The Economy’s Weekly Recap

11/24/23 - 12/1/23

Raymond Lin

Since Phi Fiscal usually focuses on major developments in the business world and economy, individuals and their stories are often left out. However, there is a man that should be remembered for his ability and significance, even if he hasn’t appeared in Phi Fiscal before: Charlie Munger. Learn more about him from this brief WSJ biography. 

This Week’s Prominent Events

Amazon’s New AI Chatbot

• Earlier this week, Amazon unveiled an enterprise AI chatbot called Amazon Q. It is intended to make workers more efficient by helping with daily tasks like summarizing strategy documents, answering questions about company policy, dealing with data, etc. 

• Interestingly, unlike its competitors ChatGPT or Bard, Q is not built on a single AI. Instead, it uses an Amazon platform called Bedrock. Bedrock connects several AIs together, such as Amazon’s own Titan, Anthropic’s Claude 2, and Meta’s Llama 2. 

• Additionally, Q can connect to over 40 other enterprise systems to utilize data stored in Slack, Gmail, Salesforce, AWS’ data-storage service, Microsoft 365, etc. To deal with the obvious privacy concern that would arise from this, Amazon has said that Q will be more secure and private than competitors. According to Amazon, Q will not train foundational models based on private customer data and will have security parameters to ensure that restricted information cannot be seen by employees without access. 

• Unfortunately, it appears there are possibly already some issues. According to leaked documents, Q has blurted out very confidential information, such as AWS data center locations, and has severe hallucinations. While one should take these claims with a pinch of salt, they are not a good look for a business oriented AI that is meant to be more secure and private.

Tesla’s Cybertrucks

• 4 years after their embarrassing initial announcement, Tesla’s Cybertruck is finally available to consumers. Unfortunately for both consumers and investors, it is a bit of a disappointment.

• Consumers faced a major price increase over what was proposed in 2019 as the base price went from $39,900 in 2019 to $60,990 in 2023. Furthermore, that model won’t be available until 2025, making the cheapest currently available Cybertruck the $79,990 AWD. Besides the price increase, the long delay and presence of other EV trucks from Tesla competitors has likely also dampened enthusiasm for the Cybertruck.

• Investors are likely similarly disappointed as Tesla shares have fallen about 2% since the launch event, although some of that may be due to Musk’s other recent antics regarding X. Investors may be disappointed because Musk has said “We dug our own grave with Cybertruck” and because Cybertruck production will be relatively limited at only 250,000 cybertrucks a year by 2025. In comparison, Tesla aims to deliver 1.8 million vehicles in 2023. 

A Pharmaceutical Acquisition 

• AbbVie, a major pharmaceutical company, has announced that it is acquiring fellow pharmaceutical company ImmunoGen for $10.1 billion. 

• After this announcement, ImmunoGen’s stock rose 83% on Thursday and AbbVie’s stock rose 3%, the latter of which is a bit unusual because acquiring companies usually face a dip in valuation following a major acquisition deal.

• However, when considering that ImmunoGen is the developer of a type of cancer treatment known as antibody-drug conjugates, or ADCs, the share appreciation in both stocks is less surprising. These ADCs deliver a toxic substance directly to cancer and they can be used to treat all kinds of cancer. While these ADCs have only generated $246 million in sales in the first 9 months of 2023, they are expected to generate more than $1.6 billion in sales by 2028.

• Besides ImmunoGen’s potential, AbbVie’s own situation likely factored into its acquisition of Immunogen at $10.1 billion. AbbVie’s autoimmune disease treatment Humira was a highly valuable product, bringing in $21 billion of revenue and 36% of Abbvie’s total revenue in 2022. 

• Unfortunately, lower price competitors have reduced Humira revenues to just $11 billion in the first 9 months of 2023. So, by acquiring ImmunoGen, AbbVie can substitute losses in revenue from Humira and take advantage of a growth opportunity. 

Apple Ends Partnership

• Apple has sent Goldman Sachs a proposal to end their credit card and savings account partnership in the next 12 to 15 months. As of now, it is still unclear who will take Goldman’s place as a partner. 

