The Economy’s Weekly Recap

3/29/24 - 4/5/24

Raymond Lin

This Week’s Prominent Events

The End of a Giant

• 132 years ago, Thomas Edison’s General Electric(GE) was founded, and it was a behemoth of its day as one of the largest companies in America with many industries and innovations under its belt. However, ever since the 2000s, GE has been waning in prominence and financial viability, reaching a critical point in the 2010s when GE began to sell off major portions of its business like its entertainment investments, lightbulbs, appliances, etc. As a result of this downsizing, along with other decisions like cutting dividends and cost cutting measures, GE was able to pay off more than $100 billion of debt and quadruple its free cash flow from 2018. 

• However, the final aspect of this downsizing was only completed this week, with the company completing its split into three different companies focused on different industries: aviation, healthcare, and energy. These companies will continue to use the famous GE logo though and carry on GE’s legacy. The aviation business is the one that carries on the name GE while the energy portion has the name GE Vernova and the healthcare business is called GE Healthcare.

• Each of these companies still remain quite large though, with the now aviation focused GE’s 2023 revenue being about $32 billion and market capitalization of around $170 billion.

Disney’s Activist Struggle

• For the last few months, billionaire activist investor Nelson Peltz has been trying to secure a position on Disney’s board of directors. Peltz has argued that Disney’s stumbles in the recent past and mixed stock performance, along with the uncertain succession of Disney’s long time CEO Bob Iger, show that Disney is being mismanaged and needs changes. By obtaining a position on the board of directors, he would be able to challenge moves made by leadership and guide the company. Peltz, and by that I mean his firm Trian Fund Management owns 1.76% of Disney, making him the fifth largest shareholder. Additionally Peltz was supported by figures like former Marvel chairman Isaac Perlmutter, former Disney CFO Jay Rasulo, and  Elon Musk. 

• Despite this support and some early signs Peltz might gain the board seat, his efforts were rebuked during Disney’s shareholder meeting earlier this week as Disney’s management managed to maintain its choice of board nominees. In the voting, Peltz only got 31% of votes cast for the board seat he wanted and was soundly defeated by incumbent director Maria Elena Lagomasino, who got 61% of the votes. Additionally, CEO Iger secured 94% of the votes, with retail investors playing an important role, 75% of whom voted for Iger. Another major reason for Disney’s victory was the voting of large institutional investors like BlackRock, State Street, and Vanguard. 

• This success electorally can probably be attributed to Iger’s prominent leadership in prior years and Disney’s recent cost cutting success and good stock performance. However, although Disney’s management is now free to enact their plans, a major problem still looms as the succession of Iger remains uncertain. Iger, who is set to retire in 2026, and Disney as a whole has yet to find a successor yet and are still narrowing down potential successors, leaving room for discontent.

Effects of a Bridge Collapse

• When the Francis Scott Key Bridge collapsed two weeks ago, its tragic nature was already deeply apparent as 6 died and 2 were injured. However, some of the economic effects of this bridge collapse will also be important to note. The collapse of the bridge led to the crippling of an important piece of infrastructure: the port of Baltimore. 

• This port, while not the largest in the East Coast, is still an important regional logistics hub. 50 million tons of goods valued at around $80 billion pass through it every year, ranking in the top 10 ports nationally by value. The port directly employs 15,000 people and supports around 140,000 jobs in the Baltimore area. The impairment of this important port will likely last for several months as wreckage needs to be cleared and regional economic activity will likely be disrupted and suffer as a result.

• Fortunately though, broader supply chain disruptions are not anticipated by experts or business leaders, although there will be extra costs associated with the diversion of traffic to other ports. Nevertheless, when paired with the current status of the Suez and Panama Canal, it's easy to see the sometimes neglected importance of infrastructure to economic activity and why investment and maintenance of infrastructure is so vital.

Chipmaking Losses

• For the last few decades, the US has lost its semiconductor, which are also known as chips and are critical to consumer technology, cars, military weapons, and AI, production capability as the Taiwanese company TSMC became the primary chip producer. 

• However, due to fears of national security and China invading Taiwan, a major emphasis has been placed on ensuring that chips remain outside the reach of geopolitical enemies’ reach. For example, the US has passed the CHIPS Act to develop domestic semiconductor production capabilities and has prevented China from accessing some parts of chip production. 

• Despite this renewed rejuvenation of American chip production though, it seems it is still unprofitable. Intel, one of the few American companies producing chips on American soil, reported $7 billion in operating losses for its chip production division on $18.9 billion of revenue in 2023. Both figures initially suggest a failure for Intel as the 2022 figures were losses of only $5.2 billion and a higher revenue of $27.49 billion. From this, it appears that American rejuvenation efforts may be economically unsound. 

