The Economy’s Weekly Recap

6/7/24 - 6/14/24

Raymond Lin

Apologies for the 1-day delay as I was unable to publish the newsletter until this morning, even though it was already complete yesterday. 

This Week’s Prominent Events

Apple’s AI Implementation

• While companies like Microsoft and Nvidia have become the AI darlings of the stock market, some companies have been slow in adopting AI technology, such as Apple. Apple, in its usual slow and careful manner, has taken little initiative regarding generative AI usage in the last 2 years. However, this year’s WWDC(Apple’s technology conference) came with the announcement that Apple would be introducing Apple Intelligence into iPhones, iPads, and Macs. To help implement this, Apple has announced it is partnering with ChatGPT creator OpenAI. 

• Some features of Apple Intelligence include…

  • An improved Siri AI that can better answer questions and fulfill tasks.

  • A ChatGPT integration when asking complex questions, with users able to link their ChatGPT account.

  • Email proofreading

  • Phone call transcript generation

  • Photo manipulation

• The computing used for Apple Intelligence will mostly be on-device, which Apple says would ensure user security. However, some requests may have to access Apple’s cloud computing or ChatGPT, although Apple claims that privacy will still be maintained. 

• Investors initially responded poorly but attitudes turned into excitement as the slight disappointment of no AI breakthroughs was replaced by the excitement of AI reaching over a billion Apple customers, which led to Apple’s stock rising 8% in the last 5 days, more than they have all year excluding the last 5 days. This briefly propelled Apple to the position of the world’s most valuable company at a market cap of $3.29 trillion. 

• Despite this excitement among investors, it's uncertain whether this Apple Intelligence will have a marked impact. Apple’s revenue has been stagnant compared to its peers, being outperformed extensively by Microsoft and Nvidia, and its sales have been worsened by struggles in China and the high interest rate environment globally. But some, like Goldman Sachs analyst Michael Ng, see Apple Intelligence as “the first step of many in Apple's generative AI strategy”. 

$56 Billion Compensation Package

• In 2018, a series of Tesla performance targets regarding share price and revenue goals were created for Elon Musk, with every target giving Musk the option to purchase Tesla Shares at $23 a share. In 2024, many of these performance targets have been achieved, which if undisrupted would allow Musk to purchase 303 million shares at a steeply discounted price. This would grant Musk $56 billion of profit in the form of Tesla shares, although he would be unable to sell any of the $56 billion until after 5 years.

• This compensation plan, obviously massive, was found to be “unfathomable” by a Delaware court that tried to block it, but a recent vote by shareholders seems to have confirmed shareholder support for the massive compensation package, with 72% of votes cast excluding Musk and brother supporting the measure. Another concurrent vote was for the reincorporation of Tesla away from Delaware and into Texas, a more management friendly state in Musk’s view that aligns with his values. 

• Despite major retail investor support and institutional support from companies like Vanguard and BlackRock, there was some outspoken opposition like the California State Teachers’ Retirement and Norway’s Sovereign Wealth Fund. 

• While the shareholder vote is a Musk victory, it is a small piece of the puzzle as the compensation package has not been reinstated. Rather, the vote is a piece of evidence that the compensation package is supported by shareholders. Additionally, it is a confirmation that Tesla investors are still happy with Musk, even if he is distracted with other endeavors when Tesla faces difficulties in the EV market. 

Oracle Earnings And AI

• When an established company misses its earnings, it is usually a disappointment for investors and drags the share price down. However, this was not the case for Oracle earlier this week. While they missed expectations of $14.29 billion in revenue compared to expectations of $14.55 billion and EPS of $1.63 compared to expectations of $1.65, Oracle announced news that caused much excitement. 

• As I’m sure you can guess if you’ve been reading Phi Fiscal for the last few months, it has to do with AI. Oracle signed 30 contracts involving the usage of Oracle’s servers and equipment for AI, including a major contract with OpenAI. Altogether, the contracts are worth over $12.5 billion.