• While Apple is the one that sent the proposal, it is likely Goldman was pushing for it. Earlier this year, Goldman informed Apple it wanted to offload the partnership. Additionally, Goldman had talks with American Express about taking over the Apple partnership. 

• So, with that background information, the proposal does not seem surprising. It should seem even less surprising when considering that Goldman recently ended its credit card partnership with General Motors and sold Greensky, a consumer oriented business Goldman acquired in 2021 that led to billions in losses, to outside investors.

UAW’s Drive for Further Unionization

• Emboldened by their success against the Big Three American automakers, the United Auto Workers(UAW) is looking to expand its membership to other automakers. 

• It is seeking to target about 150,000 workers at 13 major automakers: BMW, Honda, Hyundai, Nissan, Mazda, Mercedes, Subaru, Toyota, Volkswagen, Volvo, Lucid, Rivian, and Teszla. 

• For comparison, the UAW currently only has 145,000 workers at Ford, GM, and Stellantis. If the UAW is able to expand its membership, it will have managed to stem a wider trend in the US, which has seen both the UAW and general union membership decline over the last few decades.

• Additionally, if the UAW can expand, more strikes may be coming as the UAW seeks to replicate its success at the Big Three with other automakers.

Future Events

PCE Inflation

• The core personal consumption expenditures(Core PCE) price index, which is the Federal Reserve’s preferred gauge of inflation, released earlier this week, and its results were quite satisfactory. In October, core PCE rose 0.2% month to month and 3.5% year over year, meeting estimates. For comparison, September saw 0.3% and 3.7% respectively. 

• Besides being the preferred gauge of inflation for the Fed, core PCE will also be the last major inflation indicator that the Fed sees before its meeting on December 12.

• This decrease reinforces the soundness of the Fed to not continue hiking interest rates. However, it does not encourage cutting rates either as inflation is still above the 2% target of the Fed. Instead, the Fed is most likely to keep rates steady at their meeting on December 12, although there is a possibility some internet rate cuts may occur next spring.

Record Home Prices

• Despite mortgage rates hitting crushing highs of above 7% in September, the S&P CoreLogic Case-Shiller index has revealed that home prices in September were up 0.7% from August and up 3.9% from September 2022. 

• The reason why mortgage rates hardly affected home prices is because, while higher mortgage rates decreased demand by making it harder for people to buy homes, they also discouraged people from selling their home because the sellers would just get a higher mortgage rate at a new home, decreasing the supply of homes. 

• So, unfortunately for new buyers, home prices and mortgage rates will likely continue to stay at record highs until sometime in 2024, which will likely see interest rate hikes and thus decreased mortgages. 

• While this could increase demand and home prices, it seems that analysts are actually forecasting a decline in home prices across the nation during 2024. 

Google’s Geothermal Electricity

• Google, which pursues renewable forms of energy to offset its very power hungry data centers, has been working with a company called Fervo to implement Geothermal energy.

• This energy is created by digging into hot rock thousands of feet below the surface and pumping water there. Then, this high temperature water returns to the surface to create steam that drives turbines and generates power.

• Recently, Google’s and Fervo’s project has succeeded and has produced around between 3.5 megawatts of power, enough to power thousands of homes, but the 3.5 megawatts still falls significantly short of the hundreds a data center needs. 

• Nevertheless, geothermal energy still has significant merits. It is still relatively new and can consistently generate electricity with less variability due to atmospheric conditions. 

• With more investment, geothermal energy can generate a significant portion of US electricity in the future, with the Department of Energy recently saying that the US could generate 90 gigawatts of geothermal energy by 2050. 90 gigawatts, for reference, is enough to power 65 million homes. 

Weekly Question

True or False: Amazon delivers more packages than UPS

Answer: True. Recently, Amazon eclipsed UPS in terms of packages delivered after passing Fedex in 2020. This is due in large part to Amazon’s massive logistics network that it built during the pandemic as well as the growth of Amazon generally. However, despite this growth, the USPS is still the largest deliverer of packages.