The Economy’s Weekly Recap

8/18/23 - 8/25/23

Raymond Lin

This Week’s Prominent Events

A Comforting Speech

• In recent months, inflation has been easing. Besides a slight increase between June and July, which was largely caused by housing costs, inflation has been consistently falling for about a year now. The 12 month percentage change of the Consumer Price Index, the most common way to inflation, has gone from a peak of 9.1% in June 2022 to just 3.2% in July 2023.

• This fall in inflation is largely the result of the Federal Reserve’s hiked interest rates, which help slow down economic activity and thus inflation. But after so many interest rate hikes and the decrease in inflation, many are ready to see the end of these economically painful interest rate hikes.

• The excitement and desire to see them end led to many anticipating the Federal Reserve’s chairman Jerome Powell’s speech on Friday at Jackson Hole. During the speech, Powell didn’t give clear explanations or predictions but rather erred on the side of restraint. He said “[d]oing too little could allow above-target inflation to become entrenched” and “[d]oing too much could also do unnecessary harm to the economy”.

• The primary takeaway from this speech is that the Federal Reserve is having a balancing act with interest rates and that some more interest rate hikes are expected until inflation falls to 2% again, although the rate hikes may come later in the year and not necessarily in September.

Subway Acquisition

• For the last decade, Subway has been struggling to thrive. Although it is still the eighth largest US restaurant chain and is the largest sub-style sandwich vendor, its global sales peaked back in 2012 at $18 billion and the company has undergone a process over the last few years of closing thousands of stores. This has created a leaner company that is starting to push for expansion once more. The desire to facilitate and succeed in this expansion is what led Subway to seek being acquired.

• So, despite being held by its two founding families for 6 decades, Subway is being acquired by the private equity firm Roark Capital for an estimated $9.6 billion. This final deal came after months of offers and counteroffers from 10 bidders.

• The acquirer, Roark Capital, has lots of expertise in Subway’s market and is the majority owner of Inspire Brands. Inspire Brands bought Dunkin’ Brands Group in 2020 for $8.8 billion. It also owns Buffalo Wild Wings, Sonic, Jimmy John’s, and Arby’s.

Self-Driving Cars

• The topic of self-driving cars has been a preeminent one in the tech world for the last few years. Ideally, self-driving cars would always maintain the speed limit, never get inebriated, and never get distracted. Beyond making the roads simpler and safer, self-driving cars could also help those with disabilities like blind people.

• But as companies have invested into self-driving vehicles and we have gotten closer to their realization, many problems have emerged. In particular, after San Francisco permitted self-driving vehicle companies Cruise and Waymo to operate more freely, many public incidents of their failures and deficiencies have been exposed.

• Some of these include…

  • 10 vehicles abruptly stopping and blocking traffic for 15 minutes.

  • A vehicle colliding with a fire truck and injuring the passenger.

  • A vehicle driving into freshly poured concrete.

  • Obstructing emergency vehicles such as fire trucks

• Another sore topic for self-driving technology may be the racial bias AI can have. A recent study found that self-driving car software was 20% better at detecting adult pedestrians than children and 7.5% better at detecting lighter skinned pedestrians than dark skinned ones.

• Despite these faults, many places are still welcoming self-driving technology and are more lenient regulation-wise than San Francisco.

Nvidia’s Insane Growth

• Although it was always a tech company with an extremely high valuation and growth potential, Nvidia has recently experienced outstanding growth in revenue and stock price thanks to AI and the sales and hype it generates.

• To elaborate, Nvidia’s Q2 revenue of $13.5 billion is 88% higher than Q1 and 101% greater than the Q2 last year. A massive component of Nvidia’s record revenue is the growth in data center revenue, which is at $10.32 billion and is up 141% from Q1 and up 171% from last quarter. This increase in sales is due to the importance of Nvidia’s H100 in AI and the infrastructure needed to operate AI. Overall, Nvidia exceeded expectations by a massive margin, which led to Nvidia’s stock jumping 9% after hours on Wednesday. Year to date, Nvidia is up 220%.

