil’s government-run oil
company, Petrobras. The country’s state-heavy
economy was roaring, buoyed by the global commodity boom, prompting Lula to later declare,
“God is Brazilian.” Twelve years later, Lula is in
jail, Petrobras is reeling from a massive corruption
scandal, and Brazil’s era of undisputed resource
nationalism has reached an ignominious end. As
presidential elections in October approach, the
long-unthinkable is now being openly debated:
Should public assets be sold of?
Geraldo Alckmin, a former São Paulo governor who’s running for president for the second
time, exempliies the shifting mindset. In 2006 he
campaigned wearing a vest and a cap festooned
with state-company logos to rebut claims he was a
“privatizer.” This time around he’s pledged to sell
the government’s controlling stake in Petrobras
if elected. Billionaire businessman and presidential hopeful Flávio Rocha recently proclaimed:
“I’d sell all the state companies.” Jair Bolsonaro,
a onetime army captain who’s the front-runner in
opinion polls among eligible candidates, broadly
supports auctioning state assets, though he also
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Bloomberg Businessweek
champions restrictions on foreign ownership of
farmland and mineral deposits.
These politicians are banking that anger over
corruption, the worst recession on record, and
empty public cofers can help change voters’ attitudes toward privatization. It’s not a sure bet: In a
recent survey, 7 out of 10 Brazilians opposed the
idea, led by the poorer and less educated.
“In all its history, the state always dominated economic activity in Brazil,” says Marco Troyjo, a professor of international afairs at Columbia University.
Brazilians pay the equivalent of almost one-third of
gross domestic product in taxes, one of the highest
shares in the world. The country ranks 153rd out
of 180 nations in the Index of Economic Freedom
compiled by the conservative Heritage Foundation.
France ranks 71st and Mexico is 63rd.
In the 1990s, Brazil sold scores of state-run businesses, including the telephone monopoly and
mining and steel companies. The sales drew much
needed investment, technology, and managerial
know-how—often to the beneit of the consumers
those companies served. Even so, left-of-center
politicians complained of sweetheart deals beneiting political cronies or foreign companies.
Among the poor, the stigma lingers. “It won’t
reduce corruption,” says Maria Madalena, an oice
assistant in Brasília, when asked if she supports
privatization proposals. “What it’ll do is leave even
more people unemployed.”
In Congress, support for divesting state
assets has also been lukewarm—not surprising,
considering that politicians often reward supporters with jobs at state-owned companies. A proposal
to privatize power utility Eletrobras, which could
fetch an estimated $3.4 billion, has been stuck
in Congress for almost four months. The federal
mint and Congonhas Airport in São Paulo are
often mentioned as potential candidates for auction. The planned June 14 tender of a management
concession for the Lotex scratch card lottery has
generated interest from several international companies, the inance ministry says.
Renato Nobile, chief executive oicer of BullMark
Financial Group, is encouraged that presidential
aspirants are willing to discuss what was once
taboo. “With one or two exceptions, there are no
disaster candidates in terms of economic policy,”
he says. “Independent of who wins, there’s a bigger
chance of getting a pro-market candidate than in
previous elections.” —Raymond Colitt, with Gabriel
Shinohara and Samy Adghirni
THE BOTTOM LINE A recent poll shows the majority of Brazilians
oppose privatization, led by the poor. Many legislators do, too,
because it would deprive them of a large pool of patronage jobs.
May 14, 2018
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○ James Comey talks
about Trump, Giuliani,
and leadership
○ Women are running
for Congress in record
How P
○ The Democratic Party gets
more progressive without
tearing itself apart
During the irst years of the Obama presidency,
the Republican Party found itself out of power in
Washington—and went to war with itself. Right-wing
insurgents, mobilized under the Tea Party banner,
brought out the knives against fellow Republicans
deemed insuiciently conservative, particularly in
party primaries and often with disastrous efect.
Angry voters nominated a succession of hard-right
candidates who took down more electable incumbents, inhibiting the party’s eforts to win back the
Senate for six years even as it won control of the
House in 2010.
Democrats, likewise shut out of power in the
early years of the Trump presidency, face a similarly rebellious activist lank that risks pulling
their party to an unelectable extreme by defeating
Establishment-friendly candidates. But so far the
left-wing “resistance” hasn’t sparked an intraparty
civil war so much as a genteel cofee-table discussion. During the irst big wave of primaries this
month, Democratic centrists did something their
GOP counterparts often couldn’t during the Obama
years: They survived. Instead of nominating radical outsiders, voters mostly went with moderate
incumbents. Putting of any signiicant discussion
about what the party truly stands for is just ine for
House Minority Leader Nancy Pelosi, who on May 8
said at an event in Washington, “Just win baby.”
That evening, two of the Senate’s most conservative Democrats—West Virginia’s Joe Manchin
and Indiana’s Joe Donnelly—coasted to renomination. Manchin crushed his liberal challenger
by 40 points, while Donnelly ran unopposed.
Both have angered the left by casting numerous
votes in favor of Trump’s agenda. In the last year,
Democrats nominated other moderates, such as
Jon Ossof (who lost a Georgia House race), Conor
Lamb (who won in Pennsylvania’s House special
election), and Doug Jones, who pulled of an
May 14, 2018
Edited by
Matthew Philips and
Jillian Goodman
Bloomberg Businessweek
upset against a tainted Republican Senate candidate in deep-red Alabama.
Liberal voter intensity and grass-roots energy,
driven by anger at Trump, sometimes evokes comparisons to the Tea Party. But the resistance has
less money, is less organized, and therefore is less
able to bend the party in its direction. “I envy how
well-funded the right is,” says Karthik Ganapathy,
a spokesman for the progressive activist group
MoveOn. “It’s not the most glowing thing to say
about the progressive movement, but at this point
in the Tea Party cycle they were purifying the ranks.
And we’re still catching up to that.”
At the same time, the resistance is avoiding the
suicidal tendencies of the Tea Party, which nominated radical candidates who blew winnable races
for the Senate, such as Sharron Angle in Nevada,
Todd Akin in Missouri, and Richard Mourdock in
Indiana. In 2010 and 2012 the movement defeated
Republican incumbents with strong general election appeal such as Delaware’s Mike Castle and
Indiana’s Dick Lugar, only to watch Democrats
win those races. “The only signiicant races we
won in 2010 were in races where Republicans ate
themselves alive,” says Senator Chris Murphy, a
Connecticut Democrat. “What should scare the hell
out of Republicans is that we have energy and relative unity. That’s hard, because with energy usually
comes some opposing forces, and that has not happened in any meaningful way so far.”
While red states such as Indiana and West Virginia
drew the most attention on May 8, Democrats also
stopped populist insurgents in important swing
states like Ohio. Democratic leaders had worried
that their preferred candidate, former Obama oicial Richard Cordray, might lose to Dennis Kucinich,
the outspoken populist ex-congressman who won
the backing of Our Revolution, an advocacy group
that emerged from the Bernie Sanders campaign.
But Cordray trounced Kucinich by 40 points. Rather
than representing a broad divide between two poles
of the party, Cordray says, he and Kucinich shared
many policy positions, lessening the temptation of
grass-roots activists to defect to his left-wing rival.
Trump is enough of a unifying force that
Democrats can paper over policy diferences. The
party also isn’t nearly as much of a top-down organization as the GOP, where big donors like the
Kochs exert outsize inluence. “Our donors have
much less impact on our grass-roots structure than
Republicans do,” Murphy says. “That’s one of the
outstanding questions for us: Are they still going
to have a big money advantage that we’ll have to
counter with an enthusiasm advantage?”
Progressives have found ways to move the
policy conversation to the left, without attacking moderates. Potential presidential contenders
such as New Jersey’s Cory Booker, Massachusetts’
Elizabeth Warren, New York’s Kirsten Gillibrand,
and Vermont’s Bernie Sanders have endorsed singlepayer health care and a federal jobs guarantee, two
left-wing pipe dreams that were conined to the
fringes during Obama’s presidency. Progressives
are thrilled that a number of candidates—mostly in
safe blue districts—are running on those ideas this
year. “Democrats are being bolder and proposing
big solutions to big problems,” says Ari Rabin-Havt,
a senior adviser to Sanders. “We have been way too
limited in our thinking, and I’m very glad Democrats
are breaking out of that as a whole.”
By contrast, the Tea Party was less about policy
and more about capitalizing on cultural resentment
among older white voters. While its leaders styled
it as a iscal conservative movement, its goals were
rife with contradictions, such as reducing the deicit while cutting taxes and preserving Medicare. In
the end, the true power of the Tea Party was in channeling voters’ revulsion to demographic diversity, a
phenomenon embodied in the election of the irst
black president. “The Tea Party movement became
efective because they were able to vilify President
Obama and tag every Democrat to him,” says Mike
Caputo, Democratic minority whip in the West
Virginia House of Delegates. “If you were running
for dog catcher, they would do a mailer telling about
how you and Obama used to have lunch together.”
Democrats still face huge challenges, including a
depleted bench. The party lost more than 1,000 legislative seats during Obama’s presidency. “The progressive movement hasn’t done enough to cultivate
the bench down-ballot,” Ganapathy says, adding that
the left is “lacking the sort of roster that we need”
to elect liberal candidates in higher-level races.
Democrats also have a geographical disadvantage. In
the House, GOP-drawn congressional districts have
stacked the deck against Democrats, whose voters
are concentrated in urban areas. In the Senate, red
states with fewer than a million people carry the
same weight as California, with 40 million residents.
“We have to simultaneously represent workingclass voters in Michigan and Brooklyn hipsters and
Southern California farm workers,” Ganapathy
says. “That’s a more diverse coalition, and it presents more of a challenge. If that means we’re going
to have some more discordant views in our party,
we have to be OK with it.” —Sahil Kapur, with
Joshua Green and Tim Loh
THE BOTTOM LINE Antipathy for Trump is energizing Democrats
and, so far at least, keeping the party from fracturing over internal
diferences or nominating extreme candidates.
May 14, 2018
Bloomberg Businessweek
May 14, 2018
James Comey
On Leadership,
Trump, and Why
He Left the GOP
○ “What are the values the Republican Party
stands for anymore? Rule of law? Really?”
Former FBI Director James Comey’s book, A Higher
Loyalty, made headlines for its barbed comments
about President Donald Trump. But Comey’s real
subject is leadership. On the eve of the irst anniversary of his being ired by Trump, Comey sat down
for a wide-ranging talk on his time as a public servant, what makes a good boss, and how he rates two
men he’s worked for—Trump and the latest addition
to his legal team, Rudy Giuliani—as leaders.
Bloomberg Businessweek: You’ve had a lot of famous
bosses, yet the one you point to as the best is Harry
Howell, who ran the grocery store where you worked
as a kid. What did he have that presidents and top government oicials didn’t?
James Comey: The best leaders are a combination
of two pairs of attributes: They’re conident people, but they also have humility to leaven that conidence, and they’re tough and kind. What made me
want to please Harry so much is that he was able to
create an environment where we knew he loved us
but he kicked us in the butt. He was kind and tough,
and he had enough conidence that he wasn’t threatened by us. Just the way he reacted to me destroying, by accident, a prototype label gun and dumping
a lake of milk in the back of the store, an insecure
boss could not react that way.
So you found higher levels of insecurity among top
members of the federal government than you did with
a grocery store manager?
Yeah. And in our current president I found a
much higher level of insecurity than I did in a manager of a grocery store.
You explicitly draw comparisons between the mob
and President Trump. Did you struggle with whether
to include that?
Yes. In fact when the thought irst occurred to
me I pushed it away, convinced that it was too
dramatic. And it kept coming back. And so, yes,
I tried actually to not think that, but the leadership styles were so strikingly similar, that’s why
it kept popping back in my head. I guess there’s
some risk that people think I’m saying the president is robbing banks or breaking people’s legs
like a mob leader. I mean the leadership culture
is strikingly similar.
In what regard?
In that it’s entirely boss-centric. The only thing
that matters is what you can do for me. How does
the decision we’re going to make beneit the boss?
It’s all about the boss, not about any external values
or anything higher than that, and that’s the way the
Cosa Nostra family is run, and that’s why the comparison kept striking me.
Back when you were a young New York prosecutor in
the 1980s, your boss was Rudy Giuliani, then the U.S.
attorney for the Southern District of New York. Was
he a good leader?
No. At the time, I thought he was a cool leader.
I found it very exciting to work for someone like
that, but I had never led at that point. I’ve since
realized that the second U.S. attorney I worked
for, Helen Fahey, was a far better leader. She
Bloomberg Businessweek
had enough conidence in herself to be humble and take joy in the achievements of her people. That is efective leadership in a way that I
didn’t see with Rudy. I didn’t know it at the time.
I thought, How cool is this? My boss is on the covers of magazines, he’s in charge of everything. I
didn’t realize until later that style makes it harder
to get the truth from your people and limits the
circle that will talk to you.
Are you surprised to see him in his current role defending the president?
No. It would’ve surprised me if you’d asked me
20 years ago, but it doesn’t now given his public role
of the last few years.
What about some of the things he’s said about you and
the FBI—calling FBI agents stormtroopers and saying
that you probably lied to Mueller?
I honestly don’t care about the stuf about me,
because others will decide that. I care very much
about the attack on the institutions, because it’s
just not true. Republicans and Democrats should
both knock it of, attacking the institutions of justice, because everybody needs them. It’s just a very
short-sighted thing and bad for the country.
You once worked for Ray Dalio, who runs the hedge
fund Bridgewater, which is notorious for its ruthless
culture. What’d you learn there?
I learned about my own weaknesses. In Ray’s
view, you’re failing if you’re not being honest. I have
a hard time delivering feedback that’s negative, and
he taught me that you’re duty-bound to be accurate.
Let’s talk about Bob Mueller. You inherited an FBI from
him in 2013 that you describe as very buttoned-up and
still had an overhang from the time of J. Edgar Hoover,
where the main motivation was to tell the boss what he
wanted to hear. Did that surprise you?
Not entirely. I’d come from eight years in the private sector where transparency is something that’s
always talked about. I was a little surprised, though
maybe I shouldn’t have been knowing that Hoover
had been in charge for half a century, that it was less
modern than I’d expected in terms of that culture.
