The Economy’s Weekly Recap

7/15/24 - 7/22/24

Raymond Lin

This Week’s Prominent Events

And The Earth Stood Still

•  Or, at least that’s what it may have looked like on Friday for those whose flights became delayed. The reason for these delays, as I’m sure you’ve already heard about, was the cybersecurity company Crowdstrike’s faulty update.

• In essence, Crowdstrike, which provides cybersecurity software to major companies, governments, etc, sent out a faulty update to its software, causing Windows computers to begin crashing. This incapacitated many organizations, resulting in American Airlines and United Airlines among others to ground all flights. Additionally, healthcare systems became unusable and 911 lines went down temporarily. Many retail stores also shut down for the day as a result.

• While Crowdstrike’s faulty update was soon patched, its update debacle highlights a key point that Phi Fiscal has focused on before: the fragility of digital infrastructure. Just one company’s mistake could have an outsized impact, with the possibility that one rogue actor could cause immense damage if they wanted to. 

A Slew of Earnings

• With many companies’ quarterly earnings coming out this week and in the following ones, they’ll certainly be featured prominently in Phi Fiscal. One sector of note that reported its earnings this week is the financial sector, with companies like JP Morgan Chase, Bank of America, Goldman Sachs, Blackrock, etc reporting their earnings. Here’s a highlight of some of the most important ones.

• JP Morgan Chase beat revenue and earning expectations of $50.99 billion to $49.87 billion and EPS of $4.26 vs. $4.26. In the process, they increased revenue by 20% year over year, with investment banking revenue increasing 46% and equities trading revenue growing by 21% from last year. However, profit declined 9% year over year, in part due to a slow 4% growth in net interest income(NII), which is the income made from the interest on loans minus the interest paid to depositors. This metric is vital for banks because loans make up the foundation of their business, with NII accounting for $22.7 billion in revenue. 

• Bank of America also beat revenue and earning expectations of $50.99 billion to $49.87 billion and EPS of $0.83 vs. $0.80. However, BofA saw its revenue fall 1% and profits drop 7% from last year, although 29% growth in investment banking fees and 14% in asset management fees helped soften the blow. The all important net interest income dropped 3% to $13.86 billion, although BofA said that its NII would increase in the near future. 

• Wells Fargo also beat expectations but saw a 9% drop in NII, falling below analyst expectations and causing its stock to tumble. 

• Goldman Sachs saw revenue rise 17% and net earnings increase 148% annually. Major contributors to this growth were investment banking fees, which grew 21% annually, and asset management revenues, which increased 27%. 

• Blackrock reported an 8% growth in revenue and 11% growth in profit year over year. Additionally, it saw a 13% increase in AUM annually. Blackrock’s AUM growth is relevant because it generates much of its revenue through fees from AUM. 

Lean AI

• With news of rapid AI developments and dreams of AI’s future potential, it can be easy to forget that AI is still a tool like any other. And like any other tool, substitutes for a specific AI exist. This was the case with GPT-4o, OpenAI’s most advanced AI model to date. GPT-4o was quite expensive relative to some options like Google’s Gemini 1.5 Flash or Anthropic’s Claude 3 Haiku, resulting in some developers opting for those AI models instead of OpenAi’s. Recently though, it seems OpenAI is attempting to seize this lower cost AI market since it has introduced a new AI called GPT-4o Mini.

• As the name implies, it is a mini version of GPT-4o, which means it will be more affordable and still fairly capable relative to prior OpenAI models like GPT-3.5. The model supports text and vision, with video and audio being added later on. On the Measuring Massive Multitask Language Understanding benchmark, it scored 82%, higher than GPT-3.5’s 70%, Claude 3 Haiku’s 75.2%, and Gemini 1.5 Flash’s 78.9%. 

• This capable but lean AI underscores an important question about AI usage: when will its capabilities become economically substantive? With improved capability and, seemingly, lower operating costs, GPT-4o mini may offer insight into this question as to how AI will become cheap enough and capable enough to replace work done by humans.

Death Of DEI

• While the virtues of Diversity, Equity, and Inclusion(DEI) policies were once espoused by many organizations, it seems that an increasingly large number of businesses are turning away from them. On top of Tractor Supply’s decision 2 weeks ago, there have been 3 other major reversals of DEI.

• Microsoft seems to have turned away from DEI, with a DEI team being fired and an internal leader saying “DEI programs everywhere are no longer business critical or smart as they were in 2020”. This is a stark reversal from the aforementioned year of 2020 when Microsoft pledged to make serious commitments to DEI and double its number of black leaders by 2025, although Microsoft claims it is still committed to D&I.

