The Economy’s Weekly Recap

9/15/23 - 9/22/23

Raymond Lin

This Week’s Prominent Events

California Sues Oil Giants

• 5 massive oil companies, Exxon Mobil, Shell, BP, ConocoPhillips, Chevron, along with the industry trade group American Petroleum Institute, have been sued by California District Attorney General Rob Bonta for deceiving the public and society as a whole about the risks of fossil fuels.

• The lawsuit alleges that these companies, beginning in the 1950s, began to downplay the risks of fossil fuels. This action and the effects of it, the lawsuit claims, means that the companies created a public nuisance, destroyed natural resources, and violated product liability and false advertising laws.

• Given the recent natural disasters in California and the billions of dollars worth of economic damages they have caused, the state of California wishes to force the companies to pay for an abatement fund that will cover damages caused by climate related disasters.

• Ryan Meyers, the General Counsel of the industry group American Petroleum Institute, has said that the lawsuit is part of a distraction from important national conversations and a waste of California taxpayer’s resources. He also said “Climate policy is for Congress to debate and decide, not the court system.”

• The lawsuit has been in the making for a while, with legal action being contemplated even in the early 2010s. It appears it may have taken this long because the lawsuit needed more evidence. A recent study published this year from Harvard and the University of Potsdam found that Exxon’s climate models from 40 years ago were spot on.

Planet Fitness’ Surprise Ousting

• Planet Fitness, one of the largest gym chains in the US, had its longtime CEO Chris Rondeau abruptly removed by its board of directors. In response to this sudden ousting, the stock has fallen 20% and many analysts have downgraded the stock, albeit many other concerns like increased costs contributed to the downgrades.

• To give some background, Chris Rondeau has been at Planet Fitness for 30 years, starting by working at the front desk. He would rise through the ranks though, serving as Chief Operating Officer from 2003 to 2013 and then Chief Executive Officer from 2013 until now.

• Besides being a veteran of the business, Rondeau has also overseen Planet Fitness’ growth and successes in the recent past. In his 10 year long tenure as CEO, the number of Planet Fitness locations tripled and their revenue quintupled. Additionally, their earnings last quarter were fairly strong.

• However, his time as CEO has not been perfect. Rondeau has had his controversies, such as being alleged to have had sexual relationships in the workplace, donating to conservative politicians like Donald Trump, and possibly violating consumer protection laws.

• Nevertheless, his firing has left most people, including Chris Rondeau himself, blindsided. Rondeau has said that he still doesn’t know why the board of directors asked him to resign.

Instacart’s IPO

• Instacart, a grocery delivery service, was valued in a 2021 funding round at $39 billion. Since then, due to the pandemic ending, higher interest rates, and more apprehensive investors, it ended its first day of being a public company at just about $11 billion dollars and $33.7 per share, up 12% from its IPO price of $30.

• However, the stock fell 11% on the next day as investors displayed a lukewarm response to the IPO. A similar story has happened with Arm and Klaviyo, tech companies that have also gone public recently.

• They also experienced an exuberant first day that allowed employees and early investors to cash out, but their stock soon began falling. It appears that investors are not as enthused about these tech IPOs as they once were.

• However, that doesn’t mean these IPOs were failures. Instacart, Klaviyo, and Arm have all managed to raise money or allow for people to cash out. Additionally, their stock prices hover around or still exceed their initial IPO price. The fact that these companies had a successful IPO at all and managed to not fall in value immediately demonstrates a relatively lively, but cautious, market.

Cisco’s $28 Billion Acquisition

• Cisco announced a $28 billion acquisition of AI cybersecurity company Splunk. This means Cisco is paying $157 per share, a very healthy margin over what the stock $120 per share prior to the announcement. It will be Cisco’s largest ever acquisition by a huge margin. Cisco’s previous largest acquisition was the 2005 $6.9 billion purchase of Scientific Atlanta.