It’s ironic that an agency dedicated to inding the truth
struggles from a lack of transparency.
That struck me, too. And a lot of what I did during
my four years as director was to get people to feel
safe enough around me to tell me the truth.
How’d you do that?
In lots of ways, some small, some big. I tried to
issue an edict on how people should dress around
me, with no outer garments. If you dress like you’re
in church, you’ll act like you’re in church. I took the
wild step of wearing blue shirts, and it’s something
everybody noticed—it was a signal that I wanted a
diferent approach.
Do you think Mueller struck some as too intimidating,
and the effect on people kept them from opening up?
Did you try to be more approachable?
I think that’s fair. I think he’s a better leader
than I in some respects. I don’t know that I
could’ve accomplished what he did after 9/11
because I don’t know that I’m strong enough and
tough enough. When I inherited the FBI, my mission was to get it to relax a little bit and open up.
My goal was to get people to laugh more and to
communicate with me in a way that was diferent than Bob.
What went through your mind when you heard
Mueller had been made special counsel?
Surprise at first, and then relief, because I
thought it was important to pursue the possibility
that there were tapes of my conversations with the
president, and if there was someone who was going
to go get the tapes, it would be Bob Mueller.
Other than Trump’s tweets do you have reason to
believe tapes exist?
I don’t.
What went through your mind when you learned that
Deputy Attorney General Rod Rosenstein provided
legal cover for the rationale behind your iring?
I was surprised, given my encounters with him in
the days before. We met privately for him to seek my
advice about how to do his job. Four days later he
authored that memo. So that surprised me and disappointed me. If you really had concerns about my
performance as FBI director, you would’ve told me
that instead of leading me to the opposite. And then
when I read it, I thought, that’s not the real deal.
Do you worry the Mueller investigation is taking
too long?
My view is that it’s moving very quickly. A whole
lot of evidence has emerged in the charges they’ve
brought. He’s got a really talented team. It’s not even
been a year since he was appointed.
Are you surprised that the Republican Party has
turned on the law-and-order institutions in the U.S.?
Yes. I’m shocked, disappointed, and disgusted.
Do you worry about the future of the GOP?
I do. I don’t know what it stands for, honestly,
and it’s going to have to answer those questions.
What are the values that the Republican Party stands
for? Rule of law? Really?
Are you still a Republican?
When did you leave the party?
It kind of left me is how I think about it.
Would you ever consider running for oice?
No. That’s not my gig. It’s not in my DNA. I don’t
want to have to ask strangers for money.
—Matthew Philips and Chris Strohm
May 14, 2018
The best
leaders are
people, but
they also have
humility to
leaven that
and they’re
tough and
The Year of the Woman
A record number of women are running for Congress in 2018. As of the end of
April, the count was 527, with more than a dozen states still taking candidates.
That’s a 67 percent jump from 2016. Says Stephanie Schriock, president of
pro-choice PAC Emily’s List: “I think we’re really on the verge of a sea change.”
Women are competing in 278 of 435 House districts, more than twice as many as in 2000.
278 races
Bush v. Gore
Tea Party emerges
Trump elected
While more
women than ever
are running, they
still make up only
23.1 percent of the
candidate pool,
because men are
running in record
numbers, too.
Women on a primary or general election ballot
Number of candidates
Share of candidates
As recently as the
Tea Party wave of
2010, the number
of Democratic
and Republican
women candidates
was almost equal.
This year, far more
Democratic women
are running.
Races to Watch
Women in a major party on
a primary or general ballot
The Upshot
Arizona, U.S. Senate
Texas 16th and 29th
California 49th
Democrat Kyrsten Sinema,
currently in the U.S. House,
will face either GOP House
member Martha McSally or
former state legislator Kelli
Ward for the seat vacated by
Senator Jef Flake.
Democrats Veronica
Escobar and Sylvia Garcia
won primaries in heavily
Democratic districts around
El Paso and Houston. They’d
be the first Latinas elected
from Texas.
Two of the top candidates
for Representative Darrell
Issa’s seat are Republican
women: former Encinitas
Mayor Kristin Gaspar and
Diane Harkey, a former state
If all women incumbents win,
15 percent of women challengers
unseat men, and competitive races
break women’s way—a highly unlikely
prospect—women would hold about
30 percent of seats in Congress, up
from 20 percent now.
Bloomberg Businessweek
May 14, 2018
l k l
Bloomberg Businessweek
May 14, 2018
Andrés Manuel López Obrador, sharing a stage with crates of
coconuts and limes, looks out upon a crowd of thousands:
a sea of sombreros bobbing in the sun. They’re farmers,
mostly—or used to be, before the North American Free Trade
Agreement upended the old traditions here in the Mexican
heartland. Now, many take whatever jobs they can ind and
lament that so much corn, Mexico’s iconic national crop, is
now imported from the U.S.
López Obrador—or AMLO, as he’s widely known—assures
the crowd that their dreams of returning to their farms are
within reach. After he wins the presidential election on
July 1, he says, he’ll provide them with free fertilizer and
cheap fuel, and he’ll establish minimum price guarantees
for homegrown crops. The ields here in the central Mexican
state of Zacatecas will spring back to life, which will provide
people with jobs and, in turn, stem the outward low of
migrants to America. But for this chain of prosperity to
kick in, there’s one condition: An electoral deathblow must
be struck against the ruling political class, a group López
Obrador references in terms this rural audience appreciates.
“Filthy pigs!” he shouts. “Hogs! Swine!”
The contempt that most of Mexico feels toward the established political order might be measured by the rising pitch
of the whistles and the jeers, a resentful clamor that the
64-year-old López Obrador—ist raised, sweat beading on his
brow—has done his best to provoke and amplify. For decades
he built a following throughout Mexico the hard way: staging rallies in every one of the country’s 2,400-plus municipalities, no matter how small, no matter how distant from
the centers of power. Now, after two failed presidential bids,
he’s emerged as the undisputed front-runner, enjoying an
advantage of almost 20 percentage points over his nearest
rival in a crowded ield.
Earlier this year, despite López Obrador’s commanding
lead in the polls, 85 percent of Mexican corporate executives surveyed by Banco Santander SA predicted he would
ind a way to lose this election. Now their conidence seems
to be giving way to apprehension. They fear his brand of
populism is fueled by a false nostalgia for simpler times—a
mythical era that was never that good to begin with—and
they’re afraid he might roll back 25 years of economic modernization. López Obrador doesn’t bother to counter the
claims that his victory would represent a large-scale societal upheaval; in fact, he encourages the notion, casting his
rise as the most consequential political development here
since the Mexican Revolution that began in 1910.
It’s tempting to compare his campaign to Donald Trump’s,
though ideologically they’re negative images of each other.
Both appeal to a base that dreams of reviving sectors—
manufacturing in the U.S., agriculture in Mexico—that were
economic backbones broken by globalization. So far, López
Obrador’s relationship to the American president is shaping
up as a symbiotic one. His campaign, which taps into a proud
vein of nationalism, seems to grow stronger every time Trump
uses Mexicans as rhetorical cannon fodder.
“We won’t care about threats of a wall,” López Obrador
announces, assuring another rally crowd in Zacatecas, one
of the states that sends the most migrants to the U.S., that
with him in power, they’ll inally achieve equal footing with
their neighbors to the north. “Nothing will matter. They’ll be
the ones with the problem because our people won’t have
to go to the United States, and they won’t have anyone to
pick their crops or build their houses. And so we’ll be the
ones deciding the conditions.”
Before dueling tuba bands lood the rally with noise, one
enthusiastic onlooker raises his voice above the others. He
calls out a phrase that has become something of a campaign
slogan for López Obrador, a saying with roots in Mexico’s
rural past, when people tried to pick their winners in the
cockighting ring. “Ese es mi gallo!” the man shouts. He’s
my rooster!
López Obrador’s story begins in Tepetitán, a village of fewer than
1,500 on a river bend in the southern state of Tabasco. His
grandparents were campesinos and his parents ran a fabric
shop. Boyhood friends recall a kid who loved baseball and
whose destiny didn’t look a lot diferent from theirs. But when
he was 15, a murky drama unfolded inside his parents’ store
that would become a foundational parable of his career.
Late one afternoon his younger brother, José Ramón,
grabbed a pistol and tried to persuade López Obrador to use
it to scare an employee of a nearby shoe shop. According to
a report by Enrique Krauze, a prominent Mexican historian,
López Obrador argued with his brother, trying to persuade
him to put away the gun. He had just turned his back on the
boy when he heard the bang. His brother had accidentally shot
himself, sufering a fatal wound.
He doesn’t say much about the incident today, other than
acknowledging that it afected him deeply. Krauze has suggested the tragedy burdened López Obrador with guilt, which
he tries to atone for with an almost messianic zeal to change
the course of history.
As a young man he became an advocate for Mexico’s indigenous population, and he helped oversee the construction of
rudimentary houses and latrines in rural villages. His irst foray
into electoral politics came in 1976, when he joined the senatorial campaign of a candidate representing the Institutional
Revolutionary Party, or PRI. Choosing a PRI ailiation was
almost a given; the party maintained a stranglehold on national
politics, occupying the presidency from 1929 to 2000. He was
quickly appointed a local party head but lasted less than a
year—he tried to oversee spending among PRI mayors in
Tabasco, and they pushed back. According to a local historian, López Obrador was also advised to tone down his revolutionary rhetoric and was warned, “This isn’t Cuba.”
Bloomberg Businessweek
May 14, 2018
“There are people in history who have no ideology and
adapt to circumstances,” says Geney Torruco, who serves as
the oicial historian of Tabasco’s capital city, Villahermosa.
Such people, he says, have almost nothing in common with
López Obrador. Rodolfo Lara, his middle school teacher,
describes someone whose leftist beliefs have never really
changed, even if his method of expressing them has evolved.
“He’s matured in the sense that his expressions aren’t as
harsh. He invokes ‘love and peace’ whenever they try to
corner him. But has he changed his ideology? I don’t think
so,” Lara says.
In 1988, López Obrador joined a coalition of leftist parties,
ran for governor, and lost by a wide margin, which didn’t stop
him from leading protests claiming voter fraud. He lost a bid
for governor again in 1994, and this time his complaints of
vote-rigging carried more weight. Regulators found evidence
of numerous discrepancies at polling stations. He led a caravan of protesters from Tabasco to Mexico City, where he and
his followers took over the capital’s main square. The sit-in was
eventually broken up, but not before it helped force the resignation of Mexico’s interior minister, who serves as the president’s second-in-command.
López Obrador now was a presence on the national stage,
and his leadership of a string of protests against Pemex, the
national oil company, helped him stay there. In 1996, Mexican
police tried to remove him from one such blockade. Pictures
of him in a blood-soaked shirt graced the cover of a national
magazine, reinforcing his standing as one of the country’s most
persistent social agitators.
All of this set the stage for his irst—and, to date, only—
electoral victory. In 2000 he was elected mayor of Mexico
City. He instituted a slate of social programs, including
monthly pensions for the elderly, and ushered in widespread infrastructure improvements. As his popularity grew,
his political opponents closed in on him. Amid accusations
that he improperly built a road to a hospital on private land,
López Obrador, bloodied from a
confrontation with the police, on
a 1996 magazine cover. “Tabasco,
a lawless state,” the text reads.
he was impeached. The case buckled under scrutiny and
under pressure from protests that attracted more than 1 million supporters. Mexico’s attorney general, who was widely
accused of trying to sabotage López Obrador’s presidential
aspirations, was forced out of oice. López Obrador ended
his term in 2005 with approval ratings hovering around
80 percent.
During his irst presidential campaign, as the candidate of
the Democratic Revolutionary Party (PRD) in 2006, he was
often cast in the media as a member of Latin America’s New
Left, a group that included populists such as Venezuela’s
Hugo Chávez and Argentina’s Néstor Kirchner. But Mexico’s
politics have always been more intricately connected to the
country’s northern neighbors than its southern ones, and it
narrowly resisted the leftward swing. López Obrador lost to
Felipe Calderón by about a half-percentage point. He disputed
the results, again alleging fraud and casting himself as a political threat that Mexico’s elite would do anything to destroy.
His followers took over tollbooths on federal highways and
surrounded the oices of foreign banks, accusing the businesses of conspiring with Calderón to deny him his rightful triumph. López Obrador declared himself the legitimate winner
and appointed members to a shadow cabinet. He led another
sit-in in downtown Mexico City, and this one lasted more than
a month.
By the time he lost his second presidential bid, in 2012, his
reputation among rivals was irmly set, and it centers on two
dominant traits: a seeming willingness to tear down any institution he believes is biased against his political movement and
a bitter reluctance, regardless of the circumstances, to give up.
If the anxiety that López Obrador provokes among Mexico’s
political and business leadership has a geographical center, it probably sits somewhere near Monterrey. Many of
the country’s most successful international corporations are
headquartered in the city, which has been thoroughly transformed during the past 25 years by Nafta. Factories and business parks ring the outskirts, and its roadsides are crowded
with chains: Carl’s Jr., 7-Eleven, Walmart. Monterrey isn’t
immune to Mexico’s epidemic of cartel violence, but some of
the suburbs on the west end of town could be mistaken for
upscale neighborhoods in Southern California. The region
has the country’s lowest poverty rate and highest formal
employment rate, and a per capita income roughly double
the national average.
When Trump hectored Carrier Corp. to keep manufacturing jobs at a plant in Indianapolis during the 2016 campaign,
those jobs came here anyway, to a sprawling complex of
factories and warehouses north of town. And when Trump
swore of Oreos because Nabisco started talking about
Bloomberg Businessweek
moving out of Chicago, those jobs, too, ended up in the
same industrial park.
The development is called Interpuerto Monterrey, a
3,459-acre complex that opened in 2013 and is now home to
a dozen companies from the U.S., Korea, Japan, and Mexico.
Its enticements are clear: easy access to Mexico’s two main
rail lines, a dedicated customs oice, full utility services, a
two-hour drive to the border, and a seemingly inexhaustible
supply of cheap labor. That said, these can be challenging
times. In 2017 the park attracted a little more than half of
the $120 million in investment it had forecast that February.
Chief Executive Oicer Mauricio Garza Kalifa blames it on a
“perfect storm” of uncertainty that’s settled over Monterrey.