• With Nvidia’s key role in AI and subsequent immense growth, it is likely that strong revenue growth will continue for the near future and that Nvidia’s stock price is not just a bubble.

The Buffoonery of WeWork

• Once the world’s most valuable startup at a $47 billion valuation, workspace provider WeWork is now a mere $100 million company discussing a bankruptcy plan with its creditors BlackRock, King Street, Brigade, among others. This bankruptcy plan would likely involve shedding real estate leases, offering creditors shares, and restructuring debt.

• But if the company is able to renegotiate its leases and bring down other costs, the bankruptcy may not happen. However, that doesn’t mean it's likely to happen. Since it is still unprofitable, WeWork burnt through $530 million in the first half of 2023 and only has $205 million of cash left.

• Other bad news for WeWork includes its upcoming delistment from the New York Stock Exchange. This is due to the fact that WeWork’s stock price is far below a dollar for some time now. Its stock is down about 90% year to date.

Upcoming Events

Climate Change’s Effects

• Climate change and global warming are severe threats to the economies and people of the world, but it has, in the past, sometimes seemed distant and insignificant. This is starting to change as the effects of weather conditions are exacerbated and global warming continues.

• One recent example of these effects is the long wait, smaller cargo weight, and limited number of ships allowed to pass through the Panama Canal. These restrictions are due to a severe drought that caused low water levels in the Panama Canal. This slowdown’s effects cannot be stressed enough as the Panama Canal is critical for international trade as 40% of US container traffic and $270 billion of cargo moves through it every year.

• Logistical slowdowns and incidents like the Panama Canal’s recent restrictions force trade to take more costly and less efficient routes that can contribute to higher prices and decreased trade.

• The potential damage to global trade and the world economy is especially potent when considering the multitude of areas where climate change could devastate a crucial center of trade. Some examples include the aforementioned Panama Canal, the Rhine River, the Suez Canal, the Strait of Malacca, the Strait of Hormuz, and the Bab-el-Mandeb.

US Mortgage Rates

• Home ownership is a critical component of the American dream and even just the ambitions of most people, but it seems that it is slipping out of reach of more people by the day. A major reason for this dire outlook is the record high mortgage rates. A 30 year fixed mortgage averaged 7.23% this week, which is up from 7.09% last week and is the highest mortgage rates have been since 2000. These high rates are largely the result of higher interest rates and 10-year Treasury yields.

• These high mortgage rates, which lead to expensive payments every month for new homeowners, have led to the lowest numbers of mortgage applications since 1995. Unfortunately, this decrease in demand for mortgages and thus housing has not led to a decrease in home prices because of the constrained supply of homes. As a result, homes remain unaffordable and unattractive for now. The situation may improve in the future if home construction grows and if the Federal Reserve stops hiking interest rates.

EU Digital Services Act

• The EU Digital Services Act(DSA) was passed on November 16, 2022 and is intended to protect users and prevent the spread of misinformation.

• Companies will have to…

  • Stop profiling children and giving them targeted ads

  • Share how their algorithms work with regulators

  • Rigorously control what kind of content is on their platform to take down illegal content, protect minors, ensure rights, and support public security and electoral processes.

  • Adopt systems to share data with independent researchers

• Given the prominence of the Brussels effect, which is when the EU’s regulation has outsized effects on company's actions globally and on regulation in other countries, it is likely these regulations will eventually come to other parts of the world.

• Large companies like Meta, Alibaba, X, Snapchat, Tiktok, Instagram, etc will be subject to the rules and will be fined or even banned if they don’t comply. However, there are still several months until these regulations come into effect.

Weekly Question

Which of the following is false?

• A: UBS, after some difficulty integrating Credit Suisse, is keeping Credit Suisse’s brand and identity alive as a separate entity.

• B: Former largest Chinese real estate developer Evergrande lost $81 billion in the last two years

• C: Nvidia has a P/E ratio of about 110.

• D: The Danish pharmaceutical giant Novo Nordisk, which was previously featured in Phi Fiscal for its drug Wegovy, is worth more than the entire Danish economy.

Answer: A. A is completely made up and the Credit Suisse brand is being shut down. B, C, and D are all true.