The Economy’s Weekly Recap

10/6/23 - 10/13/23

Raymond Lin

This Week’s Prominent Events

Birkenstock’s Lackluster IPO

• When a company that’s older than the United States goes public, you would expect some fanfare and excited investors. However, it appears that, following the trend of other recent IPOs, Birkenstock’s stock has fallen significantly after going public earlier this week.

• Birkenstock, which sells fashionable sandals that have experienced recent growth and popular acclaim, went public at a valuation of $8.6 billion and $46 per share.

• While it did manage to raise $1.5 billion dollars, which will be used to pay debt and Birkenstock’s private equity owner L Catterton, shares fell 13% in value on the first day of trading followed by another 7% fall the next day.

• Despite this fall in valuation from $8.6 billion to just around $6.8 billion, L Catterton is probably still happy given that it paid just $4.35 billion in 2021 to acquire a majority share.

Microsoft Acquires Activision

• After announcing it all the way back in January 2022, Microsoft has finally completed its $69 billion acquisition of Activision Blizzard.

• This will give Microsoft access to franchises like Call of Duty, Candy Crush, Diablo, Overwatch, World of Warcraft, StarCraft, etc. Some of these games will be incorporated into Microsoft's Xbox Game Pass, which could lead to more revenue and subscribers for the Xbox game pass.

• To finalize this deal, Microsoft had to fight legal battles with the US’ FTC and the UK’s CMA. Microsoft also had to compromise with cloud gaming and game exclusivity to ensure that the acquisition went through.

Kaiser’s Tentative Resolution

• Kaiser Permanente, which has health plans that cover 13 million people, has reached a tentative deal with its workers, 75,000 of which went on strike last week for 72 hours. The healthcare workers wanted higher pay and increased staff to cope with the crushing workload they faced.

• These simple but important conditions, thanks to the support of Labor Secretary Julie Su, were met as Kaiser has agreed to raise wages 21% over the next four years and establish a minimum wage of $25 in California and $23 in other states. Additionally, Kaiser has also agreed to accelerate hiring.

• The coalition of unions that orchestrated the strike had planned to strike for another 8 days if a deal was not reached by October 31st.

Country Garden’s Crisis

• Country Garden, China’s largest private property developer, said it expects to miss debt payments due to falling property sales. While this doesn’t mean it is defaulting, it is definitely a sign that it is struggling financially and is teetering on the edge of insolvency.

• Country Garden’s situation is a microcosm of the Chinese real estate market. Country Garden was a financially responsible real estate developer until recently. However, it has been hurt recently because of China’s slowing property market, particularly in third and fourth tier cities where Country Garden had heavy exposure.

• Country Garden only serves as the largest example of a crisis gripping other Chinese real estate firms. While China’s economy is not in dire straits, its health is far from secure and China’s government may have to further assist the crucial real estate sector.

Hulu’s Consolidation

• Hulu, which is ⅔ owned by Disney and ⅓ owned by Comcast, is likely to be consolidated soon. This consolidation will come as a result of an unusual agreement between Disney and Comcast where either party can force Disney to buy Comcast’s minority share.

• This mechanism of the agreement will become triggerable on November 1st, and Comcast CEO Brian Roberts expects it to happen. In preparation for this, both Disney and Comcast have independently hired JPMorgan and Morgan Stanley to assess the value of Hulu.

• If their estimates are within 10% of each other, the average of them will be taken and that will be the valuation of Hulu. If they are not within 10% of each other, a third investment bank will be approached.

• The minimum valuation of Hulu, as agreed upon in the unusual 2019 agreement, is $27.5 billion.

Future Events

September’s Inflation

• The Federal Reserve’s interest rate hikes have gone a long way towards taming inflation from its shocking highs to its more benign recent increase. Despite this, one more rate hike may still come in the next few months as inflation remains above the Federal Reserve's 2% target.

• September’s inflation report seems to further this view as inflation rose 0.4% from August and 3.7% year over year, which is down from August’s 0.6% raise from July. Meanwhile, core inflation, which removes the volatile food and energy prices, was up 4.1% year over year.

• A big contributor to both inflation and core inflation was the cost of shelter as it made up 50% of the increase in normal inflation and 70% in core inflation. Without shelter, core inflation rose 0.1% from last month and 2% year over year.

The Gap In Taxes

• According to IRS projections, there is a growing gap between how much taxes are owed and how much is actually paid. This gap was a record $688 billion dollars in 2021, which is up $138 billion from estimates of 2017-2019’s tax gaps.

• This massive gap has three major causes. These are…

  • Unfiled taxes, which made up $77 billion

  • Underreported taxes, which is when people don’t report all of their income. This made up the largest portion at $542 billion.

  • Underpaid taxes, which can happen to freelancers as they aren’t able to anticipate their work and pay taxes consistently. This made up $68 billion.

• Despite this, the vast majority of Americans, about 85%, pay taxes voluntarily and on time. Additionally, the IRS has ramped up their auditing efforts since 2021 as additional reporting rules for gig workers and funding from the Inflation Reduction Act comes into effect.

• The continued growth or shrinking of this gap will likely play a large role in combating the growing US debt, which hit $33 trillion a few weeks ago.

Hydrogen Hubs

• Hydrogen, a gas that when burnt does not release carbon dioxide, is seen by some as a promising tool in the transition to net zero. However, it is still a very premature tool with minor existing infrastructure and interest when compared to renewable energy.

• In an effort to kickstart this industry, the Biden administration has announced plans to award up to $7 billion to create hydrogen producing hubs.

• These hydrogen hubs will be located in 7 regions, with investments in California, the Gulf Coast of Texas, the Ohio River Valley, and some multistate networks.

• The hydrogen produced could theoretically be used to produce fertilizer, steel, and cement as well as to power trucks, airplanes, and ships without emitting harmful greenhouse gases.

• There are concerns about the production of hydrogen, however, as hydrogen is often made using natural gas. This could lead to further dependence on fossil fuels and increased carbon emissions from hydrogen production.

Weekly Question

True or False: Your attractiveness has a significant impact on your experience working in Wall Street.

Answer: True, at least according to a recent study. It found that facially unattractive people outperform facially attractive people by 2% per annum. Additionally, it found that facially attractive people attracted higher fund flow, had a higher chance of promotion, and tended to move to small firms.