The ongoing Nafta renegotiation is part of it. So is the new
U.S. corporate tax plan, which has bitten into Mexico’s competitive advantages. Finally, there’s López Obrador.
“Yes, there is a little bit of worry around what, in reality,
he’s actually going to do,” Garza Kalifa says. “Is he going to radically change the course of the country, or will he follow the
same general path we’ve been on? Foreign investors seem cautious, waiting to see what’s going to happen.”
Mexico’s domestic investors are also skittish. In
Monterrey’s executive suites, there’s a natural antagonism toward López Obrador. Some suspect it’s them he’s
talking about when he rails against the “maia of power.”
In February the candidate visited the city and convened a
meeting at a Holiday Inn Express, ostensibly to assure the
business community that he was willing to work with them.
Hundreds crammed into the conference hall, but some who
attended say the gathering was notable for who wasn’t there.
Jesus Garza, who runs a Monterrey inancial company and
People pose with a person in
an AMLO suit at a campaign
rally in Nicolás Romero, near
Mexico City, in April.
May 14, 2018
who previously worked as an economist for Mexico’s Central
Bank and the Ministry of Finance, says many of the city’s
biggest business leaders were nowhere to be seen.
Garza managed to snag an invitation from a friend involved
with López Obrador’s political party, Morena. Like many others here, he was keen to hear what López Obrador had to say
about the energy sector. For most of a century, Pemex dominated the industry. But in 2013 the government opened the oil
and gas business to foreign companies. The idea that López
Obrador might nullify many of those contracts, undermining
the sector’s privatization plan, tops the list of concerns among
many business leaders.
López Obrador has said he has no plans to nullify any of
the contracts, which are valued at as much as $153 billion—
unless reviews prove individual contracts were tainted by corruption. A week before that February meeting, one of López
Obrador’s economic advisers publicly assured investors that
they shouldn’t be scared and that the contracts would be
respected and protected. Even if López Obrador wanted to
roll back the reform, he’d need the support of two-thirds of
Congress. But when López Obrador got to Monterrey, Garza
says, the candidate seemed to leave the door open to a massive
overhaul of the sector. “I think deep down inside he doesn’t
believe in the energy reform agenda that was established by
the current administration,” Garza says. “And with power, I
think he would reverse it if he got the chance.”
That sort of distrust casts a shadow over almost everything
López Obrador promises. Some warn that his history of disputing election results is a sign of authoritarian impulses, and
they warn he might bring a Hugo Chávez-style socialism to the
country. That typically means government spending. López
Bloomberg Businessweek
Obrador and his pick for inance minister, Carlos Urzua, however, have pledged to reduce the budget deicit, to respect the
autonomy of the central bank, and to keep the peso loating
freely. The savings they’ll reap from eliminating corruption
and graft, they say, will keep the government lush. “We are
more centrist than Lula,” says Urzua, referring to Brazil’s former president Luiz Inácio Lula da Silva, another leftist who
campaigned on social reform and who ultimately surprised
investors with business-friendly policies.
Not everyone buys the sales pitch, of course. Citigroup Inc.’s
Mexico economist Sergio Luna recently warned clients that
López Obrador would “eventually generate macroeconomic
inconsistencies in terms of monetary, iscal, and commercial
policy.” He sees inlation rising and the deicit widening.
It doesn’t help that the candidate himself often contradicts
the same advisers who defend him as a iscal pragmatist who
won’t do anything drastic. At a February rally in Puebla state,
López Obrador vowed to his supporters that he would never
allow Mexican crude to return to the hands of foreigners—
after his advisers had said he would never try to nationalize
the oil industry. At another rally he vowed to end gasolinazos,
or surges in gasoline prices, by freezing prices in real terms—
though his team later insisted that what he really meant was
that he’d cut fuel taxes. More recently he said he may seek to
reform the oil industry in the second half of his administration.
The current administration of Enrique Peña Nieto instituted
free-market reforms to the energy and iscal sectors under a
plan called the Pacto por México. Over time, they’ve proved
deeply unpopular, as has the president, who’s been saddled
with approval ratings as low as 12 percent. Corruption scandals hastened his fall from grace.
The higher López Obrador rises in the polls, the more willing he seems to drop all pretense of appeasing business leaders. Within the larger context of Mexico’s problems—spiraling
violence, rampant corruption, endemic poverty—their anxieties can seem beside the point, and Monterrey begins to look
like a tiny island in a very big sea.
The first of three planned presidential debates was held in late
April, and the evening’s broadly stated theme—governance and
politics—quickly narrowed to focus on Mexico’s two most pressing preoccupations: violence and the impunity that almost
always accompanies it.
Last year was the deadliest in Mexico’s history, with almost
30,000 murders. This year things are even worse, with homicides jumping 20 percent in the irst three months. Turf battles among the drug cartels rage across the country, and daily
news reports are dense with assassinations and dismemberments. In contrast to the U.S., where about two-thirds of homicides result in arrests and indictments, about 95 percent of all
crimes in Mexico—and more than 98 percent of homicides—
remain unsolved.
One of the ive presidential candidates, Jaime Rodríguez, the
independent governor of Nuevo León, suggested he’d combat
crime and corruption by cutting of the hands of thieves. When
May 14, 2018
a debate moderator asked if he was speaking iguratively, he
assured her he was not.
López Obrador’s own proposal of amnesty for certain criminals as an attempt to start a dialogue and stop the cycles of
violence—an idea that previously had been pounced upon by
some of his critics as irresponsibly unhinged—seemed relatively
conventional. A political truism seemed to be emerging from
all of this: When important governmental institutions are so
comprehensively broken, the politics of continuity becomes
untenable, and the extremes are pulled into the center. How
could a candidate be criticized as too radical if radical change
is desperately needed?
López Obrador’s closest competitor in the race is Ricardo
Anaya, who represents a coalition of parties and generally
casts himself as pro-business. The PRI’s Jose Antonio Meade
has struggled to distance himself from Peña Nieto and is running a distant third. Rodriguez and Margarita Zavala, the wife
of former President Calderón, round out the ballot. As the most
vocal proponent of comprehensive change in the race, López
Obrador seemed both galvanized and relaxed at this debate.
In 2006 he infamously told incumbent President Vicente Fox
at a campaign event to “¡Cállate, chachalaca!” (“Shut up, you
noisy bird!”). Now he appeared subdued, even withdrawn. At
one point he marveled at his lead in the polls and suggested
there was almost no way he could lose.
“Something terrible would have to happen,” he said.
A week later he returned to Monterrey to attend a forum at
the Monterrey Institute of Technology and Higher Education.
Known as Tec, it’s generally considered the best business
school in Latin America. Tec is the alma mater of many of
López Obrador’s adversaries within the country’s business
elite. Figuratively, and in some cases literally, he had come to
speak to their children.
About 1,800 students packed into an auditorium, where
López Obrador relaxed in an armchair, serenely answering
dozens of questions about everything: the death penalty (he
opposes it), euthanasia (he supports it), the idea of pensions
for former presidents (he’ll abolish it), gender equality (he’ll
respect it). When he dropped a casual reference to how the
powers that be unfairly thwarted his irst presidential run, he
was rewarded with applause. A former student named Manuel
Toledo took to Twitter after the event and observed, “As an
alumnus of this institution, I must admit that I never in my life
expected to hear the students of Tec de Monterrey applaud
AMLO after he stated (with customary pride) about 2006, ‘With
all due respect, they stole the presidency.’”
The millions who dwell in Mexico’s impoverished countryside remain his ever-reliable base, the ones he’ll always be able
to connect to with an unafected ease. But it’s the residents of
Mexico’s north, in cities such as Monterrey, who will determine whether this year is diferent for him from 2006 or 2012.
When he concluded his remarks, López Obrador waved
to the students and slipped a Tec jersey over his shirt and
tie. He exited the stage to chants of “Presidente, presidente,
presidente!” 55
Bloomberg Businessweek
Most of us see
sales pitches
One online
By Adrianne Jeffries
Photo illustration by Scott Gelber
May 14, 2018
Anyone who works in the $200 billion digital advertising
industry should be scared of people like Mark Drobnak,
because the ad blocker he uses is way more powerful than
yours. The college freshman says it feels as though everyone
at Rochester Institute of Technology, from his roommate to
his professors, has installed some way to ward of online ads.
But Drobnak is one of the die-hards who goes further, working with a handful of comrades to build what they call “a
black hole for advertisements.” His parents say the one he
built them works great.
Pi-hole (as in “shut your …”) is a free, open source software
package designed to run on a Raspberry Pi, a basic computer
that’s popular with DIYers, its in the palm of your hand, and
retails for about $35. Most ad blockers have to be installed on
individual devices and work only in web browsers, but Pi-hole
blocks ads across an entire network, including in most apps.
(Two big exceptions, both for technical reasons, are YouTube
and Hulu.) It can’t block ads inside Facebook, but it can stop
Facebook from following you around the web. It’ll let you play
Bejeweled without seeing ads between games, watch Mr. Robot
ad-free in the USA app, stream NPR with silence in place of
the sponsor messages, and avoid the banner ads that have
become common on internet-connected TVs. If friends come
over and connect to your Wi-Fi, it’ll block ads for them, too.
Drobnak discovered Pi-hole in high school in 2015, after
he and his siblings had already used their Raspberry Pi to
play tic-tac-toe, program an elaborate light show, and monitor their respective addictions to electronics. The ad blocker,
created by a Minnesota programmer named Jacob Salmela,
was 2 years old and still fairly rudimentary. Less than a
month after installing it at home, Drobnak hacked together
a web interface to let users more easily block or whitelist
sites. Two months later, Salmela invited him to join a tiny, allvolunteer development team. “Ads are annoying,” Drobnak
says. “Pi-hole gives you control over that.”
PageFair Ltd., a company that helps advertisers ind technical ways to work around the software, says about 18 percent
of U.S. web users have an ad blocker. (Its estimate is among
the more conservative ones.) Outside the U.S., the numbers
are more dramatic. Desktop ad-blocker penetration is 24 percent in Canada, 29 percent in Germany, and 39 percent in
Greece, according to PageFair. The practice is growing fastest on mobile devices in Asia, where data allowances are typically lower. In Indonesia, 58 percent of users block mobile
ads. “In the early days, it was privacy activists and people
who had an objection to capitalism in principle,” says Sean
Blanchield, chief executive oicer of PageFair. “These days,
it’s just average people.”
Only a few years ago, even people who hated ads saw using
ad-blocking software as akin to stealing. But online advertising has grown so predatory that while blocking is estimated
to cost publishers billions of lost revenue a year, it’s started to
seem less like robbery than self-defense: Ads slow devices, eat
up data plans, and sometimes deliver malware. Meanwhile,
the industry is building ever-more-detailed dossiers on every
user based on web habits.
Among other things, the online advertising business model
has incentivized clickbait—and worse—at enormous scale.
Facebook Inc. and YouTube LLC igure out how to make people spend more time on their sites to maximize ad inventory.
This has abetted the spread of fake news, violent children’s
content, and Logan Paul.
Enforcement of the European Union’s General Data
Protection Regulation (GDPR), which requires companies to
get consent before tracking users, is set to begin on May 25.
And with members of Congress grumbling, Silicon Valley,
which has ignored complaints about invasive ads for decades,
is beginning to acknowledge the scope of the problem. Google
and Apple Inc. have added features to their browsers that
limit the most intrusive and invasive ads. In response to its
Cambridge Analytica scandal, Facebook has taken steps to
limit its rampant data-sharing and also ended partnerships
with companies that combine online proiles with oline
credit card transactions, public records such as voter registration and home purchases, and store loyalty programs. Even
the Interactive Advertising Bureau, an industry trade group
unsurprisingly hostile to ad blocking, now says the practice
is “a crucial wake-up call to brands and all that serve them
about their abuse of consumers’ goodwill.”
Pi-hole is installed on only 140,000 networks. Unlike more
popular ad-blocking browsers (Brave, which claims 2 million
users) or browser extensions (Adblock Plus, 105 million), it
requires a dedicated computer and some tech savvy to set
up. Still, it has assumed an outsize role in the ad-blocking
movement. Its 22,000 true believers on Reddit help a lot, says
Drobnak, who spends 5 hours to 20 hours a week working on
Pi-hole between computer science classes. The developers
have discovered spying by internet-connected TVs (which
collect data for ad targeting), lightbulbs (users have reported
some LED bulbs mysteriously connecting with the manufacturer’s server every 2 seconds), and printers (including one
that sent out 34 million queries in a day).
Drobnak’s fellow core developers, all volunteers, say what
unites them most is resentment of just how far the advertising industry has overreached in building its online empire of
distraction and surveillance. There’s a corollary motivator,
too: Puzzling out ways to frustrate the industry’s eforts—to
zap millions upon millions of ads—can be really, really fun.
“There’s a huge community behind it,” Drobnak says. “It’s
just tinkerers trying to igure stuf out.”
The rise of ad blocking mirrors an explosion in online
advertising technology. Barely 100 digital-only ad-tech companies operated in 2011; today there are about 2,000. Most
arose with what’s known as programmatic advertising, automated systems run by the likes of Google and Microsoft Corp.
that promise to match every ad with the person it’s most
likely to inluence.
Dissect how such systems work, and it’s easy to be outraged. When you load a website, it sends a series of requests
to other web domains to auction your eyeballs to the highest
bidder. The number of intermediaries involved changes
Bloomberg Businessweek
May 14, 2018
with every page load, but on a recent visit, the homepage
for one popular U.S.-based news site sent 20 requests to 10 ad
exchanges, each of which likely ofered the space to hundreds of advertisers. It also set 47 cookies with unique tracking IDs, many of which log user data such as location, gender,
age, and likes and dislikes based on browsing behavior. These
data give advertisers a sense of how valuable you might be
as a customer, and therefore how much to bid to show you
an ad. When one of the advertisers wins the auction, an ad
appears on your screen. The whole process takes less than
a tenth of a second.
As a side business, every company involved in any step of
the process may also try to place a cookie or tracker to collect
more data on you for later use. Such companies often swap
data to try to identify users they have in common, and they
may pull in your email address, name, public records, and
credit card history. “Ad blocking has grown in response to a lot
of legitimate problems,” says PageFair’s Blanchield. His previous venture, Jolt Online Gaming, collapsed because 30 percent
of its users were blocking ads. He and his co-founder were, too.