• Cisco CFO Scott Herren believes that there is great synergy and potential for Splink’s integration into Cisco. Splunk’s “unassailable” security information and event management position makes it easier for Cisco to protect customers from attack and to obtain a competitive advantage. Furthermore, Cisco may benefit from Splunk’s usage of AI and data to grow and provide better services.

• Additionally, ⅔ of Splunk’s revenue comes from the US, which is a great opportunity for Cisco since Cisco has big clients both American and international that could become new Splunk clients.

• Even in terms of regulatory scrutiny, the deal looks solid. There is little product overlap and the cybersecurity is highly competitive, which led Cisco CFO Herren to say that the regulatory process should be “relatively straightforward”.

Rupert Murdoch Steps Down

• Rupert Murdoch is a very controversial man who built a massive and powerful news empire. But, at the age of 92, he has decided to step down as chairman of Fox Corporation and News Corporation. Both of his positions will be succeeded by his oldest son Lachlan, who is already the CEO of Fox Corporation.

• Murdoch’s story began with the acquisition of a small Australian newspaper in the 1950s. He slowly grew over the decades, mostly focusing on building a media empire. His companies now own well known, but not necessarily respected, news organizations like Fox news, the Wall Street Journal, and the New York Post.

• An prominent addition to this list would’ve been Twentieth Century Fox, which he also owned for several decades, but he sold it in 2019 for $71 billion in 2019 to Disney.

Future Events

Twenty Three Disasters

• The National Oceanic and Atmospheric Administration has reported that the US has suffered 23 billion-dollar disasters so far in 2023. This means that each of these weather disasters caused more than billion dollars in damage. In total, they have cost more than $57.6 billion.

• When the NOAA first started measuring these disasters in 1980, there were just 3. However, the list has experienced a significant and continued climb since then, with a record of 22 being set in 2020. However, 2023 has already surpassed that record and may even top by a larger margin if more disasters happen in the remaining quarter of the year.

• The increase in the numbers of these billion dollar disasters can be squarely blamed on climate change. Climate change has exacerbated extreme weather, making it more common and powerful.

• Furthermore, the government’s prior unwillingness to combat climate change seriously and the existing apprehensiveness of local governments towards stricter building codes have also contributed to the record number of billion-dollar disasters.

Interest Rates Stay Steady

• The Federal Reserve announced this week that it will not be raising interest rates. However, it still expects one more interest rate hike before the end of the year and fewer interest rate cuts next year than previously expected. This means the economy will likely continue facing some of the highest borrowing costs in recent history.

• The decision to keep interest rates steady but plan to keep them high for the near future comes off the back of resilient economic growth and slowing but persistent core inflation. This hawkish stance may be subject to change though as labor strikes and student debt payments take a toll on the economy.

• The next interest rate decision on November 1 will likely hinge on September's economic data.

A US Government Shutdown

• As the US debt hits $33 trillion, with $1.5 trillion being added in the first 11 months of the fiscal year, the US government faces a shutdown.

• Infighting between Congressional Republicans means that none of the 12 spending bills needed to fund the agencies of the government have yet to pass. If hardline conservatives continue to fight to hold the government’s finances hostage, then the government will shutdown on October 1.

• Some effects of this shutdown are

  • Millions of military and civil government workers facing delayed paychecks

  • A number of those workers being furloughed, meaning they don’t work and don’t get paid

  • Shortened or closed federal offices

  • Delays in clinical trials, firearm permits and passport

  • Major economic disruptions to sectors like travel

  • General uncertainty, the bane of investors

• The shutdown will not affect social security checks, the President or members of congress, the judiciary, and some other critical components of the federal government like border protection, federal law enforcement and air traffic control.

• However, Congress can pass a continuing resolution, which extends funding for a short period to resolve the looming shutdown. However, even this is uncertain as some house republicans have railed against it.

Weekly Question

Which of the following countries has an economy larger than California?

• A: India

• B: The United Kingdom

• C: Mexico

• D: None of the above

Answer: D. None of the above. If California was a country, it would have the world’s fifth largest economy, beating all the countries listed above.