• However, these figures, while bad, are expected to be the worst it will get. Intel expects chip making losses to peak in 2024 before breaking even around 2027. This is largely due to poor past decisions as Intel failed to capitalize on the ASML’s advanced EUV technology. Intel, having now adopted this technology, is expected to become more cost effective and is also fairly optimistic about chip production as a whole.

• Intel plans to spend $100 billion on chip production in the US, and its CEO Patrick Gelsinger believes that chip production “ is going to drive considerable earnings growth for Intel over time. 2024 is the trough for foundry operating losses”.

Tesla’s Struggles

• Tesla, once a poster boy for the energy transition and innovation, has seemingly been struggling in recent times as it faces intense competition and slowing EV demand. This fact was most apparent in its Q1 report as it saw its sales tumble 9% from 423,000 Q1 2023 to 386,810 Q1 2024. This performance is also much worse than expected as Q1 sales were 15% lower than analyst expectations of 457,000. Furthermore, Tesla produced 10.7% more vehicles than it sold, suggesting a mismatch between demand and supply.

• Worsening this reality is the fact that these poor sales are with the new Cybertruck and price cuts, suggesting that Tesla may be entering a difficult time for growth. At the very least, investors seem to think so as Tesla is down around 34% YTD and 8% in the last month alone. 

• Despite these losses though, Tesla was able to reclaim its spot as the top EV seller, retaking its position after it lost it in Q4 2023 to Chinese automaker BYD. BYD sold just over 300,000 EVs, although BYD’s figures are up 13 year over year. Other companies also seem to be having bad EV sales though as General Motors’ EV sales fell 22% year over year. It’s possible to view Tesla’s sales mishaps as both a struggle for Tesla and a part of a broader trend regarding EV demand.

Future Events

Fed Rate Cuts

• The Federal Reserve’s interest rate cuts, which would lower interest rates and lower the cost of borrowing for credit cards, mortgages, car loans, etc, have been much anticipated over the last year or so. However, as the months of 2024 keep passing, the possibility that we’ll see limited or no rate cuts has emerged. 

• A combination of factors, including strong economic growth, higher than expected inflation in January and February, and a strong labor market, have led members of the Federal Reserve to begin expressing doubts about rate cuts. For example, despite updated Federal Reserve forecasts that there would be 3 rate cuts in 2024, some Federal Reserve policy makers had different views. 9 of the 19 policymakers forecast just 2 or less rate cuts, with Dallas Fed President Lorie Logan saying that ““It’s much too soon to think about cutting interest rates”, Atlanta Fed Raphael Bostic favoring just 1 rate cut, and Minneapolis Fed President Neel Kashkari suggesting no rate cuts.

Mexican Production

• As a part of the economic war between China and the US that you caught a glimpse off in “Chipmaking Losses”, much supply chain and production relocation has been occurring. One of the places where this is most apparent is with Mexico, which has courted increased US investment and demand in recent times. 

• This has resulted in America investing more into Mexico than China in 2022 and Mexico becoming a larger trading partner than China in 2023. With geopolitical and economic tensions between the US and China remaining unresolved, it seems that their relationship will only deepen in the new future. 

• One recent sign of this has been with the Taiwanese company Foxconn, a major electronics manufacturer, which spent $27 million to acquire land in Mexico to expand its AI sever production. This, which is a part of Foxconn’s $690 million invested in Mexico over the last 4 years, showcases the growing role of Mexico to the US as a place for production and investment. 

Questions Regarding AI

• With AI dominating much discussion surrounding technology and innovation these days, it is important to look at some of the serious questions surrounding its usage and implementation. While there are moral and ethical dilemmas one could inspect, a more tangible one involving AI has been raised by Google parent company Alphabet.

• In regards to OpenAI’s powerful AI video creation tool Sora,  CEO Neal Mohan of Alphabet owned Youtube said that if Sora used Youtube videos in training, it would be a “clear violation” of Youtube’s TOS. When combined with OpenAI’s CTO not knowing whether Youtube videos were used in training, the question of how AI is trained and how people should be compensated becomes apparent. Additionally, the question of legality remains uncertain. 

• And it seems no answer will be coming soon as lawsuits against OpenAI by the NYT and by author George R.R. Martin have yet to result in much. Other efforts, such as the open letter from 8000 authors addressed to AI leaders from last spring, have remained ignored as well. This dilemma regarding training is one of immense importance to AI development and just compensation that will have to be resolved one day, and it is something to watch closely for when it does get resolved.

Weekly Question

True or False: Global M&A activity did poorly in Q1 2024

Answer: False. Global M&A activity has done very well in Q1 2024 as, when compared to Q1 2023, M&A volume rose 30% to reach $755.1 billion. US M&A in particular rose 59% to $431.8 billion.