By acting as a traic cop at the network level, rather than in
a browser, Pi-hole can cut of the nested bidding and tracking
processes from the start. It takes on the role of your network’s
Domain Name Server (DNS), meaning it translates IP addresses
into URLs and vice versa. So if a website tries to contact what
the Pi-hole knows to be an ad server, “it sends a request to the
Pi-hole for the ad, and the Pi-hole is like, ‘Hah, I’m just going to
return an empty page to you,’ and the ad server is never contacted,” Drobnak says. In the ad slots, the user typically sees
blank white rectangles.
Installing Pi-hole took me about an hour with the help
of a friend who’d done it before, and much of that time was
spent setting up my new Raspberry Pi. The Pi-hole can run
on any computer, but in general you probably want it to be
a cheap model that can be left powered on and online. Even
the Raspberry Pi 3 Model B+, the most full-igured Pi, ships
naked and blank: no case, no operating system, no apps, just
a single green circuit board with components and ports sticking out of it. Spring for a case if you like, plug in a monitor
and keyboard, and install an operating
system. Then it’s simply a matter of connecting the Pi to the internet, installing the
Pi-hole software with a single line of code
(curl -sSL | bash),
and setting it as the DNS server for the
network. In case of trouble, Pi-hole fans
tend to respond promptly to questions
on their forums.
Turn the Pi-hole of after you get used
to it, and you ind your brain engaging
more with the ads than it used to because
it’s forgotten how to glance past them.
Were they always so garish? Who needs
that many razors a month? And why
would anyone set a video to autoplay
with sound?
After three weeks, my Pi-hole logs reported the system had
blocked 29 percent of the more than 39,000 requests made to
my two devices (a phone and a laptop). They were all ads or
ad-related trackers from places such as,,,,, analytics, and It’s fascinating to
look at Pi-hole’s dashboard, a colorful layout of numbers and
graphs, and think about what the network is doing—and just
how many entities are keeping watch.
Salmela, the creator of Pi-hole, is a 33-year-old Linux
administrator who lives outside Minneapolis with his wife
and son. He has buzzed brown hair, favors black T-shirts,
and rarely volunteers information. He worked at a Target for
12 years before he got bored enough to go to college, where
he studied computer networking. With a bachelor’s in hand,
he got a job in the IT department of a high school, quickly
automated everything he needed to do, and got bored again.
In the summer of 2014, facing three months in an
empty school, Salmela massively upped his internet
time. Lifehacker, OS X Daily, and Macworld were among
his go-to sites, and he started to notice the ads more and
more. He doesn’t remember what the pop-ups or autoplay
ads were for, just that they were annoying. On Kickstarter,
he’d backed a device called AdTrap that sounds a lot like
Pi-hole: blocks ads at the network level, shows you what it
blocked if you want to know. After using it for a while, “I
thought, ‘I could probably make something better with a
Raspberry Pi,’ ” he says.
Salmela spent the rest of the summer writing the code
for Pi-hole. A few months later, Lifehacker wrote about it.
He published a 6,000-word install guide on his blog, and
Lifehacker wrote about it three more times. By fall 2015,
Salmela was getting a lot of bug reports and feature requests
and needed help. Luckily, he’d hosted Pi-hole on GitHub,
a website that allows programmers to collaborate on code.
GitHub is popular for open source projects, because it allows
anyone to submit suggested changes, which means it also
functions as a recruiting tool. Salmela
began to assemble some extremely dedicated and like-minded volunteers.
“It really is a project of love for me,”
says the irst recruit, Dan Schaper, who
claims to spend 50 hours to 80 hours
a week on Pi-hole in addition to his
work as a consulting network engineer.
He wouldn’t divulge personal details,
except that he lives on the West Coast
and is obsessed with the pervasiveness
of tracking. “I’m the tinfoil-hat guy of the
group,” he said in an email.
Another Pi-hole developer, an
Australian who consented to a video
interview on the condition that he be
identiied only by his internet handle,
The typical Raspberry Pi ships as bare-bones as possible
Bloomberg Businessweek
May 14, 2018
While working in a high school IT department, Salmela created Pi-hole over a summer
WaLLy3K, is more of a scorched-earth type. He
distinguished himself among Pi-hole fans by
curating huge block lists of domains associated
with ad servers, trackers, and malware. One of
the other devs took to calling him “Mr. Insane
Lists.” If you take all of WaLLy3K’s recommendations, you’ll ind yourself blocking about 2.6 million domains. His objection to ads includes an
aversion to “visual clutter” as well as a desire for
privacy. He’s the kind of guy who will go up to a
photographer at an event and ask that she not
take his picture. “It comes down to consent,” he
says. “I didn’t consent to giving out this information to people.” He estimates he spends 10 hours
to 15 hours a week on Pi-hole.
Along with Drobnak in Rochester, Salmela’s
other core comrades are Blayne Campbell in
Canada, Adam Warner in the U.K., and the
pseudonymous DL6ER in Germany. Together they put in
a lot of late nights, mostly focused on talking new Pi-hole
users through setup and the occasional bug. To support that
labor, donors provide $1,000 to $2,000 a month. Salmela
also collects an extra $20 to $100 a month through sales of
Pi-hole T-shirts, hoodies, and mugs, and about $20 to $30
through ailiate links on the Pi-hole website, which pay a
tiny commission when someone clicks on them.
This is obviously a pittance for a team of skilled
developers putting in serious hours. After a user survey
found that 69 percent thought Pi-hole was “worth paying for,” Salmela set up a one-time fundraiser asking for
$100,000. He says he’d need $160,000 to $180,000 a year to
truly support the project, including some full-time staf, but
he’s been shy about asking for donations. “If your product is
actually good, your consumers will sell it for you,” Salmela
said in an email. “We have paid $0 in marketing and advertising, and look what we’ve grown into. It’s not easy and not
currently sustainable, but it’s the way it needs to be done.”
It’s common for Pi-hole users to screenshot their stats
(how many ads blocked, from where) and hold informal
competitions with one another. Some wear T-shirts and
drink from mugs emblazoned with replicas of the software’s
colorful graphs; at least one displays his stats on his internetconnected mirror. “Get to see how many ads I’ve blocked
any time I look in the mirror now!” he wrote. (It was 227.)
Another asked the community how to set up an audio alert
every time an ad is blocked in real time. “Could be super
satisfying,” they wrote.
Pi-hole has attracted fans from mainstream tech companies such as Microsoft and AsusTek Computer Inc.—plus,
its developers believe, the occasional self-loathing adman.
In 2016 someone showed up in the team’s chat room with a
carrier pigeon avatar, a number of sophisticated technical
suggestions, and what sounded like inside information. “He
was like, ‘You know, this isn’t going unnoticed,’ ” Drobnak
says. “Or, ‘The advertising business, this is something that
concerns them.’ ” The carrier pigeon was active for about
two to three months, then disappeared.
The ad industry hasn’t taken any oicial shots at Pi-hole,
likely because setup remains a signiicant barrier, says Jeremy
Gillula, tech policy director at the nonprofit Electronic
Frontier Foundation. Yet some 30 percent of the internet’s top 10,000 sites now use software designed to subvert
browser-level ad blocking. Publishers will target Salmela’s
software if it becomes anywhere near as popular as AdBlock
Plus, says Nicole Perrin, an analyst at researcher eMarketer.
Still, the popular support for Pi-hole and other ad blockers may signal changes. The scandal around Cambridge
Analytica, the political advertising irm that got hold of data
from as many as 87 million Facebook users and used the information to inluence an election, shows that people still value
privacy more than Mark Zuckerberg long claimed. In April,
Democratic Senators Richard Blumenthal of Connecticut
and Ed Markey of Massachusetts introduced a bill that would
allow ad targeting only with users’ clear consent.
While the U.S. legislation has built little momentum so
far, the EU’s privacy law, which afects any company doing
business in Europe, is already changing the industry’s practices. The letter of the law requires publishers to get explicit
permission from users to share data with every party that’s
asking for data each time one of them makes a request. That
could mean clicking “OK” perhaps hundreds of times just
to get to one webpage, a status quo that would at least force
the consolidation of data collection and reduce the ad industry’s data drain.
For publishers struggling to survive even with maximum
ad surveillance, the Pi-hole team recommends a renewed
focus on subscriptions, ailiate links, and curated endorsements for products and services that might truly interest
users, similar to the way podcast hosts may talk about how
much they personally enjoy a sponsor’s products. There’s
nothing wrong with pitching people stuf they might enjoy,
the team says. It’s just the constant, ever-intensifying surveillance that needs to stop. 59
Bloomberg Businessweek
Bill Benter did the impossible: He wrote an
algorithm that couldn’t lose at the track.
A billion dollars later, he tells his story for
the first time
May 14, 2018
By Kit Chellel
Photograph by Xyza Bacani
Bloomberg Businessweek
orse racing is something like a religion in Hong
Kong, whose citizens bet more than anyone
else on Earth. Their cathedral is Happy Valley
Racecourse, whose grassy oval track and loodlit stands are ringed at night by one of the sport’s
grandest views: neon skyscrapers and neat stacks of highrises, a constellation of illuminated windows, and beyond
them, lush hills silhouetted in darkness.
On the evening of Nov. 6, 2001, all of Hong Kong was
talking about the biggest jackpot the city had ever seen: at
least HK$100 million (then about $13 million) for the winner of a single bet called the Triple Trio. The wager is a little like a trifecta of trifectas; it requires players to predict
the top three horses, in any order, in three diferent heats.
More than 10 million combinations are possible. When no
one picks correctly, the prize money rolls over to the next
set of races. That balmy November night, the pot had gone
unclaimed six times over. About a million people placed a
bet—equivalent to 1 in 7 city residents.
At Happy Valley’s ground level, young women in beer
tents passed foamy pitchers to laughing expats, while the
local Chinese, for whom gambling is a more serious afair,
clutched racing newspapers and leaned over the handrails.
At the crack of the starter’s pistol, the announcer’s voice
rang out over loudspeakers: “Last leg of the Triple Trio,” he
shouted in Australian-accented English, “and away they go!”
As the pack thundered around the inal bend, two horses
muscled ahead. “It’s Mascot Treasure a length in front, but
Bobo Duck is gunning him down,” said the announcer, voice
rising. “Bobo Duck in front. Mascot ighting back!” The crowd
roared as the riders raced across the inish line. Bobo Duck
edged Mascot Treasure, and Frat Rat came in third.
Across the road from Happy Valley, 27 floors up, two
Americans sat in a plush oice, ignoring a live feed of the action
that played mutely on a TV screen. The only sound was the
hum of a dozen computers. Bill Benter and an associate named
Paul Coladonato had their eyes ixed on a bank of three monitors, which displayed a matrix
of bets their algorithm had made
on the race—51,381 in all.
Benter and Coladonato
watched as a software script iltered out the losing bets, one at
a time, until there were 36 lines
left on the screens. Thirty-ive of
their bets had correctly called
the inishers in two of the races, qualifying for a consolation
prize. And one wager had correctly predicted all nine horses.
“F---,” Benter said. “We hit it.”
It wasn’t immediately clear how much they’d made, so
the two Americans attempted some back-of-the-envelope
math until the oicial dividend lashed on TV eight minutes
later. Benter and Coladonato had won a jackpot of $16 million. Benter counted the zeros to make sure, then turned to
his colleague.
May 14, 2018
“We can’t collect this—can we?” he asked. “It would be
unsporting. We’d feel bad about ourselves.” Coladonato
agreed they couldn’t. On a nearby table, pink betting slips
were arranged in a tidy pile. The two men picked through
them, isolating three slips that contained all 36 winning lines.
They stared at the pieces of paper for a long time.
Then they posed, laughing, for a photo—two professional
gamblers with the biggest prize of their careers, one they
would never claim—and locked the tickets in a safe. No big
deal, Benter igured. They could make it back, and more, over
the rest of the racing season.
eteran gamblers know you can’t beat the horses.
There are too many variables and too many
possible outcomes. Front-runners break a leg.
Jockeys fall. Champion thoroughbreds decide,
for no apparent reason, that they’re simply not
in the mood. The American sportswriter Roger Kahn once
called the sport “animated roulette.” Play for long enough,
and failure isn’t just likely but inevitable—so the wisdom goes.
“If you bet on horses, you will lose,” says Warwick Bartlett,
who runs Global Betting & Gaming Consultants and has spent
years studying the industry.
What if that wasn’t true? What if there was one person
who masterminded a system that guaranteed a proit? One
person who’d made almost a billion dollars, and who’d never
told his story—until now?
In September, after a long campaign to reach him through
friends and colleagues, I received an email from Benter. “I
have been avoiding you, as you might have surmised,” he
wrote. “The reason is mainly that I am uncomfortable in the
spotlight by nature.” He added, “None of us want to encourage
more people to get into the game!” But in October he agreed
to a series of interviews in his oice in downtown Pittsburgh.
The tasteful space—the top two loors of a Carnegie Steel-era
building—is furnished with 4-foot-tall Chinese vases and a marble ireplace, with sweeping views of the Monongahela River
and freight trains rumbling past.
Benter, 61, walks with a slight
stoop. He looks like a university professor, his wavy hair
and beard streaked with gray,
and speaks in a soft, slightly
Kermit-y voice. He told me
he’d been driven only partly
by money—and I believed him.
With his intelligence, he could have gotten richer faster working in inance. Benter wanted to conquer horse betting not
because it was hard, but because it was said to be impossible. When he cracked it, he actively avoided acclaim, outside
the secretive band of geeks and outcasts who occupy his chosen ield. Some of what follows relies on his recollections, but
in every case where it’s been possible to corroborate events
and igures, they’ve checked out in interviews with dozens
of individuals, as well as in books, court records, and other
Benter in his oice in Pittsburgh in April.
Bloomberg Businessweek
documents. Only one thing Benter ever told me turned out
to be untrue. It was at the outset of our conversations, when
he said he didn’t think I’d ind anything interesting to write
about in his career.
enter grew up in a Pittsburgh idyll called
Pleasant Hills. He was a diligent student and
an Eagle Scout, and he began to study physics in college. His parents had always given him
freedom—on vacations, he’d hitchhiked across
Europe to Egypt and driven through Russia—and in 1979, at
age 22, he put their faith to the test. He left school, boarded a
Greyhound bus, and went to play cards in Las Vegas.