• This news drove Oracle’s stock up more than 13% as the mixed quarterly earnings were supplanted by the story of the AI contracts in the minds of investors. UBS analysts said “The AI narrative is powerful enough to lift sentiment” and Morgan Stanley analysts commented that “near term AI build-out likely wins the day and sustains momentum in shares” even in the presence of mixed financial figures.

• Oracle’s story raises a major question regarding AI though: should we be optimistic? Obviously, it is a transformative technology, but its powerful effect on people’s attitudes should be noted when trying to invest. 

EU EV Tariff

• A few weeks ago, Biden announced a 100% tariff on Chinese EVs to attack the subsidized Chinese EV industry and protect American industry as a part of the larger US-China trade war that has been on and off for the last few years. Echoing this sentiment, the EU has also announced Chinese EV tariffs of 17.4% to 38.1%. 

• To give some background, the EU is an important market for Chinese automakers because it can tolerate higher prices than the highly saturated and less wealthy Chinese markets, becoming the number 1 export market for Chinese automakers and granting them a major opportunity to make profits. However, this new tariff will restrict the ability of Chinese automakers to expand in the EU. 

• However, despite some minor effects like the withdrawal of some Chinese automakers like Great Wall Motor, the effectiveness of such tariffs is uncertain. Companies like BYD, a major Chinese automaker that temporarily overtook Tesla in EVs sold in Q4 2023, have factories in Europe and plans to build more, which would allow them to avoid the tariff. Additionally, other Chinese automakers could simply build EVs in other countries, such as Thailand, to skirt the tariff. 

• A side effect of these tariffs is the impact they have on European automakers. For example, BMW produces iX3 EVs in China and then exports them to Europe, which means BMW would face the new Chinese EV tariffs.  Similarly, Tesla’s Shanghai built EVs would also be tariffed. 

• With this in mind, it seems evident that these tariffs are not so business related as they are politics related since EU politicians seem to be seeking self-sufficient industries. 

Boeing’s Crisis

• For the last few years, Boeing has been in a quality control crisis that has irreparably damaged its reputation among the public, corporations, and the government, which has resulted in federal investigations, decreasing revenue, and lower share prices. 

• This fact was reiterated by some recent headlines, which have just come out even though Boeing’s problem has been well covered for months now. 

  • One NYT article described how titanium with false authenticity documentation found its way into Boeing planes, although the scope of the issue is uncertain and it also affects Boeing’s rival Airbus.

  • An NPR report covered how Spirit AeroSystems, a company that Boeing outsourced fuselages and other plane equipment production to, has had systemic quality control issues like constant mistakes in important equipment, highlighting how Boeing’s recent attempt to acquire Spirit is a meaningless move given the quality issues systemic in both.

  • An Associated Press article reported that it only received 4 orders in May and 0 orders for the now infamous 737 Max, compared to 15 orders for aviation rival Airbus. 

• However, while Boeing is stuck in a rut, it's unlikely to go anywhere anytime soon. It is one of only 2 major airplane manufacturers and plays a crucial role in the US defense industry, making its disappearance a practical impossibility in the near future. Additionally, it still faces demand because, despite the minuscule number of new orders, it has a backlog of over 5,600 orders.

Future Events

Exciting Inflation News

• Contrasting last week’s disappointing jobs report, this week saw some exciting inflation news, for May’s CPI(Consumer Price Index) inflation data came out, which tracks inflation for consumers. In May, inflation didn’t increase at all from last month and increased by 3.3% from May 2023. Core CPI, which excludes volatile items like energy and food, increased 0,2% from last month and 3.4% from last year. For reference, April’s CPI figures were a 0.3% monthly increase and 3.4% yearly increase. 

• Some interesting items from May’s CPI inflation report were…

  • Gas prices falling 3.6% from April

  • Transportation services dropping 0.5%

  • Food prices increasing a slight 0.1%

  • Shelter inflation increasing 0.4% 

• This positive narrative is supported by May’s PPI(Producer Price Index) inflation report, which tracks inflation for manufacturers based on suppliers. In May, PPI inflation rose 0.2% monthly to a 2.2% yearly rise, which is very close to the Federal Reserve’s desired 2% target. 