• However, Microsoft is not alone in this abandonment of DEI. John Deere has announced that it will “ensure the absence of socially-motivated messages” in training material and no longer sponsor social awareness events. In response, the National Black Farmers Association called for the resignation of John Deere’s CEO and a boycott of John Deere products.

Beyond Meat’s Collapse

• In 2019, Beyond Meat’s trajectory looked quite favorable. It was a leading figure in the growing plant based meat industry that had just hit a $10 billion valuation, with major celebrity promotion and retail presence. 

• However, in the years since Beyond Meat has struggled with growth and profitability. Q1 2024 saw sales decline 18% from a year prior, although losses were reduced by around 8%. Additionally, its unrestricted cash declined again from $190.5 million in Q4 2023 to $157.9 million in Q1 2024. 

• Things only got more foreboding last week as Beyond Meat held restructuring discussions with bondholders that collectively hold $1.1 billion of convertible notes. This kind of meeting hammered home the dire financial straits of Beyond Meat as, in response, Beyond Meat’s stock fell around 19%, leaving it down 30% YTD and down 91% from its IPO price. 

Future Events

September, 2 Months And 1 Rate Cut Away

• As covered over the last year or so, interest rates have been quite high for long, with inflation falling significantly as a result. Besides the inflation blip in early 2024, inflation has trended downwards for the last few months, with June even seeing a 0.1 monthly decline in the CPI. 

• This has made it clear that a rate cut is now practically certain for 2024, which would help spur growth in the economy by lowering the cost of borrowing. At the very least, investors seemed convinced of the certainty of a rate cut as traders are 100% certain the Federal Reserve will cut interest rates in September based on the CME FedWatch Tool.  

• This sentiment was recently supported by Federal Reserve Chairman Jerome Powell’s statement at the Economic Club of Washington D.C, where he said that “if you wait until inflation gets all the way down to 2%, you’ve probably waited too long” but added that the Fed was still looking for greater confidence that inflation would return to 2%. As a whole though, this statement suggests that a September cut is very possible despite inflation still being above 2%, assuming inflation data continues decreasing. 

Chipmaking Conflict

• The US and China have been locked in a struggle geopolitically for much of the last decade, and this has resulted in many businesses being impacted through tariffs and sanctions. One victim of this conflict has and will continue to be the semiconductor industry. 

• Semiconductors, which are also known as chips and are crucial to industries like software, automobiles, defense, AI, and technology, are considered a good of national security for the US and China, which have both invested billions into fostering domestic chip production. The US has also taken steps to block access to advanced chip production technology and advanced chips themselves to China in the past, but it seems this may worsen. 

• According to an unconfirmed Bloomberg report, the US government is considering placing tighter import restrictions on companies that sell chip making technology to China. The US has, in the past, also pressured allies to follow suit when such US restrictions are enacted. For many chip firms domestic and foreign, this means that their Chinese sales may soon be reduced, which led to a tumble in many chip stocks. The Dutch chip technology maker ASML fell 13%, TSMC fell 2.4%, Nvidia fell almost 7%, Broadcom lost 8%, and ARM dropped 10% soon after. 

• Compounding this chip stock meltdown was Donald Trump’s statement that “Taiwan took our chip business from us, I mean, how stupid are we?”, which exacerbated TSMC’s stock decline into a 10% fall. Given Trump’s animosity towards China, similar or more severe policies to the ones Biden is considering may be enacted. 

The Chinese Economy

• Since Covid, China’s economy has begun struggling as it first faced severe Covid lockdowns and then saw a slowdown in real estate and employment. The issues that plague the Chinese economy, like high local government debt, low consumption spending, and a declining real estate market, have continued to exacerbate this economic slowdown. 

• Q2 economic data has only reinforced this narrative as Q2 saw quarterly real GDP growth of just 0.7% down from 1.5% in Q1. When annualized, growth for Q2 was 4.7% down from 5.3% in Q1. Some sectors impacted were…

  • Real estate, which saw property sales fall 27% from last year.

  • Automobiles, which saw sales decline 6.2%.

  • Consumer electronics and appliances, which saw sales drop 7.6%.

• This slowdown, on top of the already sluggish Chinese economy, is not a good sign. However, the Chinese government has yet to announce any large changes to economic policy, seemingly waiting the slowdown out. In fact, a recent meeting by the Communist Party’s Central Committee produced a plan for the Chinese government that failed to mention any immediate policy proposals to address the economic slowdown. 

Weekly Question

While many may have not heard of Crowdstrike before last Friday, it’s quite a large company. What is its market cap as of Friday’s closing?

• A: $22 billion

• B: $162 billion

• C: $74 billion

• D: $7 billion

Answer: C. Crowdstrike, while perhaps not the most well known, is indeed a fairly large company, although its stock performance over the next week will likely reduce the market cap severely.