Benter had been enraptured by Beat the Dealer, a 1962 book
by math professor Edward Thorp that describes how to overcome the house’s advantage in blackjack. Thorp is credited
with inventing the system known as card counting: Keep track
of the number of high cards dealt, then bet big when it’s likely
that high cards are about to fall. It takes concentration, and lots
of hands, to turn a tiny advantage into a proit, but it works.
Thorp’s book was a beacon for shy young men with a
gift for mathematics and a yearning for a more interesting
life. When Benter got to Las Vegas, he worked at a 7-Eleven
for $3 an hour and took his wages to budget casinos. The
Western—with its dollar cocktails and shabby patrons getting
drunk at 10 a.m.—and the faded El Cortez were his turf. He
didn’t mind the scruf. It thrilled him to see scientiic principles play out in real life, and he liked the hedonistic city’s
eccentric characters. It was the era of peak disco, with Donna
Summer and Chic’s Le Freak all over the radio. On a good day,
Benter might win only about $40, but he’d found his métier—
and some new friends. Fellow Thorp acolytes were easy to
spot on casino loors, tending to be conspicuously focused
and sober. Like them, Benter was a complete nerd. He had
a small beard, wore tweedy jackets, and talked a lot about
probability theory.
In 1980 he’d just applied for a job as a night cleaner at
McDonald’s when his buddies introduced him to the man
who would change his life. Alan Woods was the leader of
an Australian card-counting team that had recently arrived
in Las Vegas. Woods was then in his mid-30s, with a swoop
of gray hair and cold blue eyes. Once an insurance actuary with a wife and two kids, he’d decided one day that
family life wasn’t for him and began traveling the world as
an itinerant gambler.
Woods impressed Benter with his tales of fearlessness,
recounting how he’d sneaked past airport security in Manila
with $10,000 stufed into his underwear. Most appealing, he
pursued the card counter’s craft with discipline. His team
pooled its cash and divided winnings equitably. Having more
players reduced the risk of a run of bad luck wiping out one’s
bankroll, and the camaraderie ofset the solitary nature of the
work. Benter joined the squad.
Within six weeks, he found himself playing blackjack in
Monte Carlo, served by waiters in dinner jackets. He felt like
May 14, 2018
James Bond, and his earnings grew to a rate of about $80,000
a year. Benter abandoned any idea of returning to college.
When his mother’s friends in Pittsburgh asked how his studies were going, she told them, “Bill’s traveling right now.”
Benter and his teammates got a house in the Vegas suburbs, living like geeky college fraternity brothers. Woods
strictly forbade drinking on the job, so the men would wait
until after their shifts to knock back beers and trade stories
of scrapes with casino security, who were constantly on the
lookout for card counting. Bull-necked pit bosses patrolled
the loors. A suspicious player would be told to leave or,
worse, backroomed: interrogated in a dingy oice. There
were rumors of counters being beaten and drugged. Benter
thought the treatment was unjustiied. He wasn’t a cheat. He
just played smart.
After a couple of years, Benter was playing quietly at the
Maxim one day when a meaty hand descended on his shoulder. “Come with me,” said a burly guy in a suit. In the back,
Benter was shoved into a chair and told to produce some
identiication. He refused. The guard walked out, and an even
more menacing guy walked in: “Show me your f---ing ID!”
Benter got out his wallet.
Afterward—it was probably 1984—Benter, Woods, and some
of their partners earned a place in the Griin Book, a blacklist that a detective agency circulated to casinos. On top of the
indignity of having their mug shots next to hustlers and pickpockets, the notoriety made it almost impossible for them to
keep playing in Vegas. They needed to ind another game.
Woods knew there were giant horse-betting pools to tap
in Asia—and that the biggest of all was run by the Hong Kong
Jockey Club. Begun in 1884 as a refuge for upper-crust Brits
who wanted a stretch of England’s green and pleasant land
in their subtropical colony, the club changed over time into
a state gambling monopoly. Its two courses, Happy Valley
and Sha Tin, were packed twice a week during a racing season that extended from September to July. Hong Kong’s population was then only about 5.5 million, but it bets more on
horses than the entire U.S., reaching about $10 billion annually by the 1990s.
Hong Kong racing uses a parimutuel (also known as “totalizer”) system. Unlike odds in a Vegas sportsbook, which are set
in advance and give a decisive edge to the house, parimutuel
odds are updated luidly, in proportion to how bettors wager.
Winners split the pool, and the house skims a commission of
about 17 percent. (After costs, the Jockey Club’s take goes to
charity and the state, providing as much as a tenth of Hong
Kong’s tax revenue.) To make money, Benter would have to
do more than pick winners: He needed to make bets with a
proit margin greater than the club’s 17 percent cut.
He went to the Gambler’s Book Club, a Vegas institution,
and bought everything he could ind on horses. There were
lots of “systems” promising incredible results, but to him they
seemed limsy, written by journalists and amateur handicappers. Few contained real math. Benter wanted something
more rigorous, so he went to the library at the University of
Benter (pictured here around 1982) got his start
playing blackjack professionally in Las Vegas.
Woods had the idea to bet on horses in
Hong Kong—but he and Benter quickly fell
out over money.
Nevada at Las Vegas, which kept a special collection on gaming. Buried in stacks of periodicals and manuscripts, he found
what he was looking for—an academic paper titled “Searching
for Positive Returns at the Track: A Multinomial Logit Model
for Handicapping Horse Races.” Benter sat down to read it,
and when he was done he read it again.
The paper argued that a horse’s success or failure was
the result of factors that could be quantiied probabilistically.
Take variables—straight-line speed, size, winning record, the
skill of the jockey—weight them, and presto! Out comes a prediction of the horse’s chances. More variables, better variables, and iner weightings improve the predictions. The
authors weren’t sure it was possible to make money using
the strategy and, being mostly interested in statistical models, didn’t try hard to ind out. “There appears to be room
for some optimism,” they concluded.
Benter taught himself advanced statistics and learned to
write software on an early PC with a green-and-black screen.
Meanwhile, in the fall of 1984, Woods lew to Hong Kong and
sent back a stack of yearbooks containing the results of thousands of races. Benter hired two women to key the results
into a database by hand so he could spend more time studying regressions and developing code. It took nine months. In
September 1985 he lew to Hong Kong with three bulky IBM
computers in his checked luggage.
he Hong Kong that greeted Benter was a booming
inancial center, with some of the most densely
populated spaces on the planet. The crowded
skyline that had recently inspired Ridley Scott’s
dystopian megacity in Blade Runner seemed to
sprout towers weekly.
Benter and Woods rented a microscopic apartment in
a dilapidated high-rise. Warbling Cantonese music drifted
through stained walls, and the neighbors spent all night
shouting in the hall. Their oice was an old desk and a
wooden table piled high with racing newspapers. If they went
out at all, it was to the McDonald’s down the street.
Twice a week, on race days, Benter would sit at the computer and Woods would study the racing form. Early on, the
betting program Benter had written spat out bizarre predictions, and Woods, with his yearlong head start studying the
Hong Kong tracks, would correct them. They used a telephone account at the Jockey Club to call in their bets and
watched the races on TV. When they won, there were satisied
A staff Christmas party in 2000. Benter hired anyone—
coders, academics, journalists—who could improve
his algorithms.
smiles only. They were professionals; cheering and hooting
were for rubes.
Between races, Benter struggled to make his algorithms
stay ahead of a statistical phenomenon called gambler’s
ruin. It holds that if a player with limited funds keeps betting
against an opponent with unlimited funds (that is, a casino,
or the betting population of Hong Kong), he will eventually
go broke, even if the game is fair. All lucky streaks come to
an end, and losing runs are fatal.
One approach—familiar to Benter from his blackjack days—
was to adapt the work of a gunslinging Texas physicist named
John Kelly Jr., who’d studied the problem in the 1950s. Kelly
imagined a scenario in which a horse-racing gambler has an
edge: a “private wire” of fairly reliable tips. How should he
bet? Wager too little, and the advantage is squandered. Too
much, and ruin beckons. (Remember, the tips are good but
not perfect.) Kelly’s solution was to wager an amount in line
with the gambler’s conidence in the tip.
Benter was struck by the similarities between Kelly’s hypothetical tip wire and his own prediction-generating software.
They amounted to the same thing: a private system of odds
that was slightly more accurate than the public odds. If the
public odds rate a given horse at 5 to 1, a gambler would have
to bet $1 ive times on average to win once. He spends $5 to
get back $5—his winnings and stake, minus the racetrack’s
$1 commission. Pointless. But if Benter calculated the true
likelihood to be 4 to 1, he could bet a dollar four times to win
$5, a 25 percent proit. And he could diminish the impact of
bad luck by betting thousands and thousands of times. Kelly’s
equations, applied to the scale of betting made possible by
computer modeling, seemed to guarantee success.
If, that is, the model were accurate. By the end of Benter’s
irst season in Hong Kong, in the summer of 1986, he and
Woods had lost $120,000 of their $150,000 stake. Benter
lew back to Vegas to beg for investment, unsuccessfully,
and Woods went to South Korea to gamble. They met back
in Hong Kong in September. Woods had more money than
Benter and was willing to recapitalize their partnership—if it
was renegotiated.
“I want a larger share,” Woods said, in Benter’s
“How much larger?” Benter asked.
“Ninety percent,” Woods said.
“That’s unacceptable,” Benter said.
Woods was used to being the senior partner in gambling
Bloomberg Businessweek
May 14, 2018
teams and getting his way. He never lost his temper, but his
mind, once set, was like granite. Benter was also unwilling to
budge. Their alliance was over. In a it of pique, Benter wrote
a line of code into the software that would stop it from functioning after a given date—a digital time bomb—even though
he knew it would be trivial for Woods to ind and ix it later.
Woods would keep betting algorithmically on horses, Benter
was sure of that. He resolved that he would, too.
enter’s Las Vegas friends wouldn’t stake him at
horse racing, but they would at blackjack. He
took their money to Atlantic City and spent two
years managing a team of card counters, brooding, and working on the racing model in his spare
time. In September 1988, having amassed a few hundred thousand dollars, he returned to Hong Kong. Sure enough, Woods
was still there. The Australian had hired programmers and
mathematicians to develop Benter’s code and was making
money. He’d moved into a penthouse lat with a spectacular
view. Benter refused to speak to him.
Benter’s model required his undivided attention. It monitored only about 20 inputs—just a fraction of the ininite factors that inluence a horse’s performance, from wind speed
to what it ate for breakfast. In pursuit of mathematical perfection, he became convinced that horses raced diferently
according to temperature, and when he learned that British
meteorologists kept an archive of Hong Kong weather data
in southwest England, he traveled there by plane and rail.
A bemused archivist led him to a dusty library basement,
where Benter copied years of igures into his notebook.
When he got back to Hong Kong, he entered the data into
his computers—and found it had no efect whatsoever on
race outcomes. Such was the scientiic process.
Other additions, such as the number of rest days since a
horse’s last race, were more successful, and in his irst year
after returning to Hong Kong, Benter won (as he recalls)
$600,000. The next racing season, ending in the summer
of 1990, he lost a little but was still up overall. He hired an
employee, Coladonato, who would stay with him for years,
and a rotating cast of consultants: independent gamblers,
journalists, analysts, coders, mathematicians. When the volume of bets rose, he recruited English-speaking Filipinos from
the ranks of the city’s housekeepers to relay his bets to the
Jockey Club’s Telebet phone lines, reading wagers at the rate
of eight a minute.
A breakthrough came when Benter hit on the idea of incorporating a data set hiding in plain sight: the Jockey Club’s
publicly available betting odds. Building his own set of odds
from scratch had been proitable, but he found that using
the public odds as a starting point and reining them with his
proprietary algorithm was dramatically more proitable. He
considered the move his single most important innovation,
and in the 1990-91 season, he said, he won about $3 million.
The following year the Hong Kong Jockey Club phoned
Benter at an oice he’d established in Happy Valley. He
winced, remembering the meaty hand of the Las Vegas pit
boss on his shoulder. But instead of threatening him, a Jockey
Club salesperson said, “You are one of our best customers.
What can we do to help you?” The club wasn’t a casino trying to root out gamblers who regularly beat the house; its
incentive was to maximize betting activity so more revenue
was available for Hong Kong charities and the government.
Benter asked if it was possible to place his bets electronically
instead of over the phone. The Jockey Club agreed to install
what he called the “Big CIT”—a customer input terminal. He
ran a cable from his computers directly into the machine and
increased his betting.
Benter had achieved something without known precedent:
a kind of horse-racing hedge fund, and a quantitative one
at that, using probabilistic modeling to beat the market and
deliver returns to investors. Probably the only other one of
its kind was Woods’s operation, and Benter had written its
code base. Their returns kept growing. Woods made $10 million in the 1994-95 season and bought a Rolls-Royce that he
never drove. Benter purchased a stake in a French vineyard.
It was impossible to keep their success secret, and they both
attracted employees and hangers-on, some of whom switched
back and forth between the Benter and Woods teams. One
was Bob Moore, a manic New Zealander whose passions were
cocaine and video analysis. He’d watch footage of past races
to identify horses that should have won but were bumped or
blocked and prevented from doing so. It worked as a kind of
bad-luck adjuster and made the algorithms more efective.
The computer-model crowd spent nights in a neighborhood
called Wan Chai—a honey pot of gaudy bars and topless dancers that’s been described as “a wildly liberated Las Vegas.”
Benter’s Math (Radically Simplified)
Let’s say Seabiscuit is about to
run at Happy Valley Racecourse.
Public odds
These numbers
suggest that if
the race were
conducted five
times, Seabiscuit would win once for
every four losses.
4 1
A gambler who bet $1
five times could expect
to win $5—pointless.
Benter’s odds
tracking inputs
like straight-line
speed, recuperation time, weather,
etc.—predict Seabiscuit will
actually win one of every four
hypothetical races.
3 1
That means Benter can
bet $1 four times to
win $5. That’s a profit
margin of 25 percent.