• Despite these exciting inflation figures, the Federal Reserve is being cautious. In this week’s FOMC meeting, it didn’t cut interest rates, which wasn’t a surprise. Jerome Powell, Federal Reserve Chairman, said that the FOMC needs greater confidence and more inflation data before they alter interest rates. 

• Based on the Summary of Economic Projections released by the Federal Reserve, it seems the median prediction by FOMC members for interest rate cuts is 1 this year and 4 in 2025. Let’s hope inflation subsides in line with expectations and that we can return to more a more friendly interest rate environment.

The Energy Transition

• Energy, vital to practically all matters of the economy, faces a dilemma as the concerns of climate change and increased demand from EVs and AI data centers grow. To accommodate these concerns, billions have been poured into solar and wind technology, yet one major source of energy has struggled within the US for the last few decades: nuclear energy.

• In the last 25 years, only one commercial nuclear project has come online, despite the merits nuclear energy has regarding its energy production, environmental cleanliness, and safety. The main reasons for the decline of nuclear energy are that nuclear energy facilities are highly expensive, sometimes costing tens of billions, and that a negative stigma is still associated with nuclear energy, which lowers public support and prevents projects from being set up.

• However, there is one company, among many of course, that is trying to change this: TerraPower. TerraPower, a very nascent company, has plans to develop a kind of nuclear reactor that is smaller and uses liquid sodium for cooling instead of water. This means that the pressure of the plant will be lower pressure and less dangerous, which will allow for thinner shielding and piping that could help lower costs  Additionally, the reactors will use a molten salt battery to control the production and selling of electricity, allowing it to be more agile than traditional nuclear reactors and adjust to electricity usage. This promising nuclear facility will be able to generate 350 megawatts, enough to power 350,000 homes but only a third of other nuclear reactors, and is projected to cost $4 billion, much lower than other nuclear projects but also subject to likely budget overruns. 

• While a promising concept, TerraPower faces daunting challenges like obtaining Nuclear Regulatory Commission approval and isn’t expected to finish until the 2030s. However, it has some major backers that will want to see the project come to fruition, such as the Department of Energy and Bill Gates, which have contributed $2 billion and $1 billion respectively. 

• If successful, this could be the first of several TerraPower nuclear facilities, which could help alleviate many mining communities. Coal, once a vital part of American industry, is increasingly looked down upon along with fossil fuels. For many mining towns, this means a major job provider and population magnet will disappear and leave the towns to rot. Nuclear energy projects like TerraPowers could provide jobs to these communities, which are already linked to the grid and have willing workers. 

Gen Z Investing

• Recently, the Schwab Modern Wealth survey was conducted and some interesting data points came out of it, particularly concerning the investment habits of Generation Z. 

• According to the survey, the average age when Gen Z started investing is 19, much lower than prior generations like Millennials, who started at 25, or Gen X, who started at 32. This higher rate of Gen Z investing could be due to social media, which has allowed for the widespread publication of financial information and investing. One example of this is with Wall Street Bets. While far from an ideal source, its Gen Z popularity and social media presence cannot be denied, contributing to the low average age of investing. 

• Another interesting fact is that 45% of Gen Z are currently investing, which is quite high considering some of Gen Z are still underage. For reference, 54% of Millennials and 58% of Gen X are investing, not too much higher despite a major difference in age and employment.

• Another interesting fact to consider is that much of Gen Z has student loans to contend with, but they nevertheless continue to invest, indicating that Gen Z seems to be quite immersed in the investing world and could benefit from reading Phi Fiscal every week. 

Weekly Question

Who was the first company to reach a $3 trillion market value?

• A: Saudi Aramco

• B: PetroChina

• C: Apple

• D: Microsoft

Answer: C. About a year ago, Apple reached a valuation of over $3 trillion, becoming the first company in the world to do so.