A small edge can
turn into big profit
when multiplied
across thousands
and thousands of
races. Benter says
his gambling systems
have made close to
$1 billion.
Bloomberg Businessweek
Moore favored Ridgeway’s pool bar, where he’d start ights
and boast about his gambling exploits. Woods didn’t drink
much, but he enjoyed ecstasy, and he could be found most
nights in Neptune II, a neon dungeon full of drunk businessmen and much younger women.
Benter was a more reserved presence. He could often
be seen sitting at the end of a bar, engaged in quiet conversation. Over time an aura built
up. To the small group of insiders who knew that software
had conquered Happy Valley—
perhaps a dozen people—Benter
was the acknowledged master.
Even Woods (in an interview he
later gave to an Australian journalist) admitted that his rival’s
model was the best. But the two men couldn’t resolve their
diferences. When Benter saw his old partner in Wan Chai,
he would smile politely and walk away. They’d gone 10 years
without speaking.
hroughout 1997 a shadow loomed over Hong
Kong. After 156 years of colonial rule, the British
were set to hand the territory back to China
on July 1. There were news reports of Chinese
troops massed at the border, and many islanders feared it would be the end of Hong Kong’s freewheeling capitalism. China tried to reassure residents that their
most treasured customs would be protected. “Horse racing
will continue, and the dancing parties will go on,” said Deng
Xiaoping, the former Communist Party leader.
Benter faced an additional and more peculiar anxiety. A
month before the handover, his team won a huge Triple Trio
jackpot. They were in the middle of an epic winning season, up more than $50 million. The Jockey Club normally put
Triple Trio winners in front of the TV cameras to show how,
for example, a night watchman had changed his life with a
single bet. This time, nobody wanted to tout that the winner
was an American algorithm.
The club had come to see the syndicates’ success as a
headache. There was no law against what they were doing,
but in a parimutuel gambling system, every dollar they won
was a dollar lost by someone else. If the everyday punters at
Happy Valley and Sha Tin ever found out that foreign computer nerds were siphoning millions from the pools, they
might stop playing entirely.
Benter had his Big CIT privileges revoked. On June 14
one of his phone operators called the Telebet line and was
told, “Your account has been suspended.” Woods was also
blocked. Club oicials issued a statement saying they had
acted to “protect the interests of the general betting public.” Benter lew back to Vegas, as he did every summer,
to think about his next move. He reread the club’s statement. Phone betting was out—but nowhere did it say he was
prohibited from betting altogether. He got an idea. As in
May 14, 2018
his blackjack days, it would require a low proile.
One Friday evening that autumn, after the handover of
the territory to China, Benter paid for a hotel room in Hong
Kong’s bayside North Point district. He made sure to get
a space on the ground loor for easy access. He had helpers haul in laptops, a 50-pound printer, and stacks of blank
betting slips. On Saturday morning—race day—they checked
the internet connection and
put a “Do Not Disturb” sign on
the door.
At 1:45 p.m., 15 minutes
the irst race, the lapb
tops received lines of bets from
Benter’s Happy Valley oice.
The printer began to suck in
tickets and churn them
out with black marks in the relevant betting boxes.
Eight minutes to starting pistol. Benter grabbed a pile of
80-odd printed tickets and a club-issued credit voucher worth
HK$1 million and bolted for the door. Across from the hotel
was an of-track betting shop. It was loud and smoky inside,
and he found an automated betting terminal free at one side
of the room. Two minutes to go. He started feeding in tickets, one after another after another, until the screen lashed
a message: “Betting closed.”
Benter hurried back to the hotel room to see which wagers
had hit. At 2:15 p.m. the laptops downloaded the next package of bets from the oice. Time to go again. Simultaneously,
other teams hired by Benter were doing the same in diferent parts of Hong Kong.
Benter’s solution to the phone ban was time-consuming
and required him to manage teams of runners, who risked
being robbed. But it was almost as proitable as his old
arrangement. The club continued to exchange his cash vouchers for checks, and no one came to shut him down. Woods
kept betting in a slightly diferent manner, sending members
of an extended roster of Philippine girlfriends directly to the
racetrack with bags full of cash.
ublicity is a hex for professional gamblers. That
fall an increasingly erratic Moore drew more
attention to algorithmic betting, irst by bragging to the local press—who nicknamed him the
“God of Horses”—and then by fatally overdosing
on sleeping pills.
Afterward, Hong Kong’s tax authority began to investigate
the Woods syndicate. By law, gambling winnings were exempt
from taxation, but company proits weren’t. The question was
whether the syndicates had moved beyond conventional betting and started behaving like corporations. The implications
would be dire if the Inland Revenue Department decided to
tax proits retroactively. When agents asked Woods for a list
of his investors, he led to the Philippines.
Benter continued to operate his in-person betting scheme
through the turn of the millennium, with his model
expanding to track more than 120 factors per horse, but
the logistics were proving a grind. He felt disconnected from
his gambler friends in Wan Chai—a nocturnal clique of geeks
and rogues. He had started mixing with a more professional
crowd, adopting their dress code of smart suits and ties, and
he’d taken a more active role in the local Rotary Club chapter.
Benter embraced its motto of “Service Above Self,” giving millions of dollars anonymously and visiting impoverished schools
in China and refugee camps in Pakistan. For the irst time, he
thought seriously about quitting and moving back to the U.S.
If it all has to end, he thought, I’ve had an incredible run.
It was then, in November 2001, that he decided to have a
inal punt on the Triple Trio. Benter had avoided major prizes
since 1997 for fear of angering the Jockey Club’s management,
but this jackpot was too big to resist. Wagering on it was something of a lark, albeit an expensive one: He spent HK$1.6 million on the 51,000 combinations. If he won, he decided, he
would leave the tickets unclaimed. Club policy in such cases
directed the money to a charitable trust.
After Bobo Duck, Mascot Treasure, and Frat Rat romped
across the inish line—and then days turned into weeks,
with no one collecting the prize—Benter was unprepared
for the level of mounting public interest. “The ghost of the
unclaimed $118 million Triple Trio,” wrote the racing columnist for the South China Morning Post, “is still banging
around like an unwanted poltergeist.” Outlandish theories
spread across Hong Kong. One held that the winner had
watched the inal leg and died of shock.
Finally, Benter sent an anonymous letter to the Jockey
Club’s directors explaining his intentions. But the organization never shared it with the public. (Club spokeswoman
Samantha Sui told Bloomberg Businessweek, “We are not in a
position to disclose or comment on matters related to speciic
customers due to privacy and conidentiality concerns.”) At
the time, head of betting Henry Chan told the Morning Post
that there was no way of knowing who the ticket holder was.
“Although this is bad luck for one winner,” he said, “it means
there will be a lot of winners through the charities.”
Later in 2001, without any warning, the Jockey Club lifted
the phone betting ban. It was as if Benter’s gift had appeased
the gambling gods. The club also bowed to public pressure and
let customers wager over the internet from their homes. Benter
opted to return to Pittsburgh, where he continued to bet. He
didn’t want to spend his whole life in Hong Kong.
In Manila, Woods lived like a hermit, bingeing on drugs for
days at a time, waited on by young women he hired to keep
him company. He employed gamblers remotely in Australia
and Hong Kong, but he was a diicult boss; he accused staf
of stealing, and once he made everyone take IQ tests before
telling them all how much smarter he was. Woods started calling himself Momu—short for “master of my universe.”
In December 2007 he sent a letter to Business Review
Weekly, an Australian magazine, asking to be considered for
its rich list. “I had planned to delay my hope for inclusion
until I could make it into the top 10,” he wrote. “However, as
of today, it does not appear I will live long enough.” Woods
had been diagnosed with cancer. He came back to Happy
Valley for treatment; the Hong Kong Sanatorium & Hospital
was within sight of the racetrack. He spent his inal days beating his friends at a Chinese card game known as chor dai di
and died on Jan. 26, 2008, at 62.
Interviews with Woods’s friends, employees, and other
sources indicate he had amassed a fortune of A$900 million
(then about $800 million). Mike Smith, a former Hong Kong
policeman who knew Woods, wrote about him in his book In
the Shadow of the Noonday Gun: “He left a very simple will that
pretty much summed up his lifestyle. Assets: A$939,172,372.51.
Liabilities: A$15.93.”
The Happy Valley Racecourse in Hong Kong.
Bloomberg Businessweek
Woods left the bulk of his estate to his two children in
Australia and gave token sums to various ex-girlfriends,
including a Filipina who said he’d fathered her child. A wake
was held in a bar at the Happy Valley racetrack and attended
by an eclectic crowd of gamblers and hustlers. To the last,
Woods never believed that Benter had won the 2001 Triple
Trio and given up the jackpot.
ambling,” Benter told me in his Pittsburgh
oice, “has always been the domain of wise
guys from the wrong side of the track.” Perhaps
more than anyone else, Benter has changed
that perception—within the tiny population of
people who gamble for a living, that is.
By the time he moved back to Pittsburgh, he’d inspired others in Hong Kong to form syndicates of their own. In response,
the Jockey Club began publishing reams of technical data and
analysis on its website to level the playing ield. With a little
efort, anyone could be a systematic gambler—or mimic one.
The odds boards at Happy Valley and Sha Tin were color-coded
to show big swings in the volume of wagers on a horse, speciically to reveal whom the syndicates were backing. The
robo-bettors’ numbers have continued to proliferate. After
Woods’s death, his children maintained his Hong Kong operation, but other members of the team went into business
for themselves. And Benter spread the secrets of his success
in various ways: He gave math talks at universities, shared
his theories with employees and consultants, and even published an academic paper laying out his system. The 1995
document—“Computer-Based Horse Race Handicapping and
Wagering Systems: A Report”—became a manual for an entire
generation of high-tech gamblers.
Today, online betting on sports of all kinds is a $60 billion industry, growing rapidly everywhere outside the U.S.,
where the practice is mostly banned. The Supreme Court,
however, may lift federal restrictions this year, and if it does,
American dollars will lood the market, increasing liquidity
and the proits of computer teams. Big names from the world
of inance have taken notice.
In 2016, Susquehanna International Group LLP, an
American quantitative trading company, started an Irelandbased operation called Nellie Analytics Inc., targeting
basketball, American football, soccer, and tennis. Phoenix,
a proprietary sports-betting company with headquarters in
Malta and data-mining operations in the Philippines, won a
£9 million ($13 million) investment in 2010 from a unit of RIT
Capital Partners Plc, the £3 billion trust chaired by Lord Jacob
Rothschild of the global banking dynasty. (RIT sold its stake
in 2016 to a private buyer, quadrupling its money.) What isn’t
widely known is that Phoenix was founded by former employees of Woods, including his protégé Paul Longmuir.
Many of the biggest players in sports betting can trace a
lineage directly to the Benter-Woods axis. For example, the
Australian press has called Zeljko Ranogajec “the world’s
biggest punter.” Today he runs a global algorithmic gambling
May 14, 2018
empire, but he began his career in Las Vegas counting cards
with Benter and Woods, then followed them to Hong Kong.
During a rare interview in London, Ranogajec said, “A substantial portion of our success is attributable to the pioneering work done by Benter.”
enter has few regrets. One relates to an attempt
in the early 1990s to create a model for betting
on baseball. He spent three summers developing the system and only broke even—for him, a
stinging professional defeat. America’s pastime
was just too unpredictable.
That failure, however, led to a second period of his career
as lucrative as Hong Kong was. He worked with one of his baseball backers to start betting on U.S. horse racing. Parimutuel
tracks are scattered around the country, and by the late 1990s
it became easier to amass data on a lot of them. The U.S. business took of just as competition began eroding proits in Hong
Kong. “There is a golden age for a particular market,” he said,
iddling with a stack of decommissioned casino chips. “When
there aren’t many computer players, the guy with the best system can have a huge advantage.”
In 2010, Benter married Vivian Fung, whom he’d met at
the Rotary Club in Hong Kong. The couple have a young son,
and Benter seems in every sense a contented man. An active
philanthropist, he donated $1 million to a Pittsburgh charter
school program and $3 million to a polio immunization efort
in Afghanistan, Pakistan, and parts of Africa. In 2007 he started
the charitable Benter Foundation, which donates to health,
education, and the arts. Many of the people he meets at galas
and nights at the opera have no idea how he made his money.
And how much is that—exactly? During our interviews,
it was the one topic that made him visibly uncomfortable.
William Ziemba, a inance professor at the University of
British Columbia who studied the Hong Kong syndicates,
has said that a irst-rate team could make $100 million in a
good season. Edward Thorp (who’s still writing about gambling in his 80s) asserted in a 2017 book that Benter had a
“billion-dollar worldwide business betting on horse races.”
When pushed, Benter conceded that his operations have
probably made close to a billion dollars overall, but that some
of the money has gone to partners in Hong Kong and the U.S.
“Unfortunately,” he said, “I’m not a billionaire.”
Thirty-two years after he irst arrived in Hong Kong, Benter
is still betting on horses at venues around the world. He can
see the odds change in the seconds before a race as all the
computer players place their bets at the same time, and he’s
amazed he can still win. He continues tinkering with his
model. The latest change: How much does moving to a new
trainer improve a horse’s performance?
Benter also runs a medical transcription company, but it’s
only modestly proitable. “I ind the real business world to
be a lot more diicult than horse racing,” he told me. “I’m
kind of a one-trick pony.” —With Jonathan Browning and
Giles Turner
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May 14, 2018
t’s not usually in the summer that we dream of the Caribbean. Rather, it’s the long stretches of dreary winter that turn
our thoughts to these 7,000 sun-soaked islands and their splendid hospitality. But it turns out right now is the best
time to plan your next trip. The parts of the region most afected by last year’s hurricanes—about a third of the islands
in all—are getting back on their feet, and those destinations that were spared are more enticing than ever. Book now
for the best prices on winter trips, using this guide to ind the getaway that’s right for you.
These islands are more accessible,
thanks to new nonstop flights—and
more comfortable, too, with swanky,
five-star hotel projects
Even though it’s a yearround destination and
clear of the hurricane
belt, this 135-square-mile
island remains remarkably underdeveloped.
That will change a bit
in November with the
opening of Silversands
Grenada (from $800
a night), which has
44 expansive suites
done in pale marble and
blond wood. Lounge on
sugar-soft Grand Anse
Beach, hike through the
rain forest to the Seven
Sisters waterfall, or
tour Belmont Estate, a
400-year-old plantation
that still produces cocoa
and nutmeg.
A recent partnership between United
Airlines and the regional
Tradewind Aviation
means you can get to
this French overseas
territory from San Juan,
Puerto Rico, in an hour—
without double trips to
the check-in counter and
baggage claim. While
many luxury hotels
are closed for renovations until fall, one that
is open is also among
the most exciting: the
new eco-chic Hotel
Manapany (from $678).
Located on quiet Anse
des Cayes Beach, it
ofers 43 tropical-wood
bungalows, a leet
of electric cars, and
thrilling wreck-diving
Delta has added weekly
nonstops to this West
Indies oasis from New
York, plus more frequent
lights from Atlanta.
You’ll land near one
of the region’s hottest
arrivals, Park Hyatt
St. Kitts (from $500),
where all 126 rooms
have a private balcony.
The hotel’s restaurant,
Fisherman’s Village, is
modeled on the thatched
huts that once lined the
Kittitian coast; it serves
just-caught conch on
pretzel rolls with tangy
sauce gribiche.
A surge in development
is making Barbados,
already afordable and
well-served by lights,
even more attractive. If
you stay in a beachfront
junior suite at the justrenovated Fairmont
Royal Pavilion (from
$371), you’ll get priority through immigration
and customs. Two other
recent additions: Nikki
Beach Barbados, with
the brand’s reliable daytime party scene, and
Tapestry, an adults-only
restaurant serving Bajan
tapas such as West Indian
cofee-rubbed beef.
This Dutch isle, popular
with Europeans and
cruise-goers, is set to
welcome more U.S. travelers in June, when
American Airlines
opens up daily nonstops from Miami. At
Delins Beach Resort
(from $160), ocean-totable dinners come
courtesy of Jonnie and
Thérèse Boer, purveyors
of Holland’s threeMichelin-star De Librije
restaurant. Work up an
appetite exploring the
island’s 86 dive sites or
windsuring on Sorobon
Beach, a hangout for the
sport’s world champs.
—Katie James Watkinson
Le Galion, the lone factory producing brown
sugar on Martinique, uses a decades-old process
to make its fruity, funky Grand Arôme rum
($6 for a 500-milliliter bottle). The lavor comes from vinasse, a
viscous distillation residue that’s mixed with fresh molasses for
a 10-day fermentation process. The result is aged in oak barrels
and bottled. Combine with cane syrup and lime for a comple
ti’ punch, then stir it with an all-natural swizzle stick, made from
the twisty root of Martinique’s bois lélé trees. Unlike the rum, the
sticks are easy to ind of the island. —Mark Ellwood
The pool at Delins Beach
Resort in Bonaire
A spread at
in Jamaica
Just say no to Caesar salad!
Your first rosé of the day
deserves better. At these
beach resorts, the midday meal
is the amenity to count on
Many visitors to
Mustique, the longtime
hideaway for British
royals and celebrities,
hole up in a villa with
a private chef. But at
the Cotton House hotel
pool, executive chef Elio
Debae ofers Grenadine
specialties such as
chicken roti with mango
chutney. Be sure to try
the “bakes,” savory fried
doughnuts that Debae
stufs with spiced spinylobster salad.
Don’t let the yachts in
the marina fool you:
This resort’s littleknown “staf canteen”
is one of the most
authentic, unfussy
options in St. Lucia.
Executive chef Billy
Boyle serves whatever
the staf is eating for
lunch, often a mixed
plate of fried local ish,
rice and beans, and
“ground provisions”—
taro, yams, and other
staple root vegetables.
Relaxing by one of
GoldenEye’s pools—
there are two freshwater
ones and a small saltwater one—you’ll enjoy
lunch menus that relect
the traditional cooking
of Jamaica. There’s
aromatic jerk chicken,
vegetable curries, and
salads made with greens
from owner Chris
Blackwell’s Pantrepant
farm. Blackwell also
distills his own Jamaican
dark rum, which adds
a kick to the decadent
baba au rhum cake.
Canouan—the island in St. Vincent and the
Grenadines where the billionaires go to
escape the millionaires—is getting ever-soslightly more egalitarian. This summer it welcomes Mandarin
Oriental Hotel Group’s Pink Sands Club (from $1,400), where
the 26 opulent suites have dressing rooms, rainfall showers,
and views of Godahl Beach. Guests can also book one of
three fully crewed yachts for private explorations of the
surrounding archipelago. —Nikki Ekstein
Food is an integral part
of this 19-key boutique
on a former sugar estate
in Nevis. That extends
to the mosaic-tiled pool,
where executive chef
Dimitris Zouka makes
Nevisian dishes such as
curried conch stew, corn
dumplings, and grilled
chicken with plantains.
The shallow reefs
surrounding many
Caribbean atolls are
known for their ample
conch populations. The
menu at Plunge, which
serves the serpentine
ininity pool at the
Palms, on Turks and
Caicos’s Grace Bay,
features the delectable
shellish in fritters,
tacos, and sandwiches.
The resort even leads
guests on conch-diving
expeditions, after
which your catch is
cracked and made into
ceviche at the pool bar.
—Adam Erace
Most people in their stampede to the beach or the pool
overlook the Caribbean’s stunning national parks. But their
historic sites and lush tropical trails ofer rich rewards for
intrepid visitors. We asked Will Shafroth, president and
chief executive oicer of the U.S. National Park Foundation,
and Randy Lavasseur, group superintendent for Caribbean
National Parks, to recommend their favorites.
“The snorkeling is incredible at Princess Bay in Virgin
Islands National Park, St. John,” Shafroth says. “I’ve
seen sea turtles, tropical ish in every size and shape, and
even eels hunkered down in mangrove roots.” He also suggests a 10-minute hike
along Leinster Bay Trail to the shallow, less-touristed reefs of Waterlemon Cay.
Afterward, stop at the Tap Room for a refreshing coconut porter ale, brewed
locally in shipping container-size batches.
At San Juan National Historic Site, Puerto Rico, the Castle of San Cristóbal’s
chilling, 300-year-old brick dungeon walls bear prisoner-drawn graiti of ships dating back centuries. “The ships vary based on the era in which they were drawn,”
Lavasseur says. “And the dungeon still has gigantic bars.”
When it comes to Buck Island Reef National Monument, St. Croix, he
says, “I’ve never been to a more beautiful place in my life.” This 176-acre atoll
is surrounded by a coral barrier reef shaped like a pair of branching elk horns.
“Snorkeling the underwater trail, there are hundreds of tiny blue ish lying by,
leatherback sea turtles that can weigh anywhere from 600 to 1,100 pounds, and
coral, the lower of the ocean. It’s so epic.” —Kathryn O’Shea-Evans
May 14, 2018
A room with a view at Seraina
Beach Hotel in San Juan,
Puerto Rico
Sienna Creasy,
the group
director at Montego Bay’s Jewel
Grande (see chart below),
has invented a workout that
must be tried to be believed.
Reggaelates is a mat-based
mashup of Pilates and Jamaican
dance. Start with moves such
as the Tiger Walk, a gyrating
three-legged dog; experts can
try the Bubbling Camel or Hot
Wok, a low squat with jazz
hands. Yes, there’s plenty of
Bob Marley, and you’ll sweat
enough to work of last night’s
red, red wine. —K.J.W.
Each of thesse islands features a refurbished classic and a brand-new resort
After its $75 million makeover wraps in November, Half Moon
(from $273) will be completely reimagined. At the heart of the
400-acre, 64-year-old beachside classic is a proper countryclub-like great house. And 57 rooms feature woven-rattan light
ixtures and custom fabrics from painter Laura Hamilton.
Tucked into a private cove minutes from Sangster International
Airport, Jewel Grande Montego Bay Resort & Spa (from $331)
bowed in January with 206 spacious rooms. The additional
11 three-story villas are a worthy splurge, and a 30,000-squarefoot spa ofers a Jamaican River hot stone massage.
Dorado Beach, a Ritz-Carlton Reserve (from $999), is on a
former Rockefeller estate that straddles the sand and jungle
outside San Juan. It will reopen in October with a beachside
omakase and ceviche bar, an expanded spa, and 300,000 plants
on the plantation-style grounds.
In March, San Juan’s ritzy Condado neighborhood welcomed
Seraina Beach Hotel (from $299), the irst hotel from
the popular New York-based restaurant group. Each of the
96 breezy, whitewashed rooms comes with loor-to-ceiling
windows facing the beach.
The island’s Moorish-inspired mainstay Belmond Cap Juluca
(from $725) reopens in November with gleaming multiroom
villas, an ininity pool, and a food truck that serves barbecue
and rum drinks on the beach. Exclusive access to that milelong stretch of sand feels especially VIP.
It took 10 years to transform Quintessence Hotel (from $650),
a gorgeous mansion on serene Long Bay Beach, into nine
individually decorated suites—each with Hästens beds, Turkish
marble bathrooms, and art from Haiti. Julians, the “island soul
food” bistro, provides the local lavor.
The colonial-style, all-inclusive Curtain Bluff (from $800) is
known for its position at the summit of a narrow peninsula, with
private access to two dreamy, white-sand beaches below. After
its renovation concluded in October, the property began ofering
plunge pools and outdoor daybeds for select suites.
It only has 79 rooms, but the all-inclusive Hodges Bay Resort
& Spa (from $409) packs a big punch. It arrives in July on
powdery Hodges Bay, a mere 10 minutes from the airport. A
kids pool and club cater to families, and a “rum sommelier”
and rooftop tapas bar take care of adults.
The 13 tropical villas of Oscar de la Renta’s only hotel, Tortuga
Bay (from $795), is a predictably chic oasis in Punta Cana. A
style upgrade comes from decorator Markham Roberts; tech
amenities include preprogrammed smartphones to call your
butler. A rare perk: You can swim at the hotel’s airport lounge.
A new Royal Hideaway Hotel (from $112) has replaced
El Embajador in a storied Santo Domingo property that
appeared in The Godfather Part II. After a $40 million
investment, it has 298 marble-clad rooms and 125,000 square
feet of gardens. —Brooke Porter Katz
May 14, 2018
Sure, some Caribbean resorts are made for
staying put. But these islands are meant to be explored, be it
by boat, motor scooter, or your own two feet
Mountain cyclists may
think it’s a yawn, but
Grand Cayman’s lat
topography and network of smoothly paved
bike lanes are prime for
road riders. Skip the
busy downtown during
rush hour and hit the
9.5-mile West Bay Loop
coastal bike trail, which
Castle of San Cristóbal
in Old San Juan,
Puerto Rico
runs along the pristine beaches of Barkers
National Park, past the
Cayman Turtle Centre,
and straight toward a
handful of pretty waterfront bars.
The 32-island
archipelago of
St. Vincent and the
Grenadines is one of the
Caribbean’s less-traveled
areas and one of the few
served by ferries. Most of
its nine inhabited islands
are accessible this way,
including exclusive
Mustique and low-key
Bequia. Even better,
charter your own boat
and set of for beaches
where tourist footprints
are more scarce. Steady
winds, an abundance
of anchorages, and the
close proximity of the
islands make the region
a sailor’s dream.
Wheels are essential
if you want to hit
the out-of-the-way
eateries and hidden
coves of St. Barts.
kily, scooters are
plentiful—and an
easy way
w to avoid the
king headaches
that plague the
and during peak
seasson. An added
it: There’s nothbenei
g bettween you and the
view as you descend to
the stunning crescent
of Gouverneur Beach.
On these well-paved but
winding roads, helmets
aren’t optional.
In Puerto Rico, colonial
Old San Juan rewards
an afternoon’s stroll. In
just a few square miles,
it’s illed with traditional restaurants, boutiques, and centuries-old
churches, including the
tiny Capilla del Santo
Cristo. And the best way
to see El Morro Fort is on
foot via Paseo del Morro,
a three-quarter-mile trail
along the shore. Later,
amble the art-illed
streets of Santurce, the
city’s largest and most
populated district, and
stop at Lote 23, a new
open-air food court,
for Puerto Rican sea
bass bao.
Four-wheel vehicles put
the diverse attractions
of Guadeloupe within
reach. The French
island is home to rum
distilleries, lighthouses,
the rain forest-blanketed
La Grande Soufrière
volcano, and the
black-sand beach of
Malendure, where you
can swim with turtles.
Habitation La Grivelière,
a preserved plantation,
is at the end of a narrow,
twisting route. Like
most of the roads on
this butterly-shaped
island, it’s scenic and
—Sara Clemence
… O R J U ST C R U I S E
You can now sail to the region’s most
exclusive and untouched islands on
yachtlike ships featuring free-lowing
Champagne and ive-star suites. Butler
service is one calling card of the
62-passenger Crystal Esprit, operated
by Crystal Cruises. Another is the
ship’s two-passenger submarine,
which you can use for private
explorations near Saba or St. Kitts.
The French line Ponant, owned by
François Pinault’s Groupe Artemis,
ofers voyages on a glamorous sailboat
that visits bucket-list destinations
like Havana. (For Americans, it’s the
easiest way to get there.) This winter
it opens access to less-trod islands
such as the Tobago Cays via the
184-passenger Le Champlain, complete
with a glassed-in, underwater lounge
where you can drink like a ish while
looking one directly in the eye. Suites
on Ponant and Crystal ships start at
about $6,000 per person per week.
Still prefer old-fashioned sailing? For a
starting price of $14,000 per week, the
Moorings will rent you and your pals a
private six-person yacht, crew and chef
included. —Fran Golden
Bloomberg Pursuits
H U R R I C A N E- P R O O F
Dominica, ravaged by the storms
of 2017, wants to become
the first climate-resilient country in
the world. By Nikki Ekstein
Eight months ago, Category 5 Hurricane Maria destroyed
Dominica resident Simon Walsh’s roof and most of his walls.
It also took a big bite out of his scuba-guide business. “I had
no future to see,” he says. “We should never again be as desperate as we were on Sept. 18.”
The island, where Walsh has lived for two decades, was
among the hardest-hit. Nine out of 10 buildings lost a roof.
The World Bank estimated the total damage at $1.3 billion, or
224 percent of the nation’s gross domestic product.
Remarkably, though, less than a year later, there’s optimism
in the air. In one of the Caribbean’s most ambitious comeback
eforts, the tiny country (population: 73,543) is making a bid to
be the world’s irst climate-resilient nation.
“This is a survivability issue for us,” Dominica’s foreign minister, Francine Baron, told Bloomberg. “We need to incorporate resilience in everything that we do moving forward, from
infrastructure to our economy to our social sectors.”
Enter the Climate Resilient Execution Agency for Dominica
(Cread), conceived shortly after the storm by government oicials, including Baron, as a task force to hurricane-proof the
entire island. The government expects to appoint a chief executive and leadership team to the agency as soon as it gets parliamentary approval, likely in July. Cread’s irst mission will be
to determine best practices across every sector—roads, building codes, energy grids, water management—before enforcing them islandwide.
The government has already been collaborating with international organizations to establish some parameters ahead of
Cread’s inauguration. Any roofs that are being rebuilt with
aid from the government or major nonproit groups are being
reengineered according to United Nations Development
Programme standards. The UNDP guidelines call for steeper
roof angles to better withstand wind, for example, and for the
use of screws rather than nails to strengthen frames. Building
May 14, 2018
codes are being rewritten with the help of the Canadian
government and the U.K.’s Department for International
Development, as well. And the Dominica government is taking the irst steps of burying utility cables, elevating bridges,
and shifting to solar from generator power—all projects that
Cread will see through to completion. If Dominica is successful,
it will eventually be able to rebound from a Category 5 storm
in a matter of weeks, not months or years.
Climate resiliency is more urgent in the Caribbean than
almost anywhere else in the world. Situated in the middle of
the hurricane belt, it’s especially vulnerable to the rising sea
temperatures that have spurred an increase in major storms. A
white paper by the Nature Conservancy notes that the region
“often contributes the least to climate change yet sufers from
its impacts the most.” In their eforts to safeguard themselves,
Dominica and other nearby developing small island states face
three big hurdles: parliaments that move slowly, crippled
economies, and diiculty securing international lending. To
help with the last point, there’s the Caribbean Community
(Caricom), a pan-regional agency that’s lobbying global groups
for help with resilient rebuilding.
As these broader political initiatives lurch forward at their
own pace, grass-roots eforts have already begun on the local
level. (Hurricane season begins on June 1; many islands risk
getting socked again while they’re only halfway up from the
ground.) The tourism industry, which has a business interest in
acting fast, is leading the charge.
In Dominica, that includes people such as Walsh and Daniel
Langlois, a budding hotelier with a project in development
in the village of Soufrière. Together they’re spearheading
Resilient Dominica, or RezDM, a branch of Langlois’s foundation, which has been supporting science and technology
research on the island since 1997. RezDM has several projects
under way—each focused on present and future needs.
One is a pilot program at the primary school in Soufrière
that will not only provide food for lunches but will also create stockpiled reserves in case another storm temporarily cuts
of the island. There’s a tool-lending program, as well, which
ofers no-cost assistance for rebuilding, and a centralized depot
for vehicles that can clear roads and debris if needed. And the
solar panels RezDM is installing on one-tenth of the island’s
homes will be removable, so they don’t become storm hazards or get damaged.
Despite Dominica’s ambitions, the irst climate-resilient
island may actually be 200 miles away in the French West
Indies. “St. Barts was as hurricane-proof as any island could
be,” says Nils Dufau, president of Tourisme de St. Barts.
Because of the island’s wealth, strict building codes, and smart
preventive strategies, St. Barts came through the storms relatively unscathed. (The main cause of damage—and lingering
May 14, 2018
hotel closures—was looding.) “Our electric grid was already
three-quarters underground, and now we’re accelerating the
rest,” Dufau says. “It means most of the island didn’t lose
power—and for those who did, it wasn’t for long.” St. Barts
is now testing marine barriers, watertight doorways, and
“wash-through channels” that protect building foundations,
all to ease lood damage from storms.
Ironically, the islands that were spared this time around
may be slower to achieve resilient status. “Countries that were
not as badly hit will incorporate best practices in their new
buildings,” Dominica’s Baron says, “but nobody is going to
remove a roof that stayed on to make it stronger.” Because
of its widespread devastation, Dominica will take longer to
rebuild, but its resiliency eforts should be more thorough.
Other islands are prioritizing similar eforts, which previously may have been delayed because of cost. The government of the British Virgin Islands is running water and
electricity underground on Tortola. The owners of Guana
Island, a secluded resort, are doing the same on their own
dime. Oil Nut Bay, a hotel on Virgin Gorda, is encouraging
locals to invest in AstroGuard, a type of clip-on fabric window shutter that’s virtually indestructible and afordable to
install. In Jamaica, proponents of the cruise industry have
commissioned an eco-sensitive lexible jetty to be built near
Kingston in early 2019. In good times it will allow more cruise
ships to call, but in bad times, it can be strategically repositioned to receive emergency supplies. And in Puerto Rico,
hotels such as the Condado Vanderbilt are collaborating with
local nonproits to grow artiicial coral reefs that will protect
the shoreline in a future storm.
Rebuilding coral reefs must be a top priority—at least
as important as structurally improved roofs—says Luis
Solórzano, executive director of the Caribbean division of the
Nature Conservancy, which is leading a four-year climate-resiliency efort across the region. “The solutions can’t just be
about concrete and iron,” he says. Aerial damage surveys have
shown that reefs and mangrove forests can absorb an astonishing 98 percent of a wave’s energy in a storm. Accordingly,
local groups are exploring processes such as lab-based coral
germination and micro-fragmentation, which let conservationists grow tens of thousands of coral pieces per month
and graft them onto struggling reefs.
Replanting trees along riversides and in forests, however,
is the simplest answer: They prevent erosion, which destabilizes coral. The more coral that survives, the less damage
there will be on the coast in the event of another storm. “We
have to give nature an opportunity to provide us with resilience. It makes a visible impact,” Solórzano says.
Healthier coral, better infrastructure, stricter building
codes, safer electrical grids—all are key tools in a vital struggle. As Dominica Prime Minister Roosevelt Skerrit put it in
an address to the General Assembly of the United Nations,
“We ind ourselves at the front line of a war that we did not
start. And it is one we cannot stop.” The hope, though, is that
it’s one Dominica—and the Caribbean at large—can win. 77
May 14, 2018
From a balcony at the six-monthold SLS hotel in the Bahamas,
there’s an expansive view of the
main grounds of the Baha Mar
resort: Clusters of palms, rows of
sherbet-colored chaise longues,
crisp white umbrellas, and slivers
of turquoise pools. Beyond lies
the beach and the ombré ocean.
It looks like heaven. And it can
sound like hell.
Baha Mar, now humming with
guests from around the globe
enjoying its play pools and daytime dance parties, has been
opening in phases since April 2017. That’s more than a decade
after developer Sarkis Izmirlian promised the rebirth of
Cable Beach, a prime stretch 5 miles from downtown Nassau.
With six hotels, 50 restaurants, a casino, and a Jack Nicklausdesigned golf course, the megaresort was expected to generate
12 percent of the Bahamas’ gross domestic product.
The so-called “new Riviera” cost more than $4 billion, making it the largest and most expensive resort in the Caribbean.
In 2015 it went bust, a victim of bad timing, overspending,
and allegations of contractor malfeasance. A bailout came
the following year, when Hong Kong-based Chow Tai Fook
Enterprises Ltd., the owner of Rosewood Hotel Group, bought
the whole property out of bankruptcy. At the time, it was
90 percent inished. And 100 percent vacant.
Now, electronica thumps from the SLS’s adults-only
“Privilege” pool, where revelers do bottle-service-fueled
dances on reserved daybeds. The untz-untz knocks up against
the sounds of Beyoncé playing at the long, slim Bungalow
pool next door, where bachelorettes in coordinated bikinis
day-drink on pastel chaises. The families staying at the Grand
Hyatt (rooms from $225) cluster around other pools nearby
with their own soundtracks, including one with windows
looking onto the property’s shark-illed mini-aquarium and
another equipped with “rain cabanas” whose walls are made
from streams of water.
With a staggering 2,300 guest rooms, Baha Mar needs to be
all things to all people. Doing that without feeling generic—a
word that’s become anathema to hoteliers—is a tall order.
Yet Baha Mar seems to be succeeding. The convenient location
helps: You can have breakfast in
New York and lunch at the resort.
There’s no need to leave the
grounds, where you’ll ind golf,
tennis, baccarat tables, a kids club,
and dozens of restaurants. There
are even lashes of Bahamian culture, like a conch shack. The luxury of so much choice feels fun
and indulgent—and not too tacky.
Despite the high-proile bankruptcy still visible in the resort’s rear-view mirror, business is
brisk. “We’ve exploded our budget every month,” says Charles
Dessert, marketing manager for the SLS (rooms from $355). His
hotel and the year-old Grand Hyatt have at times been sold out.
And with drinks at $21 a pop and a 100,000-square-foot casino,
there’s plenty of revenue to be made.
But the magic begins to wear of after a few days. The myriad themed areas and their background noise devolve from a
carefully orchestrated fantasy to a cacophony of hospitality.
The design throws together concrete towers, tile roofs, and
colonial gingerbread trim. Dining options include a Starbucks,
a French-style bakery, a Mexican taco truck, a Chinese noodle
shop, and a dimly lit English pub.
There’s arguably one unifying thread (besides the cake-lour
beach) at Baha Mar: Instagram. At Privilege, a blonde in cherryred sunglasses and a matching swimsuit seeks the right angle
for her pool selie. A few feet away, another woman reclines
for a shot in a lamingo loatie. A hot-pink Airstream food truck
near the pier awaits further perfect photos. Online, without
the real-life noise, they’ll look vivid and serene.
Actual serenity may come in June, when a high-end
Rosewood hotel opens. Known for sophisticated spots such
as the Carlyle in New York and Hôtel de Crillon in Paris,
Rosewood aims to have its ofering feel disconnected from
the rest of the resort. The only way to reach the other facilities will be to walk along the beach.
“It will feel like an island estate home,” says Luigi
Romaniello, managing director for the property. Just one with
1,500 slot machines at hand and a water park to come. PHOTOGRAPH COURTESY GRAND HYATT BAHA MAR
The enormous $4 billion Baha Mar resort filed for bankruptcy
in 2015, a failure before it ever welcomed a single guest.
Now it’s open—and business is booming. By Sara Clemence
Bloomberg Pursuits
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Bloomberg Pursuits
May 14, 2018
The uber-social entrepreneur wants to raise a generation
of world changers. By Arianne Cohen
All Bill Drayton wants to do is change the world—so, pretty
Drayton always understood that good policy ideas often
simple. In 1980 he founded Ashoka, a global association of come from entrepreneurs. An ideal Ashoka project isn’t
social entrepreneurs whose lagship program provides up about a particular school or hospital; rather, it helps elimto three years of inancial and logistical support for proj- inate a systemic weakness. Ashoka fellows can be widely
ects with the potential to do good on a large scale. After inluential: Half have seen their projects incorporated
3,800 Ashoka fellows and one MacArthur Genius Grant, he’s into national policy. By the mid-1980s, Drayton noticed
still inding ways to wield his inluence for the better.
that almost all Ashoka fellows had had an entrepreneurDrayton began his career as a salary man, not a vision- ial experience as a young teen; even more striking, about
ary. He was a McKinsey & Co. consultant for a decade, a third of their projects addressed youth issues. “So now
then a policy wonk at the U.S. Environmental Protection we had these two patterns together, both saying the same
Agency in the late 1970s. Roy Gamse, who ran the EPA’s thing—that putting young kids in charge is really, really
Oice of Planning and Evaluation, jokes about working important,” he says.
on Drayton’s staf—and under his exacting standards: “I
Ashoka now runs a full slate of programs aimed at
worked for Bill for eight years during the Carter adminis- teaching early teens leadership skills, including Youth
Venture, which provides kids who have ideas for socialtration, which was only four years long.”
Drayton had a reputation as an around-the-clock worker, entrepreneurial projects with help getting started. So far,
but one with a creative streak. “Much of what he did was it’s reached 15,000 kids in 40 countries. This year, Ashoka
very innovative and very controversial,” Gamse says. “A is working with teacher training institutes, teachers’
unions, parents, and school districts to teach
lot of times my irst reaction would be, ‘This is
crazy. This has no chance of happening!’ And
them how to support budding changemakers.
then Bill wouldn’t let go.” He’s famous in polb. 1943, Manhattan
“Once they’ve had an experience where
icy circles for launching emissions trading, Has taught-at Stanford they’ve had an idea, built a team, and changed
otherwise known as cap and trade, whereby
Law School and the
their world, they have their Ph.D.s in the most
Harvard Kennedy
companies can choose how to meet environimportant skill in the world,” Drayton says.
mental targets, by reducing their own emissions,
“Life is no longer repetition and following
Takes a three-week
say, or paying another company with a better
They have the skill that society is desbackpacking trip
environmental record for emissions “credits.”
every year
perate for. And,” he adds, “it’s fun.” Bloomberg Businessweek (USPS 080 900) May 14, 2018 (ISSN 0007-7135) H Issue no. 4569 Published weekly, except one week in January, February, April, June, July, September, and December, by Bloomberg L.P. Periodicals
postage paid at New York, N.Y., and at additional mailing offices. Executive, Editorial, Circulation, and Advertising Offices: Bloomberg Businessweek, 731 Lexington Avenue, New York, NY 10022. POSTMASTER: Send address
changes to Bloomberg Businessweek, P.O. Box 37528, Boone, IA 50037-0528. Canada Post Publication Mail Agreement Number 41989020. Return undeliverable Canadian addresses to DHL Global Mail, 355 Admiral Blvd., Unit4,
Mississauga, ON L5T 2N1. E-mail: QST#1008327064. Registered for GST as Bloomberg L .P. GST #12829 9898 RT0001. Copyright 2018 Bloomberg L .P. All rights reserved. Title registered in
the U.S. Patent Office. Single Copy Sales: Call 800 298-9867 or e-mail: Educational Permissions: Copyright Clearance Center at Printed in the U.S.A. CPPAP NUMBER 0414N68830
MAY 24-